What diligence is looking for
Investors are not verifying that your books are perfect. They are testing three things: whether the numbers in your deck reconcile to your accounting system, whether your growth is durable rather than one-off, and whether there are liabilities nobody has mentioned yet.
Almost every deal that slows down in financial diligence slows down for one of those three reasons — and all three are fixable months in advance, cheaply.
Test one: does the deck reconcile
The first thing an analyst does is tie your reported ARR to your financial statements. It is a fast test and it fails more often than founders expect.
- ARR reported on bookings while statements are on recognized revenue
- A metric definition that changed mid-year without a footnote
- Pilot or non-recurring revenue counted inside ARR
- Revenue reported gross while the statements are net of processor fees
- Customer counts that differ between the deck and the billing system
Fix this first
Build a single bridge document that walks from GAAP revenue to reported ARR, line by line. Hand it over before it is requested. It converts your single largest diligence risk into a signal that you run a tight shop.
Test two: is the growth durable
Aggregate growth hides a lot. Diligence disaggregates it, and the standard cuts are predictable.
- Cohort retention. Monthly cohorts tracked for 12–24 months. They want logo and dollar retention separately.
- Net revenue retention. Above 100% means the base grows without new sales. Below 90% at Series A is a hard conversation.
- Customer concentration. Any single customer over 15% of revenue gets scrutiny; over 25% affects valuation.
- CAC payback. Under 12 months is strong, 12–18 is normal, over 24 raises questions about scalability.
- Sales efficiency. New ARR divided by sales and marketing spend, trended over at least six quarters.
Test three: what is not on the balance sheet
This is where deals die quietly. None of these are fatal disclosed early; all of them are damaging when discovered late.
- Unregistered state sales tax nexus — economic nexus rules mean SaaS companies often owe in states they have never visited
- Contractors who meet the legal test for employees
- Unvested or undocumented equity promises made verbally
- Multi-year contract commitments not reflected as obligations
- Missed payroll tax filings in states where you have remote staff
- IP assignment gaps — founders or early contractors who never signed
Sales tax is the most common finding
Post-Wayfair economic nexus thresholds are low, often $100,000 in sales or 200 transactions in a state. Multi-year exposure with penalties routinely reaches six figures, and it is nearly always discovered by the buyer rather than disclosed by the seller.
The data room, in order of what gets opened
- Monthly financial statements, 24–36 months, GAAP basis
- The GAAP-to-ARR bridge
- Cohort retention analysis by monthly cohort
- Customer contracts for the top 20 accounts by revenue
- Cap table with full option ledger and vesting detail
- Payroll register and a contractor list with classification rationale
- State tax registrations and filing history
- Bank statements and reconciliations for the trailing 12 months
- The forward model, with assumptions documented and traceable
A realistic timeline
Start six months before you intend to raise and diligence becomes an administrative step rather than an emergency.
- Month 6: clean historical books, resolve every unreconciled balance sheet account
- Month 5: sales tax nexus study and any voluntary disclosure filings
- Month 4: build cohort analysis and the ARR bridge
- Month 3: contractor classification review and IP assignment cleanup
- Month 2: assemble the data room, have an outside party review it adversarially
- Month 1: finalize the model and rehearse the metric definitions with your team