There is an unwritten rule in every due diligence room: a surprise can have a price. An undisclosed liability, a contract missing a signature or a tax obligation left unresolved may each affect the buyer's assessment, and together they can widen diligence or lead to price adjustments or indemnities.
A pre-deal internal audit exists for exactly one reason: so that you find the surprise before the buyer does.
How value is lost in due diligence
It helps to understand how buyers may react to an issue found in diligence. Their responses can have different consequences for the seller:
- Seek a price adjustment or a risk allowance.
- Request contractual protection, such as an indemnity, which may leave the seller financially exposed after the sale.
- Broaden diligence or question the reliability of the information provided. This can affect the buyer's overall assessment of risk and valuation.
The key point is that the buyer's reaction depends heavily on who found the issue. An issue the seller discloses proactively, together with a remediation plan, is a technical detail in the negotiation. The same issue discovered by the buyer becomes evidence for the question "what else have they not told us?".
What does a pre-deal internal audit examine?
Unlike a routine statutory audit, a pre-deal review looks at the business through the eyes of a future buyer:
- Quality of earnings. Does profit come from core, repeatable activity, or does it depend on one-off items? Buyers value sustainable earnings, not accounting profit.
- Liabilities and off-balance-sheet commitments. Guarantees given to related parties, long-term leases, employee obligations: items that do not appear on the balance sheet but are certainly on the buyer's checklist.
- Tax exposure. A sensitive area for many private companies. Identifying it before a transaction can give the company time to assess remediation with qualified tax and legal advisers.
- Internal control systems. Approval workflows, delegation of authority and reconciliation, assessed against an appropriate framework such as COSO's Internal Control Integrated Framework. A sound control system can support the reliability of other information.
- Consistency of the figures. Do the management accounts, the tax filings and the audited statements tell the same story? Differences that can be explained are normal; differences that cannot are an alarm bell.
Timing: six to twelve months before the transaction
A pre-deal review run immediately before a deal may have limited value beyond identifying issues, because remediation time can be short. When performed sufficiently ahead of a transaction, it can give the company time to prioritise findings. For a company heading towards a listing, the runway may need to be longer; the requirements should be confirmed with appropriately qualified advisers.
One side benefit is rarely mentioned: the process produces a ready-made diligence file with the data room prepared in advance. Once a transaction starts, how fast the seller answers information requests is itself a signal of quality.
The Core Ventures view. A pre-deal review can help management identify and remediate issues before the buyer's diligence begins. Our work applies relevant VAS/IFRS principles and the COSO framework as appropriate to the engagement. More at internal audit services.
Frequently asked questions
We already have an annual statutory audit. Do we still need a pre-deal internal audit?
Yes, because the two answer different questions. A statutory audit confirms that the financial statements present fairly under the applicable standards. A pre-deal audit answers the buyer's questions: how good is the quality of earnings, where does hidden risk sit, is the system trustworthy. Many of the issues that destroy value in due diligence fall entirely outside the scope of an annual financial audit.
If a serious issue is found, should the transaction be shelved?
Not necessarily. Finding an issue early can allow management to assess the facts, remediation options and deal implications before going to market. Whether to proceed, pause or restructure depends on the issue, the transaction documents and advice from appropriately qualified advisers.
How long does a pre-deal internal audit take?
It depends on size and complexity. The review may take from weeks to months, plus the time needed to assess and remediate findings. A single legal entity with centralised books may move more quickly than a group with several entities and heavy intercompany activity. A preliminary conversation with the Core Ventures team can help scope the work.
A practical note. A pre-deal review helps a team prepare for questions; it is not an audit opinion, a guarantee that a transaction will close, or a replacement for a statutory audit. The right scope depends on the business and the deal.