Due diligence is where deals lose value. Buyers rarely walk away over what they find; instead they reprice, expand indemnities, escrow more of your proceeds, and slow the timeline while problems get fixed under deadline pressure. The sellers who net the most are the ones who run diligence on themselves first — months before a buyer appears. Here is the checklist, organized the way buyers organize it.
Corporate records and capitalization
Buyers start with the question, "Does the seller actually own what it is selling?" That means: articles and amendments, bylaws or operating agreement, minutes and consents for major actions, good standing in California and every state of qualification, and — above all — a clean capitalization table. Every issuance, transfer, option, SAFE, warrant, and convertible note should be papered, with securities-law exemptions identifiable. Missing stock ledgers, unsigned consents, and a co-founder who left years ago with unresolved equity are among the most common deal-delayers, and every one of them is cheaper to fix now than during exclusivity. If your minute book has gaps, a records cleanup with corporate governance counsel belongs at the top of the pre-sale list.
Financials, taxes, and quality of earnings
Expect the buyer to commission a quality-of-earnings review that goes behind your statements: revenue recognition, customer concentration, related-party transactions, owner add-backs, and working-capital trends. Get ahead of it — reconcile books to tax returns, document add-backs you will claim, and clean up personal expenses running through the company. On tax, buyers probe income, payroll, and sales and use tax in every state where you have people or customers; multistate sales-tax exposure from remote sales is a recurring surprise that turns into an escrow. Unremedied payroll tax or worker-classification exposure is even worse, because it follows the business in most structures.
Contracts: the change-of-control sweep
Assemble every material agreement — customer, supplier, lease, loan, license, partnership — and read them the way a buyer will:
- Assignment and change-of-control clauses: which contracts require consent for an asset sale, and which trigger even on a stock sale;
- Term and termination: contracts terminable at will by a key customer are worth less than their revenue suggests;
- Exclusivity, most-favored-customer, and non-compete terms that would bind the buyer's larger organization;
- Unsigned, expired, or handshake arrangements with material customers — paper them before diligence, not during it.
Knowing your consent map early also shapes deal structure, since consent-heavy businesses push toward equity deals.
Intellectual property and technology
The buyer's question is chain of title. Every founder, employee, and contractor who touched your product should have a signed invention-assignment agreement — under California law, work created by a contractor generally is not automatically yours without an applicable written agreement. Verify trademark and patent registrations are in the company's name (not a founder's), domain names and key accounts are company-controlled, open-source components in your code are inventoried with license terms your model can live with, and trade secrets are protected by real confidentiality practices. If customer data is part of the asset, be ready to show privacy-policy compliance and, where the CCPA applies, that a sale of the business fits your disclosed practices.
Employees, litigation, and compliance
California sellers face diligence heat on employment: independent-contractor classification under the ABC test (Lab. Code § 2775), exempt/non-exempt status, wage-and-hour practices, arbitration agreements, and any PAGA exposure — buyers price these aggressively because the liabilities are statutory and class-prone. Inventory pending and threatened litigation, demand letters, and government inquiries with a candid assessment of each; buyers react far worse to discovering a dispute than to a disclosed one. Round out the file with licenses and permits, insurance policies and claims history, real-property matters, and any industry-specific regulatory obligations.
Run the process like the buyer will
- Build the data room yourself, organized by these categories, before going to market.
- Fix what can be fixed: signatures, filings, assignments, consents you can collect quietly.
- Disclose what cannot be fixed, on your own timing and framing.
- Tie diligence to the deal documents — your disclosure schedules are your defense against indemnity claims later, so build them carefully with M&A counsel rather than treating them as an afterthought.
Talk to a California business attorney
A pre-sale legal audit, done a few months before you go to market, routinely pays for itself in price protection and speed. Schedule a free consultation or call (949) 418-2113.
This article is attorney advertising and provides general information only. It is not legal advice and does not create an attorney–client relationship. Facts matter; consult a lawyer about your specific situation.
