When a SPAC identifies your company as a potential target, the due diligence process begins in earnest. This process will examine every aspect of your business, from financial statements to customer contracts to employment practices. Companies that prepare thoroughly complete transactions faster, negotiate from positions of strength, and avoid the painful renegotiations that occur when problems surface late in the process.
Financial Due Diligence
The financial workstream is typically the most intensive. Be prepared to provide:
- Audited Financial Statements: Two to three years of PCAOB-compliant audits are typically required. If your current auditor isn't PCAOB-registered, plan for an audit transition.
- Monthly Management Reporting: Detailed P&L, balance sheet, and cash flow statements at the monthly level
- Revenue Recognition Analysis: How do you recognize revenue? Are there any complex arrangements (multi-element, long-term contracts, variable consideration)?
- Customer Concentration: What percentage of revenue comes from your top 5, 10, and 20 customers?
- Working Capital Analysis: Detailed analysis of receivables, payables, inventory, and normalized working capital requirements
Legal Due Diligence
Legal review covers the full spectrum of potential liabilities and rights:
- Corporate Records: Complete minute books, shareholder records, and organizational documents
- Material Contracts: Customer agreements, supplier contracts, partnership arrangements, and any change-of-control provisions
- Intellectual Property: Patents, trademarks, trade secrets, and any licensing arrangements
- Employment Matters: Employment agreements, equity plans, and any pending or threatened disputes
- Regulatory Compliance: Industry-specific licenses, permits, and compliance history
Operational Due Diligence
Sponsors want to understand how the business actually operates:
- Business Model: Unit economics, customer acquisition costs, lifetime value, churn rates
- Technology: System architecture, technical debt, scalability, cybersecurity posture
- Supply Chain: Key suppliers, redundancy, geographic concentration, lead times
- Management Team: Backgrounds, track records, depth of the organization
Best Practices for Due Diligence Preparation
- Start Early: Begin organizing documents and addressing gaps 6-12 months before you expect to engage with a SPAC
- Create a Data Room: Organize all materials in a virtual data room with clear folder structures and naming conventions
- Anticipate Questions: Prepare explanatory memos for any unusual items or potential concerns
- Engage Advisors: Legal counsel and financial advisors experienced in SPAC transactions can identify issues before the sponsor does
- Be Transparent: Problems discovered by the sponsor are far worse than problems you disclose proactively
At GoSPAC Capital, our pre-transaction engagement includes a comprehensive readiness assessment that identifies gaps and creates a remediation roadmap. This preparation work is what separates smooth transactions from troubled ones.