What to Expect During a PE Diligence Process

Private equity diligence is not casual.

It is structured, layered, and relentless by design.

Founders often assume that once a letter of intent is signed, the hardest part is behind them. In reality, signing the LOI is the moment scrutiny intensifies.

Private equity firms are deploying institutional capital. They have modeled returns, structured leverage, and presented the deal internally. Diligence exists to validate assumptions—and expose risk.

After nearly three decades as an entrepreneur, investor, and advisor, I’ve seen diligence make or break deals more often than negotiation. It’s rarely the headline valuation that derails a transaction. It’s the surprises uncovered during diligence.

As I explain in my book, The Entrepreneur’s Exit Playbook, exits reward preparation. Diligence doesn’t create problems—it reveals them.

The Purpose of Diligence

Private equity diligence is designed to answer three core questions:

• Are the financials accurate?
• Are earnings durable?
• Is risk appropriately priced?

Everything flows from those questions.

Buyers want confirmation that the company they modeled on paper behaves the same way under scrutiny.

On the Legacy Advisors Podcast, we often say diligence is less about finding perfection and more about reducing uncertainty.

Financial Diligence: The Deep Dive

Financial diligence is typically the most intense component.

Expect third-party accounting firms to conduct:

• Quality of earnings (QoE) analysis
• Revenue recognition review
• EBITDA normalization
• Working capital analysis
• Cash flow validation

Every add-back will be examined.
Every margin fluctuation will be questioned.
Every unusual expense will be explored.

If your financial reporting has been loose, this is where friction emerges.

At Legacy Advisors, we encourage founders to conduct internal or third-party pre-sale reviews before entering a formal process. Surprises are expensive.

Commercial Diligence: Market Reality Check

Private equity firms often hire consultants to evaluate market positioning.

Commercial diligence may include:

• Customer interviews
• Market size validation
• Competitive landscape analysis
• Pricing strategy assessment
• Growth sustainability modeling

Founders sometimes underestimate this phase. Buyers aren’t just evaluating what has happened—they’re validating what can happen.

In The Entrepreneur’s Exit Playbook, I stress that growth narratives must withstand independent verification.

Operational Diligence: Stress-Testing Infrastructure

Operational diligence examines scalability and risk exposure.

Buyers assess:

• Management team strength
• Organizational structure
• Key employee dependency
• Systems and technology
• Supply chain stability

Founder-heavy businesses often feel pressure here.

If decision-making is overly centralized, it becomes visible.

On the Legacy Advisors Podcast, we’ve discussed how reducing founder dependency before going to market pays enormous dividends during diligence.

Legal and Compliance Diligence

Law firms conduct extensive legal review, including:

• Corporate structure
• Contract validity
• Intellectual property ownership
• Employment agreements
• Litigation exposure
• Regulatory compliance

This process can feel intrusive—but it’s routine.

Documentation gaps can delay timelines significantly.

At Legacy Advisors, we often advise founders to clean up governance documentation well before entering a transaction process.

IT and Cybersecurity Review

Technology infrastructure receives increasing scrutiny.

Buyers evaluate:

• System reliability
• Data security protocols
• Disaster recovery planning
• Cyber risk exposure
• Software dependencies

In today’s environment, weak cybersecurity posture can materially impact valuation or closing timelines.

Diligence now extends beyond financial and operational fundamentals.

The Management Presentation Phase

During diligence, management presentations become more detailed and probing.

Founders should expect:

• Intensive Q&A sessions
• Scenario testing
• Assumption challenges
• Forecast scrutiny

This isn’t personal. It’s process.

Buyers need confidence in leadership.

In The Entrepreneur’s Exit Playbook, I emphasize that composure during this phase influences buyer confidence significantly.

Data Room Discipline

A well-organized virtual data room is essential.

Expect to provide:

• Historical financials
• Contracts
• HR documentation
• Tax filings
• Cap table details
• Operational metrics

Messy data rooms signal risk—even if the underlying business is strong.

On the Legacy Advisors Podcast, we’ve discussed how organization communicates credibility before a single question is asked.

The Emotional Experience of Diligence

Diligence can feel exhausting.

Every assumption is questioned.
Every number is validated.
Every story is tested.

Founders often interpret scrutiny as skepticism.

It’s not.

Private equity firms are accountable to their investors. They must justify risk.

The key is emotional discipline.

At Legacy Advisors, we help founders anticipate diligence intensity so it doesn’t feel destabilizing.

Common Reasons Deals Falter

Deals typically falter during diligence for a few reasons:

• Earnings volatility uncovered
• Customer concentration risk heightened
• Weak documentation
• Overstated add-backs
• Founder dependency concerns
• Forecast assumptions that don’t withstand testing

Most of these issues are predictable—and preventable.

In The Entrepreneur’s Exit Playbook, I stress that readiness reduces renegotiation risk. Diligence surprises erode leverage quickly.

How to Prepare Strategically

Preparation is not reactive—it’s proactive.

Key steps include:

• Cleaning financial reporting
• Reducing concentration risk
• Strengthening management depth
• Documenting processes
• Clarifying growth assumptions
• Organizing contracts

Preparation transforms diligence from confrontation to confirmation.

On the Legacy Advisors Podcast, we often say that diligence should validate your story—not rewrite it.

Find the Right Partner to Help Sell Your Business

Private equity diligence is intense—but predictable.

The right partner helps founders anticipate scrutiny, reduce surprises, and maintain leverage throughout the process.

At Legacy Advisors, we guide founders through diligence with discipline and foresight—so preparation replaces panic and clarity replaces defensiveness.

Because diligence doesn’t test whether your business is perfect.

It tests whether it’s prepared.

Frequently Asked Questions About What to Expect During a PE Diligence Process

How long does a private equity diligence process typically last?

Most PE diligence processes run anywhere from 60 to 120 days after signing a letter of intent, though complexity can extend that timeline. The length depends on deal size, industry, leverage structure, and how organized the company is. Financial, legal, commercial, and operational workstreams often run simultaneously. On the Legacy Advisors Podcast, we’ve discussed how preparation shortens timelines significantly. In my book, The Entrepreneur’s Exit Playbook, I emphasize that clean documentation and organized reporting reduce friction—and friction costs leverage.

What is a Quality of Earnings (QoE) report, and why is it important?

A Quality of Earnings report is an independent financial review conducted by a third-party accounting firm hired by the buyer. It validates EBITDA, analyzes revenue recognition, examines add-backs, and evaluates working capital trends. The goal is to confirm that earnings are durable and accurately represented. If discrepancies arise, valuation may be adjusted. At Legacy Advisors, we often recommend founders conduct a pre-sale QoE to identify issues before buyers do. Surprises during diligence rarely benefit the seller.

Will buyers really interview my customers during diligence?

Often, yes—especially in commercial diligence. PE firms may hire consultants to conduct confidential customer interviews to assess satisfaction, churn risk, competitive positioning, and pricing tolerance. This helps validate growth assumptions. On the Legacy Advisors Podcast, we’ve noted that founders sometimes underestimate this step. Your narrative must align with how customers actually describe the business. Consistency builds trust.

What are the most common deal-breakers uncovered during diligence?

Common issues include overstated add-backs, customer concentration risk, weak documentation, inconsistent revenue recognition, and founder dependency concerns. Sometimes forecast assumptions fail to withstand scrutiny. In The Entrepreneur’s Exit Playbook, I stress that diligence rarely introduces new problems—it reveals existing ones. Proactive preparation dramatically reduces renegotiation risk and valuation compression.

How can founders stay composed during an intense diligence process?

Expect scrutiny. Every number and assumption will be questioned—not because buyers distrust you personally, but because they are accountable to their investors. Emotional discipline matters. At Legacy Advisors, we coach founders to view diligence as confirmation rather than confrontation. Prepared companies experience validation. Unprepared companies experience friction. The difference is almost always foresight.