Pre-Sale Planning for B2B M&A Transactions: Key Considerations in Data Privacy, AI, and Cybersecurity

This article is the first in a series relating to privacy, security, and artificial intelligence preparedness before entering into a fundraising round or M&A transaction. Stay tuned for additional considerations for B2C companies.

As early-stage companies prepare for merger and acquisition transactions or financings, thorough pre-sale planning can significantly impact deal success and valuation. While B2B businesses face different privacy and security risks than companies which provide services direct-to-consumer, sophisticated buyers are increasingly scrutinizing how selling companies handle data privacy compliance, artificial intelligence deployment, and cybersecurity practices.

This article outlines key areas where B2B businesses can focus pre-sale preparation efforts across these three critical domains. Taking proactive steps in these areas before engaging with potential buyers or investors can streamline the diligence process, reduce transaction risk, and support strong valuations.

Part 1: Data Privacy for B2B Companies

Understanding the Data Landscape

Before addressing privacy compliance, businesses must understand what personal information they actually handle and in what capacity. This process begins with understanding two fundamental concepts:

Data Controller vs. Data Processor

Under privacy laws, B2B businesses typically operate in two distinct roles:

• As a controller when determining the purposes and means of processing personal information. For example, when collecting prospect email addresses for the company’s own marketing campaigns, or when maintaining employee records in HR systems.
• As a processor when handling personal information on behalf of customers pursuant to their instructions. For example, when the company’s SaaS platform stores customer data or processes transactions for clients. For B2B businesses, this typically represents the bulk of personal information processing activities.

These roles matter because each carries different compliance obligations that buyers or investors will evaluate separately during diligence.

Identifying Common Personal Information Types

Most B2B businesses manage at least three distinct categories of personal information:

1. B2B Contact Information: This includes marketing leads, customer contact details, and billing information. While some U.S. state privacy laws exempt business contact information from their requirements, California privacy laws and international regulations like the GDPR do not. This means even strictly B2B companies may have significant compliance obligations.
2. HR and Employee Data: This includes information about a business’s own employees and contractors. This is often the most sensitive personal data a B2B company holds and is subject to privacy regulations across multiple jurisdictions.
3. Customer Data Processed on Behalf of Clients: This includes information a business handles as a service provider for its customers. This data is subject to both contractual processor obligations and regulatory requirements.

Controller Responsibilities: What Buyers or Investors May Review

For data where a business acts as controller – primarily a business’s B2B contact database and HR information – buyers will examine whether the company has appropriate compliance programs in place.

Privacy Policies and Transparency

A business’s privacy policy serves as the foundation of its compliance program. Buyers will look for complete disclosure of how personal information is collected, used, and shared. The policy should explicitly disclose that personal data may be shared in the event of a merger, acquisition, or sale – language that many early-stage companies overlook until they are actually in a transaction.

Beyond basic data practices, a business’s privacy policy should also address modern data collection methods including tracking technologies, interest-based advertising, chatbot interactions, and uses of personal data for AI training purposes. Given the recent surge in litigation targeting companies over cookies and tracking technologies, comprehensive disclosure in this area is increasingly important.

Cookie Consent and Tracking Technologies

Privacy laws worldwide include requirements around cookie consent, typically necessitating implementation of a cookie consent management platform. While this may seem like a minor technical detail, inadequate cookie consent mechanisms have become a common target for privacy litigation and can create liability exposure.

GDPR Compliance for International Operations

For B2B businesses with EU customers, employees, or operations, buyers will expect documented GDPR compliance programs including processes for handling data subject rights requests (access, deletion, correction, portability);records of Processing Activities (ROPAs) that catalog all processing operations; and data transfer mechanisms such as Standard Contractual Clauses for receipt and onward transfers of personal data subject to privacy regulations in the EEA, the UK, and Switzerland.

Processor Obligations: Supporting Customer Compliance

When acting as a processor for client data, the business’s contractual framework and operational capabilities will become a key focus during diligence.

Data Processing Agreements

Most privacy laws and regulations around the globe require controllers to impose specific contractual requirements on their vendors and service providers. Typically, these appear in a Data Processing Addendum, or DPA. DPAs should include all requirements mandated by these laws, including appropriate security, confidentiality, and data subject rights provisions. For companies serving regulated industries, these agreements become even more critical. For example, healthcare clients will expect HIPAA Business Associate Agreements and financial services clients will require GLBA compliance terms.

When companies negotiate custom terms with every customer, this could create diligence headaches and raise concerns for buyers or investors about consistency and scalability. Standardized, attorney-reviewed DPA templates that have been successfully negotiated with clients demonstrate maturity and can significantly reduce transaction risk.

Operational Support for Customer Compliance

Beyond contractual protections, buyers and investors want to see that B2B businesses have systems and processes in place to support customer compliance obligations. This includes, for example, the ability to respond to customer data subject rights requests, provide self-service portals or ticketing systems that enable customers to meet their own obligations, and demonstrate clear data retention and deletion practices with documented procedures.

Part 2: Artificial Intelligence

Buyers and investors are increasingly focused on understanding how companies deploy artificial intelligence (AI) because AI can create novel or unexpected legal risks that even sophisticated acquirers do not yet fully understand. The questions during diligence often fall into two broad categories: how a business uses AI internally, and whether the company’s product incorporates AI features. These carry different risk profiles and require different levels of documentation.

Internal AI Use: Documentation and Controls

Most businesses today use AI tools across their organizations – developers use coding assistants, sales teams use AI for productivity, and HR departments may use AI-powered screening tools. Buyers and investors will want to understand this usage and the controls around it.

Key areas of inquiry include:

• Whether AI tools have been used to create company intellectual property, and any limitations on ownership or use of AI-generated content;
• What protocols exist to prevent customer confidential information from being input into public AI systems; and
• Whether AI is used in HR processes, which is considered a high-risk application subject to emerging regulations.

Routine use of publicly-available or “free” AI tools can create potential IP and confidentiality issues that buyers will scrutinize. Documented policies governing employee AI use – particularly restrictions on inputting confidential information into public systems – demonstrate risk awareness and maturity.

Product-Embedded AI: Heightened Scrutiny

If a business’s product incorporates artificial intelligence, expect intensive diligence on technical architecture, compliance, and ethics.

Technical Architecture and Data Flows

Buyers and investors may want detailed explanations of how AI is incorporated into a company’s product, what data serves as inputs, what the system outputs, and critically, whether customer data is used to train AI models. If a business does train on customer data, whether that training is isolated to each customer or pooled across customers can make a significant difference in risk profile and customer acceptance.

Particular scrutiny applies to AI systems that make automated decisions in high-stakes contexts like HR platforms, insurance claims processing, credit decisions, or content moderation that affects user access to platforms.

Compliance and Responsible AI

Beyond technical details, buyers and investors often want evidence of responsible and ethical AI deployment. This includes:

• Documented policies and procedures demonstrating thoughtful AI governance;
• Confidentiality protections ensuring client data doesn’t train public or shared models;
• Compliance with AI model provider terms and conditions (such as restrictions on using output to train competing models); and
• For companies selling into the EU, compliance with the EU AI Act, including risk assessments and potential regulator registration.

Emerging AI Regulatory Requirements

New AI laws in various jurisdictions increasingly require risk assessments for AI systems, bias testing and fairness evaluations, and comprehensive documentation of AI capabilities, limitations, and training data. Companies that proactively develop AI governance frameworks, including AI inventories, risk classification methodologies, and periodic review processes, can position themselves ahead of emerging regulatory requirements and demonstrate maturity that buyers and investors value.

Part 3: Cybersecurity and Information Security

For B2B businesses, especially those serving enterprise customers or regulated industries, security documentation and certifications have become table stakes rather than differentiators. Buyers or investors often evaluate security through three lenses: certifications, documentation, and track record.

Audits and Certifications

Conducting audits to industry standards or achieving certain security certifications can serve as important confidence signals to both customers and to buyers or investors. For example, conducting a SOC 2 Type 2 audit, which demonstrates operational effectiveness of security controls over time, has become increasingly expected for B2B SaaS companies serving enterprise customers. ISO 27001 provides an international standard for information security management and is particularly valued by companies with global operations.

Certifications must be current and include annual surveillance audits. Stale certifications or gaps between audit periods can raise red flags during diligence and suggest either a lapsed security program or an attempt to avoid scrutiny of current practices.

Comprehensive Security Program Documentation

Beyond audit reports and certifications, buyers also typically request extensive documentation of a business’s security program.

Written Information Security Program (WISP)

A WISP is a comprehensive security policy tailored to recognized frameworks like the NIST Cybersecurity Framework or ISO 27001 standards, supported by detailed procedures and standards covering key security domains. Evidence of regular policy reviews and updates demonstrates ongoing attention rather than one-time compliance efforts.

Security Organizational Structure

Buyers and investors typically want to see designated security leadership. Depending on organization size, this could include a Chief Information Security Officer (CISO) or clearly defined security responsibilities and roles for smaller teams. Companies should also ensure that clear reporting lines exist and that there is board-level oversight of security matters.

Testing and Vulnerability Management

Regular penetration testing by qualified third parties, vulnerability assessments and scan results, and documentation of critical and high-severity findings with clear remediation plans and timelines. Buyers understand that vulnerabilities will be discovered; what matters is how quickly and effectively a business addresses them.

Incident History and Response Capabilities

Security incidents don’t necessarily derail transactions, but poor incident response does. B2B companies should be prepared to disclose and discuss any past incidents or security events, along with the company’s incident response plan and preparedness.

Past Incidents

Buyers and investors will typically ask about any past security incidents or breaches, ransomware attacks, DDoS incidents, or significant outages. They’ll want to know what actions the company took in response, including notifications to affected individuals and regulators, and what remediation measures the company implemented to prevent recurrence.

The key is to frame incident disclosures to emphasize response effectiveness and lessons learned. Buyers value companies that respond well to incidents and improve their security posture over time. Attempting to hide incidents that are later discovered during deep technical diligence can be far more damaging than proactive disclosure with evidence of strong response.

Incident Response Preparedness

Beyond historical incidents, buyers and investors often want to see documented incident response plans, evidence of tabletop exercises or incident response testing, defined roles and escalation procedures, relationships with external resources like forensics firms and specialized legal counsel, and cyber insurance coverage with any relevant claims history.

Building a Pre-Diligence Strategy

Timeline Considerations

The single most important factor in a business’s pre-diligence strategy is timeline. Many critical compliance steps, such as obtaining SOC 2 Type 2 certification, implementing comprehensive privacy programs, or developing AI governance frameworks, can require months to complete properly.

Three to Six Months Until Sale Process

If a business is entering the market soon, it should focus on quick wins: updating privacy policies, conducting penetration testing or risk assessments, creating basic policy documentation, signing DPAs, and organizing existing materials for efficient diligence response. Prioritize areas where gaps could significantly deal value or key terms.

Six to Twelve Months Until Sale Process

With this timeline, businesses may be able to pursue a SOC 2 Type 2 audit and can focus on implementing comprehensive privacy compliance programs, creating AI governance documentation, preparing form DPAs, and conducting thorough security testing and remediation. This is the sweet spot for pre-diligence preparation.

Twelve to Twenty Four Months Until Sale Process

If a business has this much runway, it can build mature compliance programs that will streamline diligence and may support stronger valuations.

Key Takeaways

Pre-sale planning for data privacy, artificial intelligence, and cybersecurity is critical for B2B companies entering M&A or financing transactions. Sophisticated buyers and investors conduct increasingly detailed diligence in these areas, and gaps or deficiencies can significantly impact valuations, deal terms, or transaction viability.

The companies that succeed don’t scramble to create compliance documentation when buyers ask for it during diligence. They’ve built privacy protection, responsible AI deployment, and robust security practices into their operations from the beginning – or at minimum, they’ve identified gaps and fixed them well before entering the market.

For early-stage founders encountering these requirements for the first time, the good news is that most gaps can be addressed with focused effort over several months. The key is to start early, prioritize based on a business’s specific context and timeline, and engage experienced counsel to guide the company through the areas with the highest risk and complexity.

Companies that take this proactive approach will respond quickly and comprehensively to buyer diligence requests, avoid deal delays or post-closing obligations that reduce effective purchase price, demonstrate operational maturity and risk management sophistication, and support strong valuations by reducing buyer risk perception.

If a business is contemplating a transaction in the next 12-24 months, it should begin asking these questions about its operations now. The preparation done today will make the difference between a smooth, successful exit and a difficult transaction process.

For assistance with privacy, AI, or cybersecurity compliance in preparation for M&A or financing transactions, please contact KO partner Erin Locker at [email protected].