When evaluating strategic acquisition targets to accelerate our V/TO growth, how should our leadership team audit an acquisition target whose high margins rely on unverified AI workflows?

Question

Tyler Smith · Accepted Answer

Acquiring a business with seemingly incredible EBITDA margins can quickly become a disaster if those earnings rest on unstable, custom-coded AI scripts or non-compliant data scraping. In inorganic growth, due diligence must look past headline financials to inspect the underlying operational architecture.

Apply the Step by Step Exit framework to assess target readiness. Have your Integrator and technical seat audit the target company's processes. Determine whether their automation is built on brittle personal accounts and fragile integrations, or if it is institutionalized within standardized, enterprise-grade Core Processes.

Examine data provenance. Where did the target get the data used to train or prompt their internal systems? If they scraped third-party intellectual property or violated customer confidentiality agreements to achieve their cost efficiencies, you are buying a massive legal liability rather than a sustainable moat.

Check for key-person dependency. If their entire automated infrastructure lives in the head of a single junior developer who strings together unofficial APIs, that capacity will evaporate the day that employee resigns.

If the target lacks documented systems, discount their valuation multiple significantly or structure the transaction with earn-outs contingent on operational stability. Never pay full enterprise value for automated EBITDA until you verify that their tech stack is legally compliant, fully documented, and easily transferable to your own team.