Deal killers in due diligence, and the records problems behind them

What kills deals in due diligence?

Most deals that die in diligence die because something the buyer relied on turns out to be untrue or unprovable. Earnings shrink under a quality-of-earnings review, revenue is more concentrated or less recurring than presented, a liability nobody mentioned appears, the business turns out to run on the owner, or the records cannot support the story. Sellers underestimate the last group most: unclear ownership of code and content, missing contracts, deleted archives and privacy consent gaps.

Records problems hurt twice. They give a buyer grounds to reprice or walk, and they decide whether the company could ever license its operational data to AI labs and data buyers.

The common deal killers

Many of these do not kill the deal outright. They trigger a retrade after the letter of intent, when the buyer has exclusivity and the seller has the least leverage.

Which deal killers are really records problems?

Five of them come down to whether the company created, kept and can prove its records.

Ownership is where to start. The Copyright Act's definition of a work made for hire covers what employees create as part of their jobs, plus commissioned work in nine listed categories backed by a signed written agreement (17 U.S.C. 101). Standalone software is not among those categories, so code written by an outside contractor usually needs a written assignment before it belongs to the company. The CTO due diligence interview questions and the guide to AI-generated code in due diligence show how buyers probe it.

Privacy comes next. FTC staff have stated that promises not to use customer data for undisclosed purposes, such as training AI models, are enforceable wherever they were made, including privacy policies, terms of service and marketing (FTC staff post, January 2024); that is staff guidance, not a rule. In California, the CCPA gives consumers rights that include opting out of the sale or sharing of their personal information, as the California Attorney General's CCPA overview explains. This is general information, not legal, tax or financial advice. Confirm with your own counsel before acting.

The records pre-diligence check

Run it before the CIM is drafted. The company's own team answers each item; nobody outside the company needs to open a confidential file.

Ownership

• Signed invention and IP assignment agreements for every founder, employee and contractor who wrote code or core content
• A list of open-source and third-party components in the product
• A clear split between company records and records that belong to clients under service contracts

Contracts

• An index of customer, vendor and partner contracts with the signed version located
• Change-of-control and assignment clauses flagged
• Data-use, confidentiality and AI clauses in client contracts flagged

Retention

• Every business system listed with how far back its history goes
• Auto-delete and retention settings documented and frozen until the deal is done
• Exports taken before any tool is cancelled or migrated

Privacy

• Current and past privacy policies collected and compared with actual data practice
• Call recording notices and consents documented
• Consumer and patient personal data identified and kept separate

How to use the results

Why the same records decide whether a company can license its data

AI labs and data buyers look for what a careful acquirer looks for: records the company created, kept and has the right to license. SourceX's red flags line up closely with the records deal killers, among them data that belongs to someone else, mainly consumer personal data with no licensing basis, deleted archives and nobody able to export the data. A company that clears the pre-diligence check may also be a licensing candidate if it meets the baseline on who qualifies: 50+ full-time employees at peak (contractors excluded), several years of records showing how the business ran, the right to license them and an authorized executive to sponsor it.

A failed sale does not close that door. Companies still operating, acquired or wound down can all qualify if the data still exists. Brokers who build a records slide into their pitch, as in the business broker listing presentation template, catch these problems before a buyer does, and serial acquirers meet the same questions in acquired companies' archives, as the guide to programmatic M&A explains.

For advisors: making the introduction

1. Share the pre-diligence findings with the owner alone and ask whether a license is worth exploring.
2. Use the company fit checker with the owner as a first, non-binding screen.
3. Submit the company through the referral form, or hand the owner your referral link so the application is credited to you.
4. SourceX qualifies the business; the company inventories its systems and agrees price and terms before any buyer review.
5. The advisor's job ends with the introduction; exports, uploads and descriptions of records stay with the company.

Partners earn 25% of the eligible platform fees SourceX actually collects from the referred company's licensing deals, capped at $100,000 per referred company. The reward becomes payable only after the buyer pays and SourceX receives its fee, it is never taken from the company's payment, and no reward is guaranteed.

Next step

Run the records check on your next mandate before the CIM goes out. If the company passes, register as a partner and introduce it; sell-side advisors will find the program details on the M&A advisor partner page.