The Three Things Buyers Actually Diligence Before Closing

By the time a buyer is in your data room, the LOI price they offered is already a number they're trying to walk back from. Diligence isn't validation... it's a systematic effort to find the reasons your number is too high.

I lived this most recently when we sold Medicx Health to OptimizeRx for $95M in 2023. The pattern is consistent across private-company exits. Three areas drive nearly all the price erosion that happens between LOI and close. If you understand them 6–12 months before diligence starts, you keep most of the headline number. If you find out during diligence, you don't.

01Customer concentration... and the right kind of concentration

Every banker tells founders to "watch customer concentration." Most founders translate that as "any customer over 10% is bad." That's incomplete.

What buyers actually model is portfolio risk on the top accounts. Two questions drive their math:

• If your top customer leaves in year 1 post-close, what's the EBITDA impact?
• How long has that customer been there, and what does the contract say about renewal?

A 25% customer with a 7-year tenure, multi-stakeholder relationship, and 3 years left on contract is barely a haircut. A 12% customer in year 1 of a one-year deal with a single champion at the account gets discounted 50–80% in the buyer's revenue model.

Run that math now. Build the narrative for each top-10 customer. Don't let them write it for you.

02Contract durability and revenue quality

This is where the haircut compounds quietly. Buyers stratify revenue into tiers... contracted recurring, contracted non-recurring, repeat-but-uncontracted, and one-time. Each tier gets a different multiple in their valuation model. Most management teams report all of it as "revenue" and assume the buyer pays the same multiple across the stack.

They don't.

Specific points you'll get pushed on:

• Termination-for-convenience clauses (which effectively convert "contracted" revenue to at-will)
• Auto-renewal language (or the absence of it)
• Pricing escalators... or contracts you've quietly under-priced for years
• Customer-level profitability (most companies don't track this... buyers will build it)

The fix is upstream. Tighten contracts at renewal. Build a customer-level P&L now. Know your bottom-quartile customers and have a story for each.

03The gap between management EBITDA and QofE-grade EBITDA

This is where most deals lose 10–20% of value, and where founders get genuinely surprised.

Management EBITDA is whatever you've been showing the board. QofE EBITDA (Quality of Earnings, the buyer's accountant version) is what's left after a third party strips out:

• Owner add-backs that won't survive scrutiny
• Revenue recognition timing differences
• Capitalized expenses that should have been expensed
• One-time items that turn out to be recurring
• Working capital normalization (often the silent killer... a $1–2M hit on businesses with any seasonality)

I've seen the gap between the two numbers run from $200K on a clean company to $3M on a company that thought it was clean. On a 10x multiple, that's $2–30M of enterprise value.

The fix: commission a sell-side QofE 6–12 months before going to market. Find your own gaps. Close them or build a defensible answer for each one. The cost ($50–150K) returns 10–50x in price preservation.

The takeaway

Diligence isn't a moment. It's a process the buyer is running against you with the goal of finding reasons to pay less. The companies that exit at or above their LOI are the ones that ran diligence on themselves first.

If you're 12–24 months from a transaction, the work starts now. Customer math, contract architecture, and audit-grade financials aren't things you build during diligence. They're things you're graded on during diligence.