Congratulations—you got the LOI signed! Holy crap… now what?! If this is your first time managing the process, due diligence can feel like a nebulous activity. What exactly do you need to do? Missing key items exposes your project to increased risk of failure (I’ve been there), and overdoing due diligence can strain the seller and timeline, potentially killing the deal (I’ve done that too).

Too often, inexperienced sponsors become overly reliant on “expectations” from investors or one-size-fits-all checklists circulating in the ETA community. Remember: as the entrepreneur, the success or failure of the project ultimately rests on the quality of your analysis and decision-making. ETA sponsors should adopt a “first principles” approach to due diligence—focusing on what’s most important while navigating the fine line between efficiency and thoroughness.

I recently completed an ETA project where I purchased and transformed a 40-year-old HVAC service/construction business. The journey—from finding the business to closing the deal—was an amazing 1.5-year adventure. Transforming and growing the business was both exhilarating and fulfilling. I made many costly mistakes and learned powerful lessons along the way. This post is part of a blog series in which I reflect on specific pieces of my journey to help future ETA sponsors accelerate their learning and bypass some avoidable agony. I’m always happy to connect if you need help with a project; the best way to reach me is on LinkedIn (https://www.linkedin.com/in/manton2764).

Back to due diligence. Most sponsors understand its importance for the project’s outcome, yet I often hear people struggling to define the scope and specific activities involved. In the absence of a clearly defined path, many end up viewing due diligence as a series of tasks meant solely to appease investors and financiers. While these parties may clearly lay out their expectations, those expectations are rarely sufficient to validate the opportunity. They also fail to capture the nuances required for a thorough, yet deal-friendly, review.

My first serious deal died just four days before closing (after seven months of work and significant expense) because I overcooked due diligence. Lacking a confident sense of what truly mattered, I tried to do “everything.” This scorched-earth approach placed enormous stress on the seller. In the end, I validated the quality of the business but ended up killing the deal by pushing the seller too far and causing him to get cold feet.

In a subsequent deal, I tried a lighter touch but still lacked the clarity needed to focus on the most critical elements. I managed to close the deal, only to regret several overlooked details that cost me dearly in the years that followed—mistakes that, in hindsight, could have been avoided with a better diligence methodology.

So, how do you perform due diligence in a way that truly validates the most important aspects of a business, while avoiding overspending, delays, or unnecessary friction with the seller? Unfortunately, there isn’t a one-size-fits-all checklist. Instead, you need to examine the target business from first principles. This approach helps you pinpoint the critical factors that warrant your focus, giving you both confidence and clarity in your priorities.

First principles thinking is an approach engineers use to understand and innovate in complex environments—and it has recently gained popularity thanks to Elon Musk’s global impact. It involves breaking a larger system down into its fundamental components and then building an understanding of the details, relationships, and mechanisms on top of those basics.

I can’t teach you how to think from a first principles perspective in a single blog post—I suggest you go look for a few quick videos about the topic on YouTube. Ultimately, though, this paradigm requires practice.

Here’s a bit of guidance on how this might look in the ETA context:

  • Start with a mindmap. Outline the target business and its components. You’ll likely need several iterations to refine the structure, and you’ll continue to build on it throughout the due diligence process.
  • Assign risk weights. Once your mindmap is refined, assign risk weights to each branch or node (think of it like a decision tree from your MBA stats class).
  • Identify high-impact areas. Use your risk weights to pinpoint the most critical and risky aspects of the business. Focus your due diligence efforts on these areas.
  • Establish red flags. For each important area, identify the factors that, if found, would raise concerns. Work with your diligence team to devise the lightest touch possible to test for these factors.
  • Streamline your document requests. Develop a concise, efficient list of documents. Remember, every request adds friction to the deal—ensure that each item is impactful enough to justify the friction.

This is, of course, a very high-level overview of what the process could look like. You’ll need to work with your team to tailor it to your situation. As I mentioned earlier, feel free to reach out to me on LinkedIn (https://www.linkedin.com/in/manton2764) if you ever need help. Go get ‘em!

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Michael Anton is the former sponsor of MPower Industries LLC and ex-CEO/President of All Service AC & Plumbing. With a diverse background spanning consulting, product management, cyber security, corporate strategy, data analytics, home service management, and construction management, he brings a wealth of expertise to the ETA arena. Now based in Atlanta, GA, Michael is passionate about mentoring and consulting the next generation of ETA entrepreneurs. You can connect with him on LinkedIn at https://www.linkedin.com/in/manton2764.