In a non-control deal, an investor cannot fire management. Therefore, the primary diligence focus must shift from the business itself to the founder's character and the potential for a strong partnership, as this relationship is the ultimate determinant of success.

During diligence, speak directly with the target's largest clients. You may uncover deal-breaking risks, such as a client who will leave post-acquisition because their internal rules prevent reliance on a single, monopolistic supplier, a fact you would otherwise miss.

Instead of walking away immediately upon finding inaccuracies, quantify the risk. Rebuild your business case assuming the worst probable scenario based on the discovered misrepresentations. If the deal remains net positive even with these new, pessimistic assumptions, it may still be a viable investment.

An acquisition target with a valuation that seems 'too good to be true' is a major red flag. The low price often conceals deep-seated issues, such as warring co-founders or founders secretly planning to compete post-acquisition. Diligence on people and their motivations is more critical than just analyzing the financials in these cases.

An early-stage investor explains that a founder presenting a prospective client as a paying customer is a non-negotiable deal-breaker. This seemingly small exaggeration suggests a pattern of future dishonesty, making the founder untrustworthy, regardless of how close the deal is to closing.

Salas O'Brien provides every target with a contact list of all previously acquired leaders. If a target fails to perform this reverse diligence by calling these references, it's seen as a major red flag, suggesting their stated commitment to their team's future may not be genuine.

A simple but highly effective due diligence check for emerging market companies is to verify if their auditor has changed in the past 10 years. An auditor change often signals that something was amiss with the previous accounting, providing a crucial warning sign for investors to investigate further.

Surprises are best uncovered during due diligence. Finding them after closing, even if they seem beneficial (like an un-negotiated supplier contract), indicates flawed homework and disrupts the integration plan, damaging credibility with stakeholders.

When sourcing a carve-out proactively, the seller may not be fully committed. State Street recommends the seller commission a sell-side Quality of Earnings (QofE) report. Their willingness to invest in this serves as a strong signal of their seriousness and provides a more accurate financial baseline, reducing the risk of surprises during diligence.