Due Diligence Checklist for Search Fund Acquisition

This checklist summarizes the key action items from the paper “On the Nature of Due Diligence in a Search Fund Acquisition” (Yale SOM, May 6, 2022).

1. PRELIMINARY DILIGENCE CHECKLIST (Pre-LOI: Validate Fit, Price, Seller)

Industry & Target Research

Confirm fit with search criteria (e.g., positive dynamics, large market; use Exhibit 1 scorecard).
Calls with 3–5 industry experts.
Basic commercial scan (Yahoo Finance, Google).

Financial Validation

Request/review high-level financials (QuickBooks/Excel).
Build simple valuation model (comparables via S&P Capital IQ, Pitchbook; consult investors/brokers).
Swing early: Propose non-binding LOI price (stable; educate seller on public vs. private multiples).

Seller Assessment

Test character/motivation (non-economic reasons to sell; prior attempts/succession plans).
Confirm readiness (hired lawyer? Organized financials?).
Build rapport (in-person meetings; transparent communication).

Ad Hoc Legal/Regulatory Scan

Consult attorney for red flags (IP, worker classification, immigration, privacy, regulations).

Decision Gate

LOI submitted? (Low cost/risk; demonstrate knowledge)
Pipeline insulated? (Interns handle sourcing).

2. CONFIRMATORY DILIGENCE CHECKLIST (Post-LOI: 8 Pillars)

Pillar 1: FINANCIAL (Weeks 1–5; $30K–$50K)

Accounting Review

Understand methods (cash vs. accrual; GAAP deviations)
Proof of Cash – Reconcile bank statements (revenue/deposits ±1%)
Quality of Earnings (QofE):Normalize 3 years historical EBITDA (monthly trends)
Sanity check: EBITDA vs. tax return.
Taxes
Working Capital Peg:Benchmark net WC
Risk Scans: Friend invoices; bad debt reserves; pending customer loss; future comp promises.

Pillar 2: LEGAL (Weeks 4–8; $25K–$50K)

Entity Verification

Ownership structure; Certificate of Good Standing.
Background checks (owner/principals).

Key Contracts Review

Employment; leases; customer/supplier (top 5–10).
Consents for change of control.

Liabilities

Liens/tax obligations; lawsuits/claims.
Databases for encumbrances.

Pillar 3: COMMERCIAL (Weeks 1–4; $5K–$15K)

Quantitative Analysis

Market size/share; growth/margins (by geo/subindustry).

Qualitative Analysis

Porter’s Five Forces (rivalry/suppliers/substitutes/entry).
Value chain; competitors; customer segments/pricing.

Moat Depth

Organic/inorganic growth paths.

Pillar 4: CUSTOMER (Weeks 3–6; $10K–$25K)

Internal Data

Anonymized lists (concentration by logo/geo/product/rep).
Contracts/T&Cs; attrition rates (logo vs. revenue).
Sales pipeline; marketing plans.

Attrition Analysis

Patterns/reasons for defection (customer-level).

External Perspectives

Interviews/surveys (10–20 customers; direct or 3rd-party).
Stickiness; pain points; switching costs.

Pillar 5: TECHNOLOGICAL (Weeks 3–6; $10K–$20K)

Tech Stack Survey: Components; 3rd-party vendors (ERP/accounting).Tech debt/underinvestment.
Talent: Key admins (qualifications/tenure/training).
Security: Vulnerabilities (ransomware; backups).
SaaS-Specific: APIs/integrations; feature dev; onboarding.

Pillar 6: HUMAN CAPITAL (Weeks 2–5; $0–$5K)

Owner: Intentions/background check; prior sales.
Employees; Org map; contracts/handbooks, HR data (salaries/benefits/churn/demographics by dept/tenure), Incentives (formal/informal).
Anonymous Survey: Happiness/retention.
Culture: Site visits; interviews (vibe; owner tone).
Interviews (If allowed): Top performers; improvement ideas.

Pillar 7: OPERATIONAL (Weeks 4–7; $0–$10K)

Operations Cycle Map: “Staple to an Order” , People/depts involved; incentives/redundancies/bottlenecks.
Systems Review: Data flow (ERP/e-commerce/meetings).
Quality/Safety: Controls (OSHA records; root cause meetings), Failure handling.