Seeing Around Corners: Why a Two-Step Due Diligence Approach Protects Value Before the Term Sheet

In the mid-market, deals often hinge on imperfect information. Everyone is trying to make decisions with whatever limited information there is. What frequently gets overlooked is that many of the biggest value shifts happen before the term sheet is signed, often quietly and with little room to reverse.

Just as working capital seasonality can move your purchase price without you noticing, early assumptions about revenue quality, margins, quality of earnings, and cash conversion can affect valuations – and before you know it, the gap is wide.

Post-Term Sheet Discovery

Traditionally, buyers commit commercially and only begin detailed financial due diligence after the term sheet. But by then, your range is set, and your negotiating latitude narrows. Findings that emerge at this stage such as normalisation gaps, margin volatility, customer churn may necessitate renegotiations, and late-stage surprises introduce tension, slow down momentum, and can derail a deal altogether.

A different approach is needed—one that manages financial, operational, and even psychological deal risks earlier.

Introducing Two-Step Financial Due Diligence

Step 1: Pre-Term Sheet due diligence – A Clearer Picture Before You Commit

This first step is designed to help you make a well-informed offer with discipline and confidence. It is not a full deep-dive, but rather a focused review of what really influences valuation and structure.

It identifies:

• Core revenue drivers and early views on sustainability or concentration risks
• Indicative normalised EBITDA
• Early red flags that may impact price or structure
• Implications for term sheet design such as ranges, conditions, earn-out logic, or completion mechanisms.

This mirrors the early-stage clarity needed to avoid traps such as mis-set working capital pegs, and a mismatch in normalised earnings expectations, all of which can move value significantly even when both sides negotiate in good faith.

The outcome is a short, practical memo that gives you a grounded view of value—before you put forward your initial offer.

Step 2: Post-Term Sheet Deep Dive — Confirm, Validate, Refine

Once a termsheet is executed, Step 2 builds on the foundations laid earlier.

This phase includes:

• Full Quality of Earnings analysis
• Detailed revenue analytics and margin profiling
• Working capital assessment
• Debt-like items identification
• Accounting policy review
• Inputs on drafting the definitive agreement

Because Step 1 already clarifies the key questions, the confirmatory phase is more focused, more efficient, and typically faster.

Why This Matters

Better price discipline		Fewer surprises		Faster execution		Smarter use of resources
Term sheet anchored on validated assumptions, not impressions		This protects relationships with sellers, many of whom are emotionally invested in the outcome		You begin confirmatory work with a clear idea of what to focus on and a defined set of priority questions		A modest Step 1 prevents unnecessary investment in deals that should not proceed.

A Better Way Forward

Transactions are not solely financial; in the mid-market they are personal, strategic, and time-sensitive. A two-step approach recognises this reality. It gives buyers clarity earlier, respects sellers’ expectations, and supports a smoother, more predictable path to close.

Our goal is simple: help you protect value, avoid surprises, and move through your deal process with clarity and confidence.