Sell-Side Due Diligence: The Most Underestimated Part of Selling

When firm owners consider selling their business, most of the focus naturally falls on valuation. What is my firm worth? Who are the right buyers? What multiple can I achieve?

Those are important questions, but in AEC sell-side due diligence, they’re not where deals are won or lost.

In reality, the most critical phase of any transaction begins after the Letter of Intent (LOI) is signed, and it’s the part of the process that consistently catches sellers off guard: due diligence.

What Happens After an LOI is Signed in an AEC Firm Sale?

I often hear some version of this from sellers: “Once we have an LOI, we’re essentially done, right?” The answer is no. The LOI is not the finish line…it’s the starting point for buyer validation.

Until this point, a buyer has formed a view of your firm based on summary-level financials. Due diligence is where they begin to test that view in detail. And this is where things can change quickly.

Now is when buyers validate the financial, operational, and leadership assumptions used to determine valuation and deal structure. If inconsistencies surface during diligence, buyers may adjust EBITDA, revise terms, introduce earnouts, or reassess risk entirely. For sellers, understanding what happens between LOI and close is critical to protecting deal value.

I was involved in a transaction in which a firm negotiated a very strong valuation based on historical financial performance. But once diligence began, the buyer re-evaluated how revenue was being recognized across several large projects. The issue wasn’t misconduct. It was an inconsistency. And that was enough for the buyer to adjust EBITDA downward and re-trade the deal structure. Same business…same backlog…different outcome, all because of how the numbers held up under scrutiny.

Where Deals Start to Unravel

What do buyers look for during AEC sell-side due diligence? The same themes tend to surface during diligence. Not because firms are doing anything wrong, but because buyers are evaluating them through a different lens.

Sophisticated buyers are looking beyond top-line growth and backlog volume to assess the consistency, predictability, and sustainability of a firm’s operational performance. In our evaluations, four core financial and operational areas consistently surface during this vetting process:

Revenue Recognition and Financial Clarity

If financials are on a cash basis, or percentage-of-completion is applied inconsistently, buyers will re-underwrite earnings. In one situation, a firm believed they were showing steady margins year over year. During diligence, the buyer converted the financials to an accrual basis and uncovered timing mismatches between when projects were billed and when they were performed. The result? Margins weren’t as stable as they appeared.

Backlog Quality

Not all backlog is viewed equally. Buyers distinguish between:

• Contracted backlog
• Highly probable work
• Pipeline

And they will discount accordingly.

We worked with a firm that presented a very strong backlog number going into market. But as diligence progressed, it became clear that a meaningful portion of that backlog was tied to projects that had not yet been formally contracted. From the seller’s perspective, those jobs were “as good as won.” From the buyer’s perspective, they were not actionable backlog. That gap in interpretation created friction and ultimately reduced the forward-looking value of the business in the buyer’s model.

Project Performance Consistency

Variance in project performance is one of the fastest ways buyers identify operational risk. In one case, a buyer did a deep dive into individual project performance and found that two senior PMs consistently delivered strong margins, while others showed wide swings, some significantly underperforming.

The selling firm had always viewed this as part of normal variability, but the buyer saw it differently: a business dependent on a small number of individuals, rather than repeatable systems. That directly influenced how they structured retention incentives and how they assessed risk.

Leadership and Incentive Alignment

Another common issue is dependency on ownership. I’ve seen situations where the founder was deeply involved in client relationships, project oversight, and financial decision-making with limited delegation. During diligence, the buyer’s concern wasn’t about past performance but rather about future sustainability.

In one case, the deal moved forward only after a significant portion of consideration was tied to a multi-year transition and performance-based structure. The business was attractive, but its continuity hadn’t yet been proven.

How Can AEC Firm Owners Prepare for Due Diligence Before Going to Market?

The most successful sellers begin preparing for diligence well before they officially enter the market. That preparation often includes reviewing financial reporting practices, evaluating backlog classification, assessing leadership dependencies, and identifying operational risks that buyers are likely to question.

Firms that proactively address these areas through comprehensive seller advisory services tend to experience smoother diligence processes, stronger buyer confidence, and fewer valuation adjustments late in the transaction.

What Sophisticated Sellers Do Differently

The firms that navigate diligence successfully don’t necessarily have perfect businesses. What they do have is:

• Preparation
• Clarity
• Control
• Credibility

We worked with a firm that proactively conducted an internal “quality of earnings” before going to market. They identified inconsistencies in WIP reporting and backlog classification early, before any buyer saw the information. When diligence began, they didn’t just provide data, but also provided context and explanation upfront. The result? A smoother process, fewer surprises, and ultimately a stronger negotiating position.

The Hidden Challenge: Running Your Business While Selling It

One of the most overlooked aspects of a transaction is this: you still have to run your business at a high level while going through diligence. And that’s not easy. I typically forewarn clients that the closer you get to closing, the more of your time the process will consume.

In one engagement, a firm became so consumed by diligence requests that leadership bandwidth shifted away from operations. Project oversight slipped, and performance in the current quarter dipped slightly. The buyer noticed. Even a small decline raised questions about sustainability under pressure.

Contrast that with another firm that took a different approach:

• They limited diligence involvement to a small internal team.
• Maintained strict operational cadence.
• Leveraged advisors to manage the flow of information.

From the buyer’s perspective, that sent a strong signal: This is a business that performs, even under stress.

Today’s buyers in the AEC space are more disciplined than ever. They are highly analytical, focused on risk-adjusted returns, and experienced in identifying inconsistencies quickly. Due diligence is not a formality. It’s where deals are validated or reshaped.

Managing Diligence, Negotiations, and Buyer Expectations

If you are considering a transition in the next 1 to 5 years, or simply want to understand how sophisticated buyers evaluate businesses today, you can access our educational session: “During the Deal: Managing Diligence, Negotiations, and Buyer Expectations.” 

This presentation walks through: 

• • The full AEC-specific due diligence process
  • The hidden red flags buyers prioritize
  • Real-world strategies to mitigate risk before going to market

• How to maintain operational stability across your business during a transition

The session features deep-dive insights from Jeff Adams, alongside Hobson Hogan, who brings extensive experience advising firms through complex transactions, and Andrew Chavez, who adds perspective from his time on an AE firm’s internal M&A team.

Anticipating the Reality of Diligence

Most deals don’t fall apart because of what’s obvious upfront. They shift because of what’s uncovered during diligence. The firms that achieve the best outcomes are simply the ones that prepare for that reality well in advance.