Video summary

M&A Zing (Ep. 6) – Due Diligence Do’s & Don’ts

Main summary

Key takeaways

Business

Episode focus: Due diligence “do’s & don’ts” for SMB acquisitions (UK/EU context)

  • Italy: Nosttos Capital launched after closing a fundraise. Founded by Franchesco Valley, with experienced Italian search fund investors on the cap table. Theme: continued acceleration of new search funds/platform builders in Europe.
  • Canada: Roomie Capital launched a cohort-style graduate program taking on 10 acquisition entrepreneurs to help them find and operate/acquire businesses—positioned as an incubator for search funds (pipeline-building for future acquirers).
  • Spain exit: Wim Pardo (Cena Capital) completed an ~8-year journey, exiting/selling Vositel (acquired in 2017/2018) to Everfield (a UK/EU buy-and-build platform).

What due diligence is (and when it matters most)

Definition (buyer-side)

Due diligence is verifying the “reality behind the pitch” by checking documentation, financials, ledgers, contracts, records, and other evidence—so you can sign the Share Purchase Agreement (SPA) with confidence.

3 “big boy pants” moments in an M&A process

  1. Heads of terms / handshake phase (terms become real).
  2. VDR opens + SPA redlines arrive while you’re digesting documentation (hidden liabilities risk).
  3. After SPA ink is dry: you must present what you’ve bought with confidence—ideally you learn before commitment.

Core timing principle

  • The clock starts when the data room is shared—legal and advisor costs accrue immediately. Prioritization and speed matter.

Which diligence categories matter most (especially for smaller SMB deals)

The priority order is context-dependent, but the suggested emphasis is:

  • Tech due diligence (mandatory if software/product is involved)
    • Validate whether the product is real IP or “duct-tape over someone else’s platform.”
    • Assess scalability and whether engineering is sound.
    • Request access carefully under NDA; if the deal breaks, remove/delete references.
  • For traditional SMBs (often the primary focus)
    • Commercial + people + concentration risks
    • Legal diligence (contracts/liabilities)
    • Financial “quality of earnings” and working capital reality
    • Governance
    • Market/competitive sanity check (often lighter-touch, not always deep/expensive)

Framework-style checklist: what to look for (with “why it matters”)

1) People & organization (early discriminator)

  • Org structure & communication lines
    • Don’t accept only a cost spreadsheet; require an org chart (fixed/dotted lines) to avoid “headless chickens” / duplicated effort.
  • Tenure and redundancy liability
    • Request anonymized, GDPR-compliant lists of roles, salaries, tenure to estimate redundancy exposure.
  • Seller dependency & transition risk
    • Ask how customer/vendor relationships depend on the business owner vs. contractual relationships.

2) Customer & supplier concentration risk

  • Customer concentration
    • At minimum, check whether top 10 customers represent too much of revenue.
    • Example callout: if 1 customer = 25% of the business, change-of-ownership clauses may let them exit early—cutting revenue abruptly.
  • Vendor concentration
    • If a key supplier can “choke you off,” require evidence of backup/switch options.

3) IP, brand assets, and compliance/certifications

  • IP audit
    • Identify patents/trademarks/design rights and the barriers to entry (why competitors can’t easily replicate).
    • Confirm the company owns the IP (not the seller personally).
    • Watch for domain/brand assets registered to the seller personally (e.g., GoDaddy tied to seller’s personal credentials).
  • Compliance and certifications
    • Verify accreditation is not lapsed; re-approval costs can be large and time-sensitive.

4) Financial due diligence: “Quality of Earnings” (QoE / QoE report)

  • What QoE is for (vs normal review)
    • Test sustainability/durability of revenue and whether costs are realistic.
    • Detect “massaged” accounting (e.g., gross profit inflated by misclassified overheads).
    • Validate working capital/cash needs by reviewing beyond the P&L (balance sheet “calls on cash”).
  • Common tactic / red flag
    • Revenue acceleration / pull-forward
      • Example described: service sold upfront for future years but revenue booked now without correct unrealized revenue liability, effectively “pre-selling” future periods.

5) Legal diligence: “gremlins” and contract liabilities

  • Review contracts likely to create liabilities or trigger issues after ownership change:
    • employee contracts
    • customer contracts
    • supplier contracts
    • leases, hire purchase, etc.
  • Goal: find liability gremlins and contract terms that cease when the incumbent owner is no longer the same party.

6) Governance and market study

  • Governance
    • Board minutes and compliance responsibility in regulated environments.
    • Track record and certification/credentials of responsible parties.
  • Market study (optional/lightweight)
    • Don’t always commission expensive research; do basic verification of market growth/shrinkage and competitive position.

Due diligence team playbook (who to staff, what to DIY)

Minimum suggested “deal team”

  • Strategic accountant / qualified finance person
    • Able to dive into QuickBooks/Xero/Sage, reconstruct the true story, and flag anomalies.
  • Lawyer(s)
    • Not only SPA drafting—lawyers (and junior associates if needed) should read contracts with a “liability-hunter” lens (e.g., clauses triggered by ownership change, lease break/breach risks).

DIY vs professional help principle

  • DIY can work, but they emphasize:
    • The cost of legal diligence is often cheaper than operational damage (e.g., losing premises unexpectedly can be far more expensive than paying for diligence).

Depth boundary

  • They estimate few acquirers go “to that depth” for extra specialties (e.g., HR cultural review) beyond finance + legal—unless there’s a specific concern.

Deal killer patterns vs fixable issues

“Hospital pass” deal killers

  • Sellers may mask irreversible decline with a “veil of success.”
  • Warning sign emphasized: deal risks caused by duplicity/evasion or incomplete truthfulness.

Red flags: seller cooperation & integrity test

  • Framing: DD as a test of seller integrity.
  • Biggest red flags:
    • reluctance to provide crucial documents
    • lots of excuses
    • “verbiage” that avoids transparency
  • If transparency fails:
    • you’re not legally obliged to proceed because heads of terms are non-binding (per the discussion).

Fixable issues (examples)

  • Increased working capital needs (deal economics can be adjusted)
  • Growth assumptions not holding (deal structure may need to shift, not necessarily kill the deal)

Time management + avoiding “deal fatigue” (process controls)

Core tactics

  • Set a target date upfront in contracting discussions (even if movable).
  • Use granular milestones, e.g.:
    • VDR populated by a date
    • first pass of SPA delivered by a date
    • first round answers delivered by a date
  • Establish a materiality threshold for home-team review:
    • If uncovered issues aggregate to ~1/3 of deal value, treat as urgent/possibly stop
    • If issues are ~3% impact, consider deferring to avoid stalling momentum
  • Run periodic standup-style calls:
    • fortnightly early, then weekly or twice weekly near deadline
    • review obstacles, progress, and blockers

Realism statement

  • Don’t expect a 100% airtight acquisition—plan for inevitable issues with working capital headroom.

Data room “do’s” (reduce friction; increase speed)

Ideal data room characteristics

  • More is more (but organized and digestible).
  • Must be properly organized with:
    • audit trail
    • robust VDR setup (not just a loose Google Drive)
  • Preempt delays:
    • send a due diligence checklist early
    • ask the seller to populate the data room before lawyer-to-lawyer negotiations begin (ideally aligned with heads of terms)

AI augmentation (high level)

  • AI will transform due diligence, but:
    • avoid feeding all VDR content into tools that could violate NDA
    • use AI as a productivity layer for summarization/synthesis by humans-in-the-loop

Commercial vs financial diligence (how to assess market positioning)

  • Market diligence is often underdone due to resource constraints.
  • Practical competitor analysis approach:
    • ask seller for biggest competitors
    • pull competitor accounts from your home team
    • estimate relative market position using a revenue-based proxy
  • Market sizing can be hard for niche SMBs, so:
    • start with competitor pecking order + revenue proxy for market share
  • Optional customer sentiment test:
    • run a mini NPS on ~10–20 customers (existing and potential) and compare sentiment vs competitors

Buy-and-build angle

  • If planning a rollup/buy-and-build, competitive understanding early supports later integration strategy.

Post-diligence: translating insights into final deal terms

How findings affect deal structure

Due diligence should inform whether to:

  • adjust price
  • add/modify earnouts
  • or walk away (when there’s duplicity/evasion or irrecoverable risks)

Earnout risk-sharing “fairness band” (guidance)

  • Avoid extreme earnouts (e.g., not aiming for double-for-double).
  • Suggested “fair” earnout approach:
    • performance needs to be at least as good as last year
    • possibly 95% of last year or better (rather than exact doubling)
  • Earnouts should reflect shared risk—i.e., the seller believes the story enough to accept contingent upside.

Key metrics / thresholds mentioned

  • Customer concentration risk: if a single customer is ~25% of revenue, change-of-ownership clauses could remove core revenue.
  • Materiality threshold guidance
    • urgent if issues aggregate to ~1/3 of deal value
    • not necessarily deal-breaking if cumulative issues are ~3% impact
  • Mini NPS scope: sample size of 10–20 customers.
  • Time horizon for exit example: ~8 years (Vositel acquisition to exit).

Actionable recommendations (condensed)

  • Use an ~200-row due diligence spreadsheet checklist to structure the data room.
  • Request anonymized people data (roles/salaries/tenure) to estimate redundancy exposure.
  • Demand top customer/vendor tables (top 10 minimum; ideally top 50) to quantify concentration risk.
  • Perform an IP/brand ownership audit before deal close to prevent post-sale unbundling/ransom scenarios.
  • Commission Quality of Earnings to validate sustainability and working capital reality (detect revenue pull-forward and misclassification).
  • Set DD milestones + materiality thresholds to prevent deal fatigue.
  • Require a well-structured, audit-trailed VDR data room populated early (before counsel-to-counsel delays).

Presenters / sources (as stated in the subtitles)

  • Gareth Hawkins (co-host; serial acquirer; CEO of BisCrunch)
  • Other co-host/host (not explicitly named in subtitles; references interviewing Gareth)
  • Guest named by role in intro: “our guest is postponed. ghosted Freud” (appears garbled/unclear; no substantive business contribution provided in the subtitles excerpt)

Original video