AI for Due Diligence On A Private Company Acquisition

Private company acquisitions are information asymmetry warfare. Sellers have spent years curating their story. You have weeks to punch holes in it. Every hour your team spends manually cross-referencing tax returns is an hour the seller's narrative goes unchallenged — and a risk that survives into your cap table. This guide gives you a systematic, Claude-powered due diligence workflow that processes information at a speed and depth no human team can match. When traditional buy-side diligence fails, it fails quietly. An overworked analyst misses the AR aging anomaly. The EBITDA add-back schedule goes uncontested. The change-of-control clause in the top customer contract doesn't surface until after close. The result: overpayment, inherited liability, or a post-merger implosion no one saw coming. The cost isn't just financial. It's the escrow dispute. The lawsuit. The PE portfolio company that never hits its 100-day milestones because key employees walked out the door sixty days post-close. The fix isn't more junior analysts working longer hours. It's a structured prompting architecture that uses Claude to deconstruct financials, stress-test narratives, cross-reference documents, and produce investment committee-ready outputs — fast. This guide is your complete Claude-powered due diligence operating system. It covers deal room structure, prompting architecture, financial and commercial analysis, legal risk mapping, cross-referencing techniques, and a full prompt library you can deploy immediately. --- ## ? Outcomes By the end of this guide, you will have: - A structured digital deal room architecture organizing every document tier for systematic Claude analysis - A three-layer prompting system that moves from context-setting to deep document analysis to synthesis — with zero prompt guesswork - A 30-prompt due diligence library covering every deal stage — pre-LOI screening, post-LOI financial and commercial analysis, cross-referencing, deal structuring, and investment committee outputs - A cross-referencing methodology that surfaces document inconsistencies your competitors miss — including the story vs. numbers test and the bear case constructor - A red flag prioritization matrix with Critical/High/Medium/Low ratings, financial impact quantification, and go/no-go recommendation framework - A purchase price adjustment analysis methodology that translates diligence findings directly into valuation adjustments and deal structure protections - A post-merger integration risk framework built from diligence findings — Day 1 priorities, 100-day milestones, and key person retention strategy --- ## 🧾 How to Use This Resource - **Who should use it:** Corporate development professionals, PE associates and principals, search fund operators, strategic acquirers, and M&A advisors running buy-side diligence on private companies - **When to use it:** Post-LOI, once the data room opens and documents begin flowing — though the pre-LOI prompt set (Section 9, Prompt A-C) is deployable from first receipt of a CIM - **What inputs you need:** Access to the target company's data room or document package; a Claude account (claude.ai or API); a deal room folder structure on your local drive or cloud storage - **How long it takes:** Initial deal room setup and prompting architecture: 60–90 minutes. Per-document analysis prompts: 5–15 minutes each. Full synthesis and red flag dashboard: 30–45 minutes. Total elapsed time for a standard mid-market deal: 1–2 days versus the traditional 2–3 weeks. - **What you'll get at the end:** A complete diligence output package including normalized EBITDA analysis, balance sheet stress test, customer concentration risk map, legal exposure summary, document inconsistency findings, and a red flag prioritization matrix ready for the investment committee --- ## 🛠 Instructions ## Step 1: Build Your Digital Deal Room Architecture The quality of your Claude analysis is a direct function of how well your documents are organized before you start prompting. Disorganized inputs produce disorganized outputs — and in private company diligence, a missed document tier can mean a missed liability. Structure your deal room into four distinct tiers: - **Financial Documents Tier:** Three years of audited or reviewed financial statements, three years of federal and state tax returns, YTD management accounts, 13-week cash flow forecast, AR aging, AP aging, inventory listing and aging, fixed asset register, debt schedule and loan agreements, cap table and equity agreements - **Commercial Documents Tier:** Top 10 customer contracts by revenue, vendor and supplier agreements, distribution and licensing agreements, LOIs and term sheets, customer concentration analysis, pipeline and backlog reporting, pricing schedules, sales compensation plans - **Operational Documents Tier:** Org chart and headcount report, employee agreements, benefits and retirement plan documentation, union agreements if applicable, IT systems inventory, facilities leases, equipment leases, insurance policies and claims history - **Legal and Compliance Documents Tier:** Corporate formation documents, shareholder agreements, IP registrations, litigation history and pending matters, regulatory licenses, environmental compliance documentation, OSHA and safety records, data privacy policies - Label each document with its tier and document type before you begin prompting. This allows you to reference specific documents precisely in your prompts and maintain a clear chain of evidence for every finding. - Advisory note: The most dangerous gaps are the documents the seller didn't provide. Maintain a "missing document log" alongside your deal room. Unexplained absences — no environmental records for a manufacturing business, no HR claims history for a 200-person company — are findings in their own right. --- ## Step 2: Establish Your Three-Layer Prompting Architecture Don't open Claude and start pasting documents. That's how you get generic output. Instead, deploy a deliberate three-layer prompting system that sets context, analyzes documents, and synthesizes findings in sequence. **Layer 1 — Context Setting Prompt:** Before any document analysis, prime Claude with the deal context. Paste the following and customize for each transaction: - *"You are an experienced M&A analyst with deep expertise in [industry] acquisitions. You are conducting buy-side due diligence on [Company Name], a [description] business generating [revenue] in annual revenue with [adjusted EBITDA] in adjusted EBITDA. The proposed acquisition price is [price] representing a [multiple]x EBITDA multiple. Your mandate is to stress-test the investment thesis, identify hidden risks, and surface value creation opportunities. Always provide specific evidence from the documents to support your findings and rate each risk as Critical/High/Medium/Low."* - This context remains active for the full conversation thread. Every subsequent analysis prompt inherits this framing — meaning Claude applies deal-specific judgment rather than generic financial analysis. **Layer 2 — Document Analysis Prompts:** These are the 15+ specialized prompts in Sections 3–7 of this guide. Each is designed to extract maximum insight from a specific document category and calibrated to surface the risks most common in private company transactions. **Layer 3 — Synthesis and Decision Prompts:** Once document analysis is complete, cross-referencing and synthesis prompts (Prompts 13–18) identify inconsistencies across documents, construct the bear case, and generate the investment committee memo. These prompts only work after Layers 1 and 2 are complete — they depend on the prior context being established. - Advisory note: Run each deal in a dedicated Claude conversation thread. Cross-contamination between deals in a shared thread degrades output quality and creates confidentiality risk. --- ## Step 3: Execute Financial Due Diligence — Quality of Earnings The QoE analysis is where most deals are won or lost. Your job is to deconstruct reported EBITDA into its true components, identify unsupported add-backs, and establish a defensible normalized earnings figure. **Revenue Quality Deconstruction (Prompt 1):** Paste the three-year income statement and ask Claude to assess organic vs. acquisition-driven growth, one-time revenue sources inflating the base, revenue recognition policies and timing risk, customer concentration (flag if top 3 exceed 30% of revenue), contract vs. transactional revenue mix, pricing power trends, and unusual TTM revenue spikes suggesting pull-forward sales. **Normalized EBITDA Bridge (Prompt 2):** This is your most important financial prompt. Ask Claude to construct a detailed normalized EBITDA bridge for each of the last three years, identifying and quantifying: above-market owner compensation benchmarked against industry comp data, family member salaries for non-working relatives, personal expenses run through the business, related-party transactions at non-market rates (rent, management fees, consulting), genuinely one-time expenses, non-cash items, and pro forma adjustments for identified cost savings. Require Claude to rate confidence as High/Medium/Low for each adjustment. **Cash Flow Quality (Prompt 3):** EBITDA inflation often hides in the gap between reported earnings and actual cash generation. Ask Claude to analyze operating cash flow as a percentage of EBITDA over three years (flag if below 70%), working capital consumption trends, capex intensity and deferred maintenance risk, seasonal cash flow patterns, and any evidence of channel stuffing or early revenue recognition near period end. - Advisory note: If reported EBITDA and operating cash flow diverge materially, you have a quality of earnings problem that no amount of add-back argumentation resolves. This divergence is your most reliable indicator of financial statement manipulation in private company transactions. --- ## Step 4: Execute Financial Due Diligence — Balance Sheet Stress Test The balance sheet is where sellers hide the liabilities they hope you won't find. Systematic Claude analysis of each asset and liability category makes concealment structurally harder. **Asset Quality Assessment (Prompt 4):** Analyze AR aging for percentage over 60 and 90 days and adequacy of bad debt reserves, inventory obsolescence and write-down risk, unusual prepaid expense balances, fixed asset net book value versus replacement cost and deferred maintenance risk, intangible asset amortization policy and impairment risk, and related-party receivables requiring repayment at closing. **Hidden Liability Discovery (Prompt 5):** Ask Claude to identify off-balance sheet and contingent liabilities including: operating lease obligations not fully reflected on the balance sheet, deferred revenue and customer deposits representing future service obligations, warranty and product liability reserve adequacy, environmental liabilities suggested by the nature of operations, employee-related liabilities (accrued vacation, retirement obligations, workers comp), tax contingencies (compare book tax expense to actual tax payments), and litigation or claims mentioned in footnotes. - Advisory note: In owner-operated businesses, the balance sheet is often the most manipulated document in the data room. Sellers know buyers focus on EBITDA multiples. The balance sheet gets less scrutiny — which is exactly where the post-close surprises live. --- ## Step 5: Execute Financial Due Diligence — Working Capital Normalization Working capital is one of the most contested elements in any private company acquisition. Getting the peg wrong can cost you seven figures at closing. **Working Capital Peg Analysis (Prompt 6):** Ask Claude to calculate average monthly working capital over the trailing twelve months, identify seasonal peaks and troughs, adjust for non-recurring working capital items, benchmark working capital as a percentage of revenue against industry peers, identify pre-close working capital manipulation (unusual AR collections, AP stretching, inventory drawdowns), and recommend a working capital target range for the purchase agreement. - This analysis requires the AR aging, AP aging, inventory listing, and monthly balance sheet data. Paste all four documents before running this prompt. - Advisory note: Watch specifically for sellers who "clean up" working capital in the two to three months before close. A sudden improvement in DSO or reduction in inventory that doesn't match historical seasonality is a manipulation signal. Claude will flag this pattern if you provide monthly rather than annual data. --- ## Step 6: Execute Commercial Due Diligence Commercial diligence answers the question the financial statements can't: is this revenue real, durable, and transferable? **Customer Concentration Risk (Prompt 7):** Calculate revenue concentration for top 5, 10, and 20 customers; assess contract terms including length, renewal options, and termination provisions; identify change of control provisions that allow customers to exit post-acquisition; evaluate customer tenure and churn history; assess pricing trends by customer; flag customers with unusual payment terms or side agreements; and identify relationships that are primarily with the owner rather than the organization. **Pipeline and Backlog Validation (Prompt 8):** Assess backlog calculation methodology (signed contracts only vs. verbal commitments), historical backlog conversion rates to actual revenue, unusually large or lumpy backlog items that distort the picture, age of pipeline opportunities and stale deal recycling, win rates and sales cycle length against industry benchmarks, and key person dependencies in the sales process. - Advisory note: Change of control provisions in the top three customer contracts are a transaction killer that surfaces more often than sellers disclose. Make this a Day 1 document request, not a Week 3 discovery. --- ## Step 7: Execute Operational and Legal Due Diligence **Talent Risk Assessment (Prompt 9):** Identify key person dependency and roles where departure critically impacts operations; benchmark compensation to flag below-market arrangements creating post-close retention risk; identify organizational gaps in the capabilities needed to execute the growth plan; review non-compete and non-solicit agreements for key employees; and flag unusual compensation arrangements including deferred comp, phantom equity, and stay bonuses. **IT and Systems Assessment (Prompt 10):** Evaluate core business systems fitness for scale, cybersecurity posture indicators, software license compliance and renewal obligations, IT capex requirements to support the growth plan, data privacy compliance (GDPR, CCPA, industry-specific), integration complexity and cost estimates for your systems, and technology-related risks in contracts or insurance policies. **Material Contract Review (Prompt 11):** Map change of control provisions requiring consent or triggering termination, assignment restrictions complicating transaction structure, most favored nation clauses impacting post-acquisition pricing, exclusivity provisions limiting growth opportunities, IP ownership and licensing terms, indemnification obligations generating post-close liabilities, and unusual payment terms or performance obligations. **Legal Exposure Analysis (Prompt 12):** Assess current and threatened litigation materiality and likely outcomes; regulatory compliance violations, fines, or investigations; environmental liability indicators; employment-related claims and EEOC or labor board activity; IP disputes or infringement risks; industry-specific regulatory compliance status; and legal issues suggested by insurance claims history. --- ## Step 8: Deploy Cross-Referencing Techniques This is where Claude creates the most asymmetric analytical advantage. Human teams rarely have the bandwidth to systematically cross-reference every document against every other document. Claude does it in minutes. **Document Inconsistency Analysis (Prompt 13):** Cross-reference financial statements, tax returns, and management representations to identify: revenue discrepancies between book and tax, compensation differences between payroll records and tax filings, asset values that don't reconcile across documents, customer or vendor relationships in contracts but not reflected in financials, headcount discrepancies between org charts and payroll reports, and CIM narrative claims contradicted by financial data. **Management Narrative Validation (Prompt 14):** Compare the investment thesis in the CIM against actual financial and operational data to identify: market position claims not supported by revenue trends, margin improvement projections inconsistent with historical performance, customer relationship strength contradicted by concentration or churn data, management capability claims not supported by operational results, technology or IP value claims not reflected in R&D spending or patent filings, and synergy claims that appear optimistic given operational realities. **Bear Case Construction (Prompt 15):** Force identification of worst-case scenarios by asking Claude to identify the single most likely deal thesis killer and its probability, hidden liabilities materially impacting post-close economics, customer or employee departure scenarios that could crater revenue, integration risks that destroy value rather than create it, market or competitive risks making the growth plan unachievable, financing risks including covenant breach scenarios, and management retention risks and their deal value impact. - Advisory note: Run the bear case prompt after all other analysis is complete. It performs better with full deal context loaded in the conversation thread. The output should feel uncomfortable — if your bear case reads like a mild inconvenience, the prompt needs more specific document context. --- ## Step 9: Synthesize Findings into Decision Outputs **Red Flag Dashboard (Prompt 16):** Synthesize all findings into a prioritized red flag dashboard with Critical/High/Medium/Low risk ratings, quantified potential financial impact for each issue, recommended deal protections (price adjustments, escrow, reps and warranties), issues requiring specialist review (legal, environmental, actuarial), specific management interview questions to address each red flag, and a go/no-go recommendation with specific conditions to proceeding. **Purchase Price Adjustment Analysis (Prompt 17):** Quantify the valuation impact of diligence findings by calculating adjusted EBITDA after removing unsupported add-backs, quantifying working capital shortfalls relative to the proposed peg, estimating deferred maintenance and capex costs, discounting for customer concentration and key person risks, adjusting for identified contingent liabilities, and recommending a revised valuation range and deal structure to protect the buyer. **Integration Risk Assessment (Prompt 18):** Based on diligence findings, develop a preliminary integration risk assessment covering Day 1 critical priorities (systems, people, customer communication), 100-day integration milestones and success metrics, synergy realization timeline and dependencies, cultural integration risks and mitigation strategies, key person retention priorities and incentive structures, technology integration complexity and cost estimates, and a customer retention risk and proactive communication plan. --- ## ⚡ Methods & Tools The following is your complete 30-prompt due diligence library, organized by deal stage. Deploy within a single Claude conversation thread per deal. Always run the Layer 1 context-setter first — every subsequent prompt inherits that framing. --- ### Layer 1: Context Setting Prompt — Run This First ``` You are an experienced M&A analyst with deep expertise in [INDUSTRY] acquisitions. You are conducting buy-side due diligence on [COMPANY NAME], a [BRIEF DESCRIPTION] business generating [REVENUE] in annual revenue with [ADJUSTED EBITDA] in adjusted EBITDA. The proposed acquisition price is [PRICE] representing a [MULTIPLE]x EBITDA multiple. Your mandate is to stress-test the investment thesis, identify hidden risks, and surface value creation opportunities. Always provide specific evidence from the documents to support your findings and rate each risk as Critical / High / Medium / Low. ``` --- ### Stage 1: Pre-LOI Analysis (Prompts A–C) Use these before signing an LOI, starting from first receipt of the CIM or financial summary. **Prompt A — Initial Go/Pass Screen** ``` Analyze this CIM and identify the top 5 reasons to proceed with this acquisition and the top 5 reasons to pass. For each reason, cite the specific data or claim in the document that supports your assessment and rate your confidence as High / Medium / Low. ``` **Prompt B — Financial Benchmarking** ``` Benchmark this company's revenue growth, gross margin, EBITDA margin, and working capital ratios against industry peers. Identify any metrics that are significant outliers — both positive and negative — and explain what each outlier could indicate about the business quality or financial reporting integrity. ``` **Prompt C — Preliminary Valuation Range** ``` Generate a preliminary valuation range for this business based on the financial summary provided. Use at least three valuation methodologies (EBITDA multiple, revenue multiple, DCF if sufficient data exists). Flag the key assumptions driving each methodology and identify the single variable that most significantly impacts the range. ``` --- ### Stage 2: Post-LOI Financial Diligence (Prompts 1–6) Run these once the full data room is open. Paste relevant documents before each prompt. **Prompt 1 — Revenue Sustainability Assessment** ``` Analyze the revenue history in these financial statements and assess: (1) Organic vs. acquisition-driven growth, (2) One-time or non-recurring revenue sources that inflate the base, (3) Revenue recognition policies and potential for aggressive timing, (4) Customer concentration — identify if top 3 customers represent more than 30% of revenue, (5) Contract vs. transactional revenue mix and implications for predictability, (6) Pricing power trends — are margins expanding or compressing over time, (7) Any unusual revenue spikes in the trailing twelve months that could represent pull-forward sales. ``` **Prompt 2 — Normalized EBITDA Bridge** ``` Construct a detailed normalized EBITDA bridge for each of the last 3 years by identifying and quantifying: (1) Above-market owner compensation — benchmark against industry comp data, (2) Family member salaries for non-working relatives, (3) Personal expenses run through the business — vehicles, travel, entertainment, (4) Related-party transactions at non-market rates — rent, management fees, consulting, (5) One-time expenses that are genuinely non-recurring, (6) Non-cash items — excessive depreciation, amortization, stock compensation, (7) Pro forma adjustments for identified cost savings. For each adjustment, rate your confidence level as High / Medium / Low and explain your reasoning. ``` **Prompt 3 — Cash Conversion Analysis** ``` Analyze the relationship between reported EBITDA and actual cash generation by examining: (1) Operating cash flow as a percentage of EBITDA over 3 years — flag if below 70%, (2) Working capital trends — is the business consuming or generating cash as it grows, (3) Capex intensity — is maintenance capex being deferred to inflate near-term cash flow, (4) Seasonal cash flow patterns and peak borrowing requirements, (5) Any evidence of channel stuffing or early revenue recognition near period end, (6) Reconciliation of net income to operating cash flow — flag any large non-cash adjustments. ``` **Prompt 4 — Balance Sheet Stress Test** ``` Conduct a detailed balance sheet quality assessment covering: (1) AR aging — what percentage is over 60 and 90 days, and what is the adequacy of the bad debt reserve, (2) Inventory obsolescence — how old is the inventory and what is the write-down risk, (3) Prepaid expenses and other current assets — are there any unusual or unexplained balances, (4) Fixed assets — compare net book value to replacement cost and assess deferred maintenance risk, (5) Intangible assets and goodwill — amortization policy and impairment risk, (6) Related-party receivables — identify any loans to owners or affiliates that need to be repaid at closing. ``` **Prompt 5 — Hidden Liability Analysis** ``` Identify potential off-balance sheet and contingent liabilities by examining: (1) Operating lease obligations not fully reflected on the balance sheet, (2) Deferred revenue and customer deposits that represent future service obligations, (3) Warranty and product liability reserves — are they adequate based on historical claims, (4) Environmental liabilities suggested by the nature of operations, (5) Employee-related liabilities — accrued vacation, retirement obligations, workers comp, (6) Tax contingencies — compare book tax expense to actual tax payments, (7) Any litigation or claims mentioned in footnotes or management representations. ``` **Prompt 6 — Working Capital Peg Analysis** ``` Analyze the company's working capital requirements to establish a fair closing working capital peg by: (1) Calculating average monthly working capital over the last 12 months, (2) Identifying seasonal peaks and troughs in working capital, (3) Adjusting for any non-recurring working capital items, (4) Benchmarking working capital as a percentage of revenue against industry peers, (5) Identifying any working capital manipulation in the pre-close period — unusual AR collections, AP stretching, or inventory drawdowns, (6) Recommending a working capital target range for the purchase agreement. ``` --- ### Stage 2: Post-LOI Commercial & Operational Diligence (Prompts 7–12) **Prompt 7 — Customer Quality Assessment** ``` Analyze the customer data and contracts to assess revenue quality and concentration risk: (1) Calculate revenue concentration for top 5, 10, and 20 customers, (2) Assess contract terms — length, renewal options, termination provisions, (3) Identify change of control provisions that could allow customers to exit post-acquisition, (4) Evaluate customer tenure and churn history, (5) Assess pricing trends by customer — are key accounts getting larger discounts over time, (6) Identify any customers with unusual payment terms or side agreements, (7) Flag customers where the relationship is primarily with the owner vs. the organization. ``` **Prompt 8 — Revenue Pipeline Analysis** ``` Evaluate the quality and credibility of the revenue pipeline and backlog by: (1) Assessing the methodology used to calculate backlog — signed contracts only vs. verbal commitments, (2) Analyzing historical backlog conversion rates to actual revenue, (3) Identifying any unusually large or lumpy backlog items that distort the picture, (4) Evaluating the age of pipeline opportunities — are there stale deals being recycled, (5) Assessing win rates and sales cycle length against industry benchmarks, (6) Identifying key person dependencies in the sales process. ``` **Prompt 9 — Human Capital Analysis** ``` Analyze the organizational structure and people-related risks including: (1) Key person dependency — identify roles where departure would critically impact operations, (2) Compensation benchmarking — flag below-market comp that creates retention risk post-close, (3) Organizational gaps — identify missing capabilities needed to execute the growth plan, (4) Culture and management style indicators from available documentation, (5) Non-compete and non-solicit agreements for key employees, (6) Unusual compensation arrangements — deferred comp, phantom equity, stay bonuses, (7) Any HR-related issues suggested by insurance claims or legal matters. ``` **Prompt 10 — Technology Infrastructure Analysis** ``` Evaluate the technology and systems infrastructure by analyzing: (1) Core business systems and their fitness for purpose at scale, (2) Cybersecurity posture indicators from available documentation, (3) Software license compliance and renewal obligations, (4) IT capex requirements to support the growth plan, (5) Data privacy compliance — GDPR, CCPA, and industry-specific requirements, (6) Integration complexity and cost estimates for the acquiring company's systems, (7) Any technology-related risks mentioned in contracts or insurance policies. ``` **Prompt 11 — Contract Risk Mapping** ``` Review the material contracts and create a comprehensive risk map covering: (1) Change of control provisions requiring consent or triggering termination, (2) Assignment restrictions that could complicate the transaction structure, (3) Most favored nation clauses that could impact pricing post-acquisition, (4) Exclusivity provisions that could limit growth opportunities, (5) Intellectual property ownership and licensing terms, (6) Indemnification obligations that could generate post-close liabilities, (7) Unusual payment terms or performance obligations. ``` **Prompt 12 — Legal Exposure Analysis** ``` Assess the legal and regulatory risk profile by examining: (1) Current and threatened litigation — evaluate materiality and likely outcomes, (2) Regulatory compliance history — any violations, fines, or investigations, (3) Environmental liability indicators from operations and facility documentation, (4) Employment-related claims and EEOC or labor board activity, (5) Intellectual property disputes or infringement risks, (6) Industry-specific regulatory requirements and compliance status, (7) Any legal issues suggested by insurance claims history. ``` --- ### Stage 2: Post-LOI Cross-Referencing (Prompts 13–15) Run these after all document analysis is complete. They require full deal context loaded in thread. **Prompt 13 — Document Inconsistency Analysis** ``` Cross-reference the financial statements, tax returns, and management representations to identify any material inconsistencies including: (1) Revenue discrepancies between book and tax, (2) Compensation differences between payroll records and tax filings, (3) Asset values that don't reconcile across documents, (4) Customer or vendor relationships mentioned in contracts but not reflected in financials, (5) Headcount discrepancies between org charts and payroll reports, (6) Any narrative claims in the CIM that are contradicted by the financial data. ``` **Prompt 14 — Management Narrative Validation** ``` Compare the investment thesis and growth story presented in the CIM against the actual financial and operational data and identify: (1) Claims about market position not supported by revenue trends, (2) Margin improvement projections inconsistent with historical performance, (3) Customer relationship strength claims contradicted by concentration or churn data, (4) Management team capability claims not supported by operational results, (5) Technology or IP value claims not reflected in R&D spending or patent filings, (6) Synergy claims in the acquisition thesis that appear optimistic given operational realities. ``` **Prompt 15 — Bear Case Constructor** ``` Construct the strongest possible bear case for this acquisition by identifying: (1) The single most likely deal thesis killer and its probability, (2) Hidden liabilities that could materially impact post-close economics, (3) Customer or employee departure scenarios that could crater revenue, (4) Integration risks that could destroy value rather than create it, (5) Market or competitive risks that could make the growth plan unachievable, (6) Financing risks if the deal is leveraged — covenant breach scenarios, (7) Management retention risks and their impact on deal value. ``` --- ### Stage 3: Deal Structuring (Prompts D–F and 16–18) **Prompt D — Tax Return Cross-Reference** ``` Cross-reference these tax returns against the financial statements and flag any discrepancies in revenue, compensation, depreciation, or entity structure that suggest financial statement manipulation or undisclosed tax exposure. ``` **Prompt E — AR Aging Deep Dive** ``` Analyze this AR aging report and quantify the bad debt risk. Identify any customers with balances over 60 and 90 days, assess the adequacy of existing reserves, flag any related-party receivables, and recommend a reserve adjustment for the working capital peg calculation. ``` **Prompt F — Change of Control Contract Scan** ``` Review these customer contracts and identify every change of control provision, assignment restriction, and consent requirement. For each, assess whether it creates a transaction risk, estimate the revenue at risk if the provision is triggered, and recommend a mitigation strategy. ``` **Prompt 16 — Red Flag Prioritization Matrix** ``` Synthesize all due diligence findings into a prioritized red flag dashboard that: (1) Lists each issue with a Critical / High / Medium / Low risk rating, (2) Quantifies the potential financial impact of each issue, (3) Recommends specific deal protections — price adjustments, escrow, reps and warranties, (4) Identifies issues requiring specialist review — legal, environmental, actuarial, (5) Suggests specific management interview questions to address each red flag, (6) Provides a go / no-go recommendation with specific conditions to proceeding. ``` **Prompt 17 — Valuation Impact Assessment** ``` Based on due diligence findings, quantify the impact on fair acquisition price by: (1) Calculating adjusted EBITDA after removing unsupported add-backs, (2) Quantifying working capital shortfalls relative to the proposed peg, (3) Estimating the cost of identified deferred maintenance and capex, (4) Discounting for customer concentration and key person risks, (5) Adjusting for identified contingent liabilities, (6) Recommending a revised valuation range and deal structure to protect the buyer. ``` **Prompt 18 — Post-Merger Integration Planning** ``` Based on due diligence findings, develop a preliminary integration risk assessment covering: (1) Day 1 critical priorities — systems, people, customer communication, (###-###-#### day integration milestones and success metrics, (3) Synergy realization timeline and key dependencies, (4) Cultural integration risks and mitigation strategies, (5) Key person retention priorities and recommended incentive structures, (6) Technology integration complexity and cost estimates, (7) Customer retention risks and proactive communication plan. ``` --- ### Stage 4: Investment Committee (Prompts G–I and J–L) **Prompt G — Deal Structure Recommendation** ``` Based on these risk findings, recommend the optimal deal structure and protections including: purchase price adjustments, escrow amount and release conditions, rep and warranty insurance applicability, earnout structure if appropriate, and any closing conditions required to mitigate identified risks. ``` **Prompt H — Reps and Warranties Drafting** ``` Draft a list of specific representations and warranties the seller should provide based on the risks identified in diligence. For each rep, explain the specific risk it addresses and the consequence if it proves false post-close. ``` **Prompt I — Post-Close Cash Flow Modeling** ``` Model the impact of identified diligence issues on post-close cash flow and investor returns. Adjust for normalized EBITDA, required capex, working capital true-up, and contingent liability reserves. Show returns under base case, downside, and stress scenarios. ``` **Prompt J — Investment Committee Memo** ``` Generate a one-page investment committee memo summarizing all diligence findings with risk ratings, valuation impact, deal structure recommendation, and a clear go / no-go recommendation with the three conditions that must be satisfied before proceeding to close. ``` **Prompt K — Bull Case / Bear Case** ``` Construct the bull case and bear case for this acquisition side by side. For each, identify the three most critical assumptions driving the scenario, the probability of each scenario, and the key indicators that would signal which path the business is tracking toward in the first 100 days post-close. ``` **Prompt L — Critical Open Items** ``` Identify the three most critical open items that must be resolved before proceeding to close. For each, describe the specific risk it represents, the information or confirmation needed to resolve it, the recommended resolution path, and what happens to deal economics if it cannot be resolved satisfactorily. ``` --- ## 💡 Pro Tips - Run the context-setting prompt at the start of every new session — Claude doesn't retain memory between conversations, so the deal framing must be re-established each time you return to a thread. - Feed Claude monthly management accounts, not just annual financials — monthly data exposes seasonality manipulation, pre-close working capital games, and TTM cherry-picking that annual statements obscure. - Use the bear case prompt as your final pre-IC gut check: if Claude's bear case matches your own instincts, you've done thorough diligence; if it surfaces new risks you hadn't identified, you have more work to do. - For complex multi-entity structures, run separate Claude threads for each entity and a synthesis thread for the consolidated picture — combining them in one thread degrades analytical precision. - Document every Claude output with the prompt used and document version analyzed — this creates a reproducible diligence audit trail that protects you in reps and warranties disputes post-close. --- ## ⚠️ Pitfalls - Never treat Claude's EBITDA normalization as a final QoE — it's an analytical accelerator, not a replacement for the sell-side QoE report or your own accountant's sign-off on adjusted earnings. - Pasting low-quality scanned documents produces low-quality output — OCR errors in financial statements cascade into analytical errors; always use clean digital exports from the seller's data room. - Don't anchor on the seller's add-back schedule when prompting — paste the raw financials and let Claude construct the bridge independently, then compare against seller claims; starting with the seller's version biases the output. - The bear case prompt underperforms when run before other analysis is complete — it needs full document context loaded in the thread to surface deal-specific rather than generic risks. - Diligence findings without quantified financial impact won't move an investment committee — always run Prompt 17 to translate red flags into valuation adjustments before presenting to IC.