Every buyer we work with arrives with some version of the same plan. Get the financials, get them verified, get a bank to agree. That plan is correct and it is also incomplete, and the gap between those two things is where most of the deals we have seen fall apart.
Here is the thing nobody tells you about acquisition diligence: the numbers are the easy part. Not easy in the sense of quick or cheap, but easy in the sense of knowable. Tax returns exist. General ledgers exist. A quality of earnings analysis will rebuild the seller's earnings with every add-back documented rather than remembered, and a lender will stress that number until it either holds or it does not. The financial workstream has an owner, a process, and a finish line.
The rest of it does not.
What the checklist cannot see
We maintain an eight-phase diligence checklist that our clients work through on every engagement. It covers eligibility, financials, people, legal, customers, operations, real estate, and the lender package. It runs long and it is built from deals that went sideways.
The line at the top of it is the one that matters most: the checklist covers the business, it does not cover the people.
Those three things kill more deals than concentration, margin compression, and deferred capex combined, and none of them show up in a data room.
The seller has already left
A seller signs a purchase agreement with a 90-day transition commitment. The buyer reads that and hears three months of training, relationship handoff, and institutional knowledge transfer. The seller reads it and hears three months of showing up.
This is not bad faith. It is what happens when someone spends two years deciding to sell and then finally sells. The emotional exit precedes the legal one, often by months, and by the time the wire clears the seller is mentally somewhere else entirely.
Two questions surface this, and both of them are free.
What are you doing the day after close? Not in general terms. Hour by hour, walk me through week one. A seller who has thought carefully about staying engaged answers this differently than one who has been counting down. You will hear the difference immediately.
Is there a date you need this done by, and what is driving it? This one matters more than it looks. If the seller is under contract on a house, or has a date circled for a move, or committed to something that depends on these proceeds, then closing is the means and your business is the obstacle. That changes how they will behave in the last thirty days, and it changes what their transition is worth.
Ask both before the LOI. They cost nothing and they will reshape how you price the transition.
Expected to remain is not contracted to remain
If your thesis is that the business runs without the owner, then the person it actually runs on is the deal. Not a diligence line item. The deal.
We see buyers get comfortable here on the strength of a conversation. The manager seems happy. The seller says she is not going anywhere. Everybody nods. Then the ownership changes, the manager who built the operation under a founder she liked finds herself working for a stranger two time zones away, and six weeks later she is gone with the operating layer in her pocket.
Expected to remain and contracted to remain are different things, and in an absentee deal that single word is the whole thesis.
What this means in practice: name every person who cannot leave without damaging the business. For each one, answer whether they are staying and whether that is papered or merely assumed. Meet them independently of the seller, before close, and listen for whether their account of the business matches what the seller told you. Where someone is genuinely load-bearing, solve it with structure rather than optimism. We have closed deals using retention agreements, earned equity grants, and equity rollovers, and the common thread is that the operator ends up with a financial reason to stay that does not depend on how they feel about the new owner.
On a two-location deal in Texas earlier this year, both site managers had to be confirmed in seat before close. The buyer was not a mechanic and had no intention of becoming one. Without those two people, there was no business to buy, only equipment and a lease.
The employees nobody has told
Sellers want confidentiality. Buyers want access. Both positions are reasonable and they point in opposite directions, which is why this gets handled badly on most deals.
The failure mode is specific: employees find out from a rumor. Someone sees an unfamiliar car in the lot three Tuesdays running, or a manager gets pulled into a call nobody explains, and by the time there is an announcement the team has already written its own version of the story. That version is almost always worse than the truth and it is very hard to correct after the fact.
Stage it deliberately. Key managers under NDA before close. Broader team at announcement. A written plan, agreed between buyer and seller, before anyone says anything to anyone. Decide who delivers the message and what it says while you still have the leverage of an unsigned agreement.
Ask the seller directly what they have told their employees and when they plan to tell the rest. The answer tells you a lot about what you are walking into on day one.
The questions that actually surface problems
A seller interview is not a formality and it is not an opportunity to build rapport. Run deliberately, it is the cheapest diligence available and it runs in parallel with everything else.
The questions that produce real information are the ones that invite the seller to be useful rather than defensive. What would you fix if you were keeping it another five years? What has kept you up at night in the past year? Which customer worries you most? Who on the team could you not replace? Has anyone approached you to buy this before, and what happened? Is there anything you would be relieved for me to find?
That last one works more often than it should.
Then do the cross-check. Does the seller's account of the business match the financials? Does it match what the managers say independently? A gap between those three accounts is not necessarily fraud. It is usually just a founder who has not looked closely at something in a while. Either way, you want to find it now.
And write down anything that felt off during the site visit. A site visit is diligence. What you notice is data, even when you cannot immediately articulate why it bothered you.
Where this leaves the financial work
None of the above argues for doing less financial diligence. It argues for recognizing which workstream will quietly drift if nobody owns it.
The financial side has natural forcing functions. A lender will not fund without a QoE on larger deals, and under the current SOP the lender has to use the QoE earnings when sizing debt service coverage, so a report that trims the seller's add-backs directly reduces the loan. That consequence is immediate and visible. It gets attention.
The people side has no equivalent forcing function. No one will decline to fund your deal because you never asked the plant manager whether she plans to stay. The consequence arrives later, after close, when it is entirely yours.
That asymmetry is the whole reason this gets skipped.
The order matters
One practical note, because it changes the economics of a search.
Phase 0 and Phase 1 of our checklist are cheap, and they kill deals fastest. Eligibility questions, licensing transferability, whether the equity injection sources qualify, whether a lender can model the revenue at all, and a rough test of debt service coverage on historical earnings with the add-backs haircut. None of that requires a data room. All of it can end a conversation in a week.
Do that work before you spend money on appraisals, environmental review, or legal. Buyers who run the phases out of order end up paying for Phase 6 and Phase 7 diligence on deals that Phase 0 would have killed for free.
If a deal fails your QoE, that is the process working. The cost of finding out early is the entire point.
The bottom line
Finding a problem is not the same as killing a deal. Most problems are price adjustments or structural changes, and a buyer who treats every finding as a dealbreaker will never close anything.
But walk when you cannot verify something material, when the seller is evasive about one specific area, when concentration exists that nobody can explain and the seller will not address, or when your gut says no after a site visit.
And run the people workstream with the same discipline you bring to the numbers. The financials tell you what the business did. The people tell you whether it keeps doing it after you own it.
If you want to talk through diligence on a deal you are looking at, reach out to me directly at will@lhcapitalgroup.com.
Cheers,
Will Shaw
Managing Partner, Lighthouse Capital Group
We light the way to deals that last.
