Here is a simple test. Send these ten questions to your CFO and your head of operations on a Monday morning. Tell them you need the answers by Wednesday end of day. With supporting data, not just verbal responses.
If they deliver clean, consistent, documented answers in 48 hours, you are ready for diligence. If several of them come back as “we need more time” or “it depends on how you define that,” you have work to do.
This is not theoretical. These are the types of questions that land in the first week of a sell-side process. The teams that can answer them quickly move through diligence faster and with fewer surprises.
The 10 questions
1. What is your monthly revenue for each of the last 36 months, broken out by your top 10 customers?
Good answer: A clean export from your billing or ERP system, delivered within a few hours. The total ties to your GL. Customer names are consistent (not “Acme Corp” in one month and “Acme Corporation” in another).
Bad answer reveals: Your revenue data is aggregated, requires manual assembly, or does not track customer-level detail consistently. The reconciliation process takes days because data lives in multiple places.
2. How many active customers do you have right now? How many did you have 12 months ago?
Good answer: A specific number with a documented definition of “active.” The number can be reproduced by anyone with access to the system, not just the person who built the report.
Bad answer reveals: There is no agreed definition of “active.” Sales, marketing, and finance each have a different number. The customer master has duplicates, inactive records, or inconsistent categorization.
3. What is your gross retention rate and net retention rate for the last four quarters?
Good answer: Both numbers calculated with documented methodology, broken out by quarter. The underlying data (starting cohort, churned customers, expansion revenue) is available for inspection.
Bad answer reveals: Retention is calculated annually, not quarterly. Or it is calculated from a spreadsheet that someone maintains manually. Or “retention” means different things to different people in the organization.
4. What are your unit economics by product line or service type?
Good answer: Contribution margin by product or service with a documented cost allocation methodology. Updated at least quarterly.
Bad answer reveals: The company tracks revenue by product but not costs by product. Margins are known at the blended level only. The allocation methodology, if one exists, lives in someone’s head.
5. What is your customer acquisition cost by channel?
Good answer: CAC by channel (paid, organic, referral, direct sales) for the last eight quarters. Marketing spend allocated to channels with documented methodology.
Bad answer reveals: Marketing spend is tracked in aggregate. Attribution is anecdotal (“most of our leads come from referrals” without data to support it). The company does not know which channels are efficient and which are not.
6. How long does it take to close the books after month end?
Good answer: “Five business days for a preliminary flash. Seven for the full close.” Delivered with confidence because the process is documented and consistent.
Bad answer reveals: “It varies.” Inconsistent close timelines signal manual processes, reconciliation issues, and dependency on specific people. Buyers hear “this finance function will need investment.”
7. Can you show me your data flow from transaction to financial statement?
Good answer: A diagram (even a simple one) showing source systems, integration points, manual steps, and reporting outputs. Current within the last six months.
Bad answer reveals: Nobody has mapped this. Data flow is tribal knowledge. The fact that revenue gets from a customer transaction to the P&L involves steps that only certain people understand.
8. Who produces your board reporting and what happens if they are unavailable?
Good answer: “Two people can produce the board deck independently. Templates and data sources are documented.”
Bad answer reveals: One person owns the board reporting process end to end. If they are on vacation, sick, or leave the company, the board deck does not get produced. This is key person risk in its most visible form.
9. When was your last system migration and is the historical data bridged?
Good answer: “We migrated to NetSuite 14 months ago. Historical data from the legacy system was mapped to the new chart of accounts. We can report on 36 months of consistent data.”
Bad answer reveals: The migration broke data continuity and nobody has bridged it. Trend analysis for the diligence team will require manual work and may produce inconsistent results.
10. What data quality issues do you currently know about?
Good answer: A list. Even a short one. “Customer addresses are 85% complete. We have duplicate vendor records that we are cleaning. Revenue recognition timing has a known two-day lag between systems.” Honest, specific, with a sense of severity and plan.
Bad answer reveals: “None that I know of.” This is almost never true, and the buyer knows it. A company that claims zero data quality issues either has not looked or is not being honest. Neither is good.
How to score yourself
Be honest. No partial credit.
8 to 10 clean answers in 48 hours. You are ready. Diligence will go smoothly. Focus on maintaining this level of readiness.
5 to 7 clean answers. You have gaps but they are fixable. Prioritize the missing items. Most can be addressed in 60 to 90 days with focused effort. Start with revenue reconciliation and customer metrics, as these have the biggest impact on buyer confidence.
Fewer than 5 clean answers. You have significant work to do. This is not a crisis if you have time, but it is a crisis if the LOI is already signed. See How Long Does It Take to Fix Data Before Diligence? for realistic timelines.
What the test actually measures
This is not a data quality test. It is an operational readiness test.
The ten questions measure three things:
Can the company produce accurate data on demand? Diligence is a series of data requests with tight turnaround times. If your team cannot produce basic metrics in 48 hours under normal conditions, they will struggle under diligence pressure.
Is there a single source of truth? If different people give different answers to the same question, the buyer knows there is no shared data foundation. Every subsequent data point becomes suspect.
Is the institutional knowledge documented or trapped in people? Buyers are not just buying today’s team. They need the business to keep functioning through the transition. If the data and reporting capability depends on specific individuals, that is a risk the buyer will price in.
What to do with the results
The point of this test is not to grade yourself. It is to identify exactly where to spend your time before diligence starts.
For each question you could not answer cleanly, ask why. The root cause usually falls into one of three categories:
Data does not exist. You do not track it. The fix is to start tracking it. Some of these (like CAC by channel) take a few months of data collection before they become meaningful.
Data exists but is not accessible. It is trapped in a system, a spreadsheet, or someone’s process. The fix is documentation and cross-training. This is usually the fastest category to address.
Data exists but is not consistent. Different systems or people produce different numbers. The fix is reconciliation and definition alignment. This takes longer but has the highest impact on diligence outcomes.
Start with the items that have the highest deal impact. Revenue reconciliation, customer metrics, and EBITDA adjustment documentation are almost always the top three. If you can only fix three things, fix those.
For the full picture of what buyers test and how to prepare, read The Complete Data Diligence Guide. For a structured approach to identifying every gap, see 7 Data Red Flags That Kill Deals.
For a weekly brief on diligence readiness and data strategy for PE-backed teams, subscribe to Inside the Data Room.