There is a specific kind of fever that takes over an investment committee when a deal book looks perfect. The EBITDA margins are 28%, the founder is charismatic, and the growth curve looks like a hockey stick. You feel the pressure to move fast, preempt the auction, and get the Letter of Intent (LOI) signed before a competitor swoops in.
Stop.
Signing the LOI is the moment you lose your leverage. Once that document is inked, the clock starts ticking against you. Exclusivity periods burn fast, and broken deal costs begin to mount—costs that funds still bear 73% of the time, regardless of whether the deal closes. More dangerously, you enter the "confirmation bias" zone, where your team unconsciously looks for reasons to keep the deal alive rather than reasons to kill it.
The statistics are brutal. Recent data indicates that between 50% and 70% of M&A transactions fail to close after the initial agreement is struck. Even worse, for technology acquisitions, 60% of acquirers later regret the deal due to missed synergy targets or hidden technical debt. The primary culprit is rarely the headline price; it is the operational and technical reality lurking beneath the spreadsheet.
As an Operating Partner, your job isn't just to validate the financials—it's to validate the engine that produces them. Financial engineering can obscure a lot of sins, but it cannot fix a codebase that requires a total rewrite or a sales team that only closes when the founder is in the room. This checklist is your shield against the Winner's Curse.
You don't need generic questions about "culture." You need binary inputs that determine if this asset is a platform for growth or a money pit. We break these down into five critical diligence vectors: Financial, Commercial, Operational, Technical, and Legal/Compliance.
Don't just trust the CIM. Look for the manipulation of 'Adjusted EBITDA.'
Is the growth repeatable, or was it luck?
Can this business run without the founder?
The invisible deal killer. 53% of tech deals miss synergy targets because of this section.
The ticking time bombs.
Getting answers to these 50 questions is not just an academic exercise; it is a mechanism for valuation defense. When you find that the "proprietary AI" is actually an outsourced team in a low-cost geography using open-source libraries (Question 32), or that 40% of revenue is tied to a customer with a cancellation-for-convenience clause (Question 17), you have three options:
If the business is fundamentally sound but carries hidden debt—whether financial, technical, or operational—you re-price the risk. We recently advised a PE firm that discovered significant technical debt during diligence. Instead of walking away, they used the findings to negotiate a $4M reduction in the purchase price, earmarking those funds specifically for a "remediation capex" budget post-close. Use the data to adjust EBITDA add-backs or increase the escrow holdback.
If the risk is behavioral (e.g., founder dependency or unproven pipeline), solve it with deal structure. Shift more of the consideration into an earnout tied to Gross Profit rather than Revenue, forcing the seller to maintain margin discipline. Mandate the hiring of a professional COO as a closing condition to solve the "spoke-and-wheel" management issue.
There are some bells you cannot un-ring. If the revenue recognition is fraudulent, the IP is stolen/encumbered, or the customer concentration risk is existential (e.g., 60% of revenue with one client who is currently running an RFP), kill the deal. The cost of broken deal fees is a rounding error compared to the cost of a writedown. As the adage goes in private equity: "The best deal you ever do is the bad one you didn't close."
Diligence is not a box-checking exercise. It is the first step of your Value Creation Plan. If you don't ask these questions now, you will be paying for the answers later.
