Privacy and Data - The New Diligence Frontier

In our experience advising business owners through transactions over the past five years, we have witnessed a notable shift in how many buyers approach privacy diligence. What once warranted a cursory review now frequently commands dedicated workstreams and weeks of investigation, particularly for companies with significant customer data or technology-focused acquirers. This evolution reflects the convergence of comprehensive privacy regulations, increased enforcement activity, and heightened buyer sensitivity to inheriting regulatory exposure.

Executive Summary

Privacy compliance has become an important due diligence consideration that can impact deal valuation, transaction structure, and closing certainty for lower middle market companies, particularly those processing meaningful customer data. The convergence of comprehensive regulations like CCPA and GDPR, a patchwork of state privacy laws, and heightened buyer sensitivity to regulatory and litigation risk has elevated data handling practices from an afterthought to a transaction concern for many acquirers.

For business owners planning exits within the next two to seven years, privacy compliance represents both a risk to be managed and a potential differentiator. In our experience across approximately forty transactions involving data-intensive businesses, companies that demonstrate mature, documented privacy programs often experience smoother diligence processes, though many factors influence transaction outcomes. Those with significant undisclosed vulnerabilities may face purchase price adjustments, expanded indemnification requirements, or extended diligence timelines.

The relevance of privacy compliance varies significantly based on your business profile. Technology and SaaS companies, healthcare providers, financial services firms, and any business processing substantial consumer data face higher scrutiny. Manufacturing companies with minimal customer data processing and industry-specific buyers may find privacy compliance less central to their transaction. This article examines why privacy compliance has become standard diligence territory for many acquirers, identifies common data handling issues that create transaction risk, and provides practical assessment frameworks while acknowledging the limitations of our guidance and the alternatives to comprehensive remediation.

Introduction

The regulatory landscape governing personal data has transformed dramatically over the past decade. The European Union’s General Data Protection Regulation, effective May 2018, established global expectations for data protection. California’s Consumer Privacy Act followed in January 2020, subsequently strengthened by the California Privacy Rights Act in 2023. Virginia, Colorado, Connecticut, Utah, Texas, Oregon, Montana, and others have enacted comprehensive privacy statutes, each with unique provisions and requirements.

For lower middle market companies (those typically generating between two and twenty million dollars in annual revenue), this regulatory proliferation creates challenges that differ meaningfully from those faced by larger enterprises. You likely lack dedicated privacy counsel, a Chief Privacy Officer, or the resources to implement enterprise-grade compliance programs. Yet the scope of privacy obligations depends on what data you process, where your customers and employees reside, and what industry you operate in.

Companies with minimal customer data processing (such as B2B manufacturers selling primarily to other businesses with limited end-consumer interaction) may have more limited immediate privacy obligations. Conversely, if you serve customers, employees, or contractors in California, you likely have CCPA/CPRA obligations. If you process data from EU residents, GDPR applies regardless of company size.

We work with business owners who express genuine surprise when we explain that their customer database, email marketing practices, website analytics, employee records, and vendor data sharing arrangements may fall within buyer scrutiny. The conversation usually begins with skepticism (“We’re a regional manufacturing company, not a tech startup”) and sometimes ends with recognition that privacy obligations extend beyond the technology sector. But for some companies, honest assessment reveals that privacy compliance may not warrant significant investment relative to other operational priorities.

Understanding privacy compliance as a transaction risk factor requires first appreciating why certain buyers care deeply about this area and what specifically concerns them when evaluating potential acquisitions.

Why Many Sophisticated Buyers Focus on Privacy Compliance

The buyer perspective on privacy compliance stems from concrete financial and operational concerns, not abstract regulatory anxiety. Acquirers who have witnessed the consequences of inherited privacy problems approach diligence with hard-earned caution, though the intensity of this focus varies significantly by buyer type and industry.

Regulatory Enforcement Reality

Regulatory agencies have moved beyond targeting only the largest technology platforms. The California Privacy Protection Agency, which began enforcement operations in 2023, has initiated investigations across company sizes. According to CPPA public records, the agency’s first enforcement actions have included companies processing consumer data at varying scales. The California Attorney General’s office has pursued enforcement actions under CCPA, with penalties for violations involving inadequate consumer rights procedures.

State attorneys general have demonstrated willingness to pursue enforcement against regional companies in some cases. But enforcement probability varies significantly by industry, geography, data processing volume, and public visibility of any incidents. Companies processing minimal consumer data with no history of breaches or complaints face substantially lower enforcement risk than consumer-facing technology companies with extensive data collection.

When investigations do occur, costs can be substantial. In our experience across a limited number of privacy-related matters, investigation-related expenses (including legal fees, remediation, and operational disruption) have varied widely, from under $25,000 for straightforward matters to several hundred thousand dollars for complex investigations extending over twelve to eighteen months. These figures represent our firm’s observations and should not be generalized; actual costs depend heavily on specific circumstances.

For a buyer inheriting undisclosed privacy compliance failures in a data-intensive business, these potential costs factor into purchase price negotiations or may lead them to decline the transaction entirely.

Litigation Landscape Evolution

Private litigation under privacy statutes has expanded, creating a risk landscape that buyers must evaluate. The California Consumer Privacy Act includes private right of action provisions for data breaches involving unencrypted personal information, with statutory damages ranging from $100 to $750 per consumer per incident. Notable settlements in privacy class actions have reached eight and nine figures for large consumer platforms.

For lower middle market companies, litigation exposure is typically more limited but can still be significant. Defense costs for privacy-related claims (even unsuccessful ones) can reach well into six figures based on litigation industry surveys, though outcomes vary dramatically based on claim specifics, jurisdiction, and company response.

Beyond statutory claims, common law privacy torts and negligence theories provide additional litigation vectors. Companies that experience data breaches or improperly share customer information face exposure on multiple fronts. For a prospective acquirer of a data-intensive business, understanding the target’s historical data practices and any incidents that might generate future claims represents important diligence.

Integration and Operational Concerns

Acquiring a company with immature privacy practices means inheriting remediation obligations that compete for resources otherwise dedicated to realizing transaction synergies. A buyer who discovers post-closing that the target lacks fundamental data mapping, relies on invalid consent mechanisms, or maintains data sharing arrangements that violate contractual or regulatory requirements faces immediate operational challenges.

The weight sophisticated buyers place on privacy compliance varies considerably by buyer type. Strategic technology buyers typically integrate acquired companies’ data practices with their own, making privacy compliance a key concern (sometimes a dealbreaker). Financial buyers focus on regulatory risk to valuation and indemnification exposure but may be less operationally concerned. Industry-regulated buyers in healthcare or financial services tend to scrutinize privacy more rigorously than unregulated acquirers. Manufacturing or service company buyers often focus less on privacy unless the target processes substantial consumer data.

Understanding your likely buyer profile helps calibrate whether privacy remediation should be a priority relative to other operational improvements.

Common Privacy Compliance Issues in Lower Middle Market Companies

Based on our experience working with business owners preparing for exit, we have observed consistent patterns of privacy compliance gaps. Understanding these common issues provides a roadmap for self-assessment, though the relevance of each issue depends on your specific data processing activities.

Inadequate Data Inventory and Mapping

The foundation of any privacy compliance program is knowing what personal data you collect, where it resides, how it flows through your organization, and who has access to it. Most lower middle market companies cannot answer these questions with precision. Data accumulates across systems (CRM platforms, email marketing tools, HR software, accounting systems, website analytics, and countless other applications) without coordinated oversight.

Buyers conducting privacy diligence will request data inventories and flow diagrams. Companies that cannot produce these documents reveal potential compliance gaps. More concerning, companies that cannot describe their data landscape also cannot identify their full exposure.

Data mapping is more complex than it initially appears. In our experience, most companies discover data in unexpected places: archived systems, backup storage, vendor platforms, shadow IT including spreadsheets and personal devices. Initial inventory efforts typically require several weeks to several months of focused attention, with timeline varying significantly based on system complexity, resource availability, and organizational size. A company with five to ten major systems might complete initial mapping in six to twelve weeks with dedicated attention; companies with more complex environments or limited resources often require longer.

Consent and Notice Deficiencies

Privacy regulations impose specific requirements for obtaining consent and providing notice, but these requirements vary significantly by jurisdiction. GDPR requires explicit, affirmative consent to collect personal data before processing begins: an opt-in model. CCPA and CPRA require notice of data practices and the right to opt-out, with consent obtained by default absent consumer objection. If you process data from both EU residents and California residents, you must generally meet the higher GDPR standard across all processing.

The lower middle market is rife with websites displaying outdated or legally deficient privacy policies, cookie consent banners that fail to meet regulatory requirements, and marketing programs built on consent obtained years before current regulations existed. Email marketing presents particular challenges. Lists accumulated over years of business operations often include contacts added through mechanisms that would not satisfy current consent requirements.

Vendor and Third-Party Data Sharing

Modern businesses share data with numerous third parties: payment processors, marketing platforms, analytics providers, cloud service vendors, and countless others. Privacy regulations require specific contractual protections, and improper data sharing creates both regulatory exposure and litigation risk.

We routinely encounter companies that cannot identify all parties with whom they share personal data, lack appropriate data processing agreements, or maintain arrangements that violate their own stated privacy policies. These gaps create diligence findings that informed buyers will pursue.

Vendor contract review typically uncovers gaps where many relationships operate under minimal documentation. You may discover that critical vendors lack formal agreements, or their existing agreements predate current regulatory requirements. Negotiating updated terms can take one to three months per vendor, particularly if the vendor resists custom agreements (and many vendors, especially larger ones, do resist). Prioritize vendors that handle the most sensitive data or the largest volumes.

Employee Data Handling

Privacy compliance extends beyond customer data to encompass employee and job applicant information. Companies often focus externally while neglecting the substantial personal data they process in HR contexts. Background check procedures, benefits administration, performance documentation, and employment records all fall within privacy regulatory scope in many jurisdictions.

California’s Consumer Privacy Rights Act explicitly addresses employee and job applicant privacy under Cal. Civ. Code § 1798.100 et seq. Companies operating in California (or employing California residents) face these requirements regardless of company size or industry.

Data Retention and Deletion Failures

Privacy regulations typically require that personal data be retained only as long as necessary for legitimate business purposes, with deletion or anonymization when individuals exercise their rights. But important exceptions exist: data subject to legal holds for litigation or regulatory investigation, data required for legal compliance such as tax records or contract documentation, and archived backups may be retained beyond general retention windows.

Most lower middle market companies lack formal retention policies, retain data indefinitely by default, and have no established procedures for honoring deletion requests. Additionally, older systems may lack the technical capability to delete specific records without data loss, creating remediation challenges that can require significant investment to address.

Privacy Compliance Assessment Framework

Evaluating your privacy compliance posture before engaging with buyers allows you to address issues proactively rather than defensively. We recommend a structured assessment approach that examines five key dimensions. But the priority and depth of this assessment should align with your data processing profile and likely buyer concerns.

When to prioritize privacy assessment: Technology and SaaS companies, healthcare providers, financial services firms, consumer-facing businesses with extensive customer databases, and companies likely to attract strategic technology buyers should treat privacy compliance as a significant priority.

When privacy may be lower priority: B2B manufacturing companies with minimal customer data processing, service businesses with limited data collection, and companies likely to attract industry-specific or financial buyers may appropriately prioritize other operational improvements. This doesn’t mean ignoring privacy entirely. It means calibrating investment appropriately.

Governance and Accountability Structure

Begin by examining who within your organization bears responsibility for privacy compliance. For lower middle market companies, privacy responsibility typically falls to general counsel, a compliance manager, or an operations executive with privacy as one of many responsibilities.

What matters is not the title but the clarity of accountability and the resources allocated. Can you identify who makes privacy decisions, who monitors compliance, and who would respond to a regulatory inquiry or data subject request? Document these roles and ensure responsible individuals understand their obligations.

Data Mapping and Classification

Conduct a comprehensive inventory of personal data across your organization. This exercise should identify:

This mapping exercise invariably reveals data you didn’t realize you collected, storage locations you’d forgotten, and sharing arrangements that lack contractual foundation. Document your findings honestly. They represent your starting point for remediation or disclosure.

Policy and Notice Review

Examine your external privacy notices and internal policies with fresh eyes. Your website privacy policy should accurately describe your current data practices, comply with applicable regulatory requirements, and be written in language your customers can actually understand. Common deficiencies include policies that describe practices you no longer follow or never actually followed, policies that omit required disclosures, and policies that promise protections you don’t actually provide.

Internal policies governing employee data handling, data retention, incident response, and vendor management should exist, reflect actual practice, and be regularly reviewed.

Rights Request Procedures

Privacy regulations grant individuals various rights regarding their personal data: access, correction, deletion, portability, and others depending on applicable law. Implementing rights request procedures requires infrastructure and process work.

Receiving requests means establishing dedicated channels. Routing requires documented procedures and designated personnel. Verification protocols must confirm the requester’s identity to prevent fraudulent access. Locating data across systems requires completing data mapping first. Fulfillment within regulatory timeframes (forty-five days under CCPA/CPRA, thirty days under GDPR) requires systems that can actually access or delete individual records, which many legacy systems cannot do without technical remediation.

Most lower middle market companies cannot currently satisfy these requirements fully. Building these capabilities before exit positions you to demonstrate compliance maturity during diligence, but the investment should be proportionate to your data processing volume and buyer expectations.

Vendor Contract Assessment

Review your agreements with third parties who receive or process personal data on your behalf. Key contract elements include data processing terms that limit vendor use of personal data to providing contracted services, security requirements appropriate to the sensitivity of shared data, breach notification obligations, audit rights, and termination provisions addressing data return and deletion.

Inventory your data-sharing vendors, locate existing contracts, and evaluate them against current regulatory requirements. Be prepared for the reality that many vendors (particularly larger platforms) resist custom privacy terms, which may limit your remediation options.

Alternatives to Comprehensive Remediation

Before investing heavily in privacy compliance remediation, consider whether alternative approaches might be more appropriate for your situation. Privacy compliance improvement is not the only path forward, and the optimal approach depends on your specific circumstances.

Alternative 1: Disclosure and Buyer Assumption

Rather than remediating all privacy gaps before a transaction, you can disclose known issues and negotiate buyer assumption of remediation responsibilities.

When this approach may be superior:

• Transaction timeline is compressed (six to twelve months)
• Gaps are easily quantifiable and bounded
• Buyer has sophisticated privacy expertise and infrastructure
• Remediation costs are relatively modest compared to transaction size

When this approach may be inferior:

• Gaps are extensive or poorly understood
• Buyer lacks privacy sophistication
• You want a clean exit without ongoing obligations
• Issues could trigger regulatory action before closing

Tradeoffs: This approach saves pre-close remediation costs but may reduce purchase price, expand indemnification requirements, or limit buyer interest. The appropriate choice depends on your risk tolerance and negotiating position.

Alternative 2: Targeted Remediation

Address only the highest-risk gaps rather than pursuing comprehensive compliance.

When this approach may be superior:

• Limited transaction timeline
• Budget constraints
• Lower data processing volume
• Industry-specific buyer less focused on privacy

When this approach may be inferior:

• Sophisticated technology buyer
• Extensive data processing
• History of incidents or complaints
• Regulated industry overlay (healthcare, financial services)

Tradeoffs: This approach typically costs 40-60% of full remediation and addresses the most significant risks while accepting residual exposure. Many lower middle market companies find this represents an appropriate balance.

Alternative 3: Prioritize Other Operational Improvements

Privacy compliance competes for resources with other transaction preparation activities. Financial performance and core business operations typically drive transaction value more than privacy compliance alone.

Consider prioritizing other areas when:

• Privacy risk profile is genuinely low
• Buyer is unlikely to focus heavily on privacy
• Other operational issues would create larger valuation impact
• Resources are constrained

Don’t deprioritize privacy when:

• You process substantial consumer data
• Strategic technology buyer is likely
• You’ve had incidents or complaints
• Industry regulations create overlay requirements

The goal is appropriate allocation of limited resources to maximize transaction readiness across all dimensions, not single-minded focus on privacy to the exclusion of other priorities.

Building a Remediation Roadmap

If you determine that privacy remediation is appropriate for your situation, assessment findings should translate into a prioritized remediation plan with realistic expectations about costs, timelines, and potential obstacles.

Realistic Cost Expectations

Privacy remediation costs vary dramatically based on current compliance posture, organizational complexity, and desired end state. In our experience, total costs for meaningful remediation typically include:

Direct costs:

• External counsel and consultants: Wide range depending on scope; targeted remediation might require $15,000-40,000, while comprehensive programs for data-intensive companies can reach $75,000-150,000 or more
• System upgrades for data subject rights: $10,000-50,000 if legacy systems require modification
• Privacy technology tools: $5,000-15,000 annually for policy management, consent, or data mapping tools
• Training programs: $2,000-10,000 for staff education

Indirect costs often underestimated:

• Internal staff time: Data mapping, policy development, and procedure implementation require significant attention from knowledgeable employees
• Management bandwidth: Privacy remediation competes with other priorities over twelve to eighteen months
• Opportunity cost: Resources devoted to privacy cannot address other operational improvements

We cannot provide precise cost ranges that would apply to all companies because the variation is too significant. A company with five employees, minimal customer data, and modern systems will spend a fraction of what a company with fifty employees, extensive consumer data, and legacy systems will require.

Recommendation: Before committing to remediation, obtain specific quotes from qualified privacy counsel based on your actual situation. Use initial assessment to scope the work before budgeting.

Realistic Timeline Expectations

Privacy remediation timelines depend heavily on factors including resource availability, vendor cooperation, system complexity, and competing priorities.

Best case (dedicated resources, limited complexity): Six to nine months for meaningful improvement Typical case (part-time attention, moderate complexity): Twelve to eighteen months Complex situations (legacy systems, uncooperative vendors, extensive gaps): Eighteen to thirty-six months

Timeline dependencies often underestimated:

• Vendor responsiveness for contract amendments (many resist, some refuse)
• Technical complexity of legacy system modifications
• Discovery of previously unknown data flows during mapping
• Staff availability for training and procedure implementation
• Competing organizational priorities

Common obstacles to anticipate:

• Vendors that refuse custom privacy terms, limiting your remediation options
• Legacy systems that cannot technically support data deletion without expensive upgrades
• Discovery of data in shadow IT that requires additional remediation
• Regulatory changes during remediation that expand requirements
• Organizational changes that disrupt long-term projects

Plan for contingencies and maintain executive accountability throughout the process.

Priority Framework

Address immediately (high regulatory exposure or material diligence findings):

• Major policy deficiencies visible on your website
• Undocumented or unauthorized data sharing with third parties
• Absence of basic security controls over personal data
• Known incidents that haven’t been properly addressed

Within six to twelve months (core compliance infrastructure):

• Data mapping documentation
• Updated privacy notices reflecting actual practices
• Priority vendor contract remediation
• Basic rights request procedures

Ongoing maintenance:

• Policy review and updates
• Staff training
• Vendor management
• Compliance monitoring

Actionable Takeaways

Business owners preparing for exit should take specific steps to address privacy compliance as a transaction risk factor, calibrated to their specific situation.

Assess your privacy risk profile honestly. Before investing in remediation, determine whether privacy compliance should be a priority for your specific situation. Companies with minimal customer data processing, B2B business models, and industry-specific buyers may appropriately focus elsewhere. Companies with significant consumer data, technology assets, or likely technology buyers should treat privacy as higher priority.

Conduct honest self-assessment or engage qualified counsel. Before any buyer examines your privacy practices, understand them yourself. For companies where privacy is material, external assessment by qualified privacy counsel adds credibility during buyer diligence and provides legal risk assessment that internal review cannot. Expect external assessment costs to vary based on company complexity.

Consider alternatives to full remediation. Disclosure with buyer assumption, targeted remediation of highest-risk issues, or prioritizing other operational improvements may be more appropriate than comprehensive compliance programs depending on your circumstances.

Document everything. Privacy compliance increasingly requires demonstration, not just assertion. Build documentation that evidences your policies, procedures, training, and compliance activities.

Prepare for diligence questions if privacy is relevant to your buyer. Expect questions including: Describe your data inventory and where personal data is stored. What is your data retention policy? List all third parties with access to personal data. Have you had any data breaches or regulatory inquiries? How do you handle data subject access and deletion requests? Preparing clear, documented answers streamlines diligence.

Balance privacy against other priorities. Privacy compliance is one element of transaction readiness. Financial performance, customer concentration, management depth, and operational efficiency typically drive transaction value more directly. Allocate resources appropriately across all dimensions.

Conclusion

Privacy compliance has become part of the standard diligence repertoire for many sophisticated acquirers evaluating lower middle market transactions, particularly those involving significant customer data or technology assets. The regulatory complexity, enforcement activity, and litigation exposure surrounding personal data handling create risks that informed buyers evaluate carefully.

But privacy compliance exists on a spectrum, and its importance varies significantly by company type, data processing profile, and likely buyer. Your compliance posture is generally acceptable for transaction purposes if you have mapped your data and understand your processing activities, your external privacy notice accurately describes your practices, you can document your data sharing arrangements, and you can demonstrate basic response procedures for data subject requests. Perfect compliance is not required; demonstrated competence and proportionate attention are.

For business owners planning exits, this reality presents choices. You can proactively assess your practices and implement improvements appropriate to your risk profile. You can disclose known gaps and negotiate buyer assumption of remediation. Or you can prioritize other operational improvements if privacy risk is genuinely low for your situation.

The optimal approach depends on your specific circumstances: your data processing activities, likely buyer profile, transaction timeline, and resource constraints. Privacy compliance has become one consideration in exit preparation, but it should be evaluated alongside other priorities rather than pursued in isolation. Business owners who make thoughtful, informed decisions about privacy investment (whether that means comprehensive remediation, targeted improvements, or appropriate disclosure) position themselves for successful outcomes when the transaction window opens.