What legal and operational house cleaning must we complete well before entering M&A due diligence?

Question

Tyler Smith · Accepted Answer

Buyers hire aggressive legal teams whose sole job is uncovering operational and corporate liabilities to claw back your purchase price. The time to uncover compliance rot is years before an M&A attorney sends you a fifty-page due diligence questionnaire.

Conduct an internal operational and legal audit focusing on four core areas:

- Corporate records and cap table: Confirm that your operating agreements, board consents, voting records, and equity share registries are accurate, signed, and fully executed. Any unresolved founder dispute or phantom stock ambiguity will stall a transaction.
- Employment and contractor agreements: Ensure every single employee and contractor has executed non-disclosure, intellectual property assignment, and non-solicitation agreements. If a 1099 contractor built core software or designs without an IP assignment, you may not legally own your core product.
- Assignability of commercial contracts: Audit your customer and vendor agreements for change of control provisions. If critical contracts terminate upon a sale, a buyer will make renegotiating them a condition to close.
- Regulatory and tax compliance: Review state sales tax nexus liabilities, environmental exposure, and employee classification practices.

Use your weekly Level 10 Meeting to IDS (Identify, Discuss, and Solve) missing documentation systematically rather than panicking inside a sixty-day due diligence window.