A due diligence checklist for the acquisition of a private company differs from the public version in one structural way with four consequences: there are no filings. Everything a buyer knows comes from what the seller hands over, which changes what the list has to cover, how long it takes and where the risk sits. This page sets out the four consequences and what each adds to the request list.
One: nothing has been audited by the market
A public company's numbers have been through an audit and a filing regime that EDGAR makes searchable. A private company's have not, so quality of earnings does work the market already did elsewhere. That is the largest single line in a private diligence budget and it is not optional.
Two: the corporate history has to be reconstructed
Share transfers, option grants made informally, consents that were never obtained and a register that may not reflect what everybody believes. On a private company this is a real risk area rather than a formality, and a defect here is a condition rather than a discount because fixing it means finding people.
Three: the owner and the business are entangled
Personal expenses in the accounts, property owned by the owner and leased to the company, family members on the payroll, and customer relationships held personally. Each has to be identified and normalised, and each is a conversation that requires tact as much as analysis.
Four: key person risk is concentrated and rarely documented
The owner frequently is the sales function, the technical knowledge and the supplier relationships. That is not a finding to price down so much as a plan item: what happens on day one after they leave, and what retention or handover period the deal needs to build in.
Questions people ask about due diligence checklist for acquisition of a private company
How does private company diligence differ?
There are no filings, so everything comes from the seller. Quality of earnings does work the market already did for a public company.
What is the most common corporate finding?
Informal option or equity promises and consents that were never obtained. Both are conditions rather than discounts because fixing them means finding people.
How is owner entanglement handled?
Identified and normalised in quality of earnings, then addressed in the plan: personal expenses, related-party leases and relationships held personally.