You’ve seen the usual suspects that derail deals – hidden debt, tricky contracts, or that one executive with a golden parachute so heavy it’s dragging down the entire negotiation. But lately, there’s a new player creeping up the list: data privacy. While it used to be the kind of problem you shuffled off to the legal team, it’s quickly become the type of issue that can derail entire deals.

And it’s not just about staying in the good graces of regulators. A botched approach to privacy – whether it’s a class-action lawsuit or a data breach that torpedoes a company’s reputation – can wipe out your projected ROI and turn what seemed like a safe bet into an operational nightmare. Just ask the 130 companies recently slapped with legal action for violating New Jersey’s “Daniel’s Law.” The law, aimed at protecting the personal information of public servants, seems straightforward enough. But several small portfolio companies missed a detail here, exposed a bit of data there, and now find themselves facing over 20,000 violations, with potential penalties exceeding $20 million. https://www.cooley.com/news/insight/2024/2024-02-12-inundated-with-requests-under-new-jerseys-daniels-law

The kicker? Most of these companies were blindsided. It’s the sort of oversight that doesn’t just threaten deal value; it threatens your credibility as a professional. Because when you’re scrambling to explain how a seemingly routine deal turned into a regulatory fiasco, it’s not just the target company’s reputation on the line – it’s yours.

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Privacy won’t win you any trophies, but it sure saves you headaches. Look, we get it – no PE team is sitting around thinking about how to make data privacy the centerpiece of their next big play. But here’s the deal... completely ignoring it opens the door to fines, lawsuits, and reputation hits that stick around far too long.

You don’t need to be a privacy expert. But you need to know how to spot the risks early and be sharp enough to know when to bring in the right help. Where’s the sensitive data? Who has access? And what happens if something goes sideways? Answering these questions won’t make your portfolio sparkle, but it will keep things running smoothly and keep attorneys out of your inbox. And in this game, fewer surprises means a better exit.

Why Data Privacy Deserves Consideration in M&A Transactions

If you’re still treating data privacy as a problem reserved for tech giants and healthcare conglomerates, it’s time for a reality check. Over the last few years, privacy has evolved from a legal footnote into a deal-breaker that can potentially shatter valuations and cause some embarrassment for the firm. And no, this isn’t just about appeasing regulators. It’s about real financial exposure, operational disruption, and – perhaps most critical for private equity – a potential credibility hit with investors.

So why the sudden surge in privacy-related headaches? The short answer: regulations are multiplying, enforcement is intensifying, and every org, whether it’s a niche software provider or a traditional manufacturer, is now in the business of collecting sensitive data. The result? Data privacy has gone from a “nice-to-have” to an annoying and growing need.

Once upon a time, privacy compliance meant navigating the complexities of one single regulatory requirement: EU’s General Data Protection Regulation (GDPR). But those days are long gone. Now, the regulatory landscape has transformed into a sprawling patchwork of rules that read like a bowl of alphabet soup: CCPA, CPRA, VCDPA, CDPA, and BIPA. And that’s just in the U.S. Add in global counterparts like Brazil’s LGPD and India's DPDPA, etc., and suddenly even middle-market firms are drowning in compliance mandates that you'd assume have zero impact on them.

The stakes can be high. GDPR fines can hit up to 4% of global annual revenue, while U.S. state laws like CCPA carry seven-figure penalties that can be just as painful. But it’s not just about the dollar signs. The real threat is actually operational: consider having to manage regulatory investigations. You'll be navigating the demands of multiple government agencies – each moving at its own glacial pace – while your leadership team is pulled away from actually driving growth.

Real-World Relevance

‍For a mid-market private equity firm, this complexity can feel overwhelming. Take a healthcare deal, for example. You might think you’re just buying a small regional player, but if that company has even a few customers in California, Virginia, and some other country, you’re suddenly liable under three different privacy regimes, each with its own quirks and legal landmines. Miss one small checkbox in your compliance review and it’s not just a technical oversight – it’s a potential deal-breaker.

And here’s the tricky part: it’s not just about complying with these laws – it’s about ensuring that compliance holds up under scrutiny. Even the most detailed policies mean little if they aren’t backed by strong security practices.

Because here’s the thing: privacy and security aren’t two separate problems – they’re two sides of the same coin. And if you’re treating them like separate silos, it’s only a matter of time before that approach backfires.

Why Data Privacy and Cybersecurity Must Work Hand-in-Hand in M&A Due Diligence

Think of data privacy and cybersecurity like two halves of a well-crafted lock system. It’s easy to assume that privacy is purely a legal issue while security is IT’s problem. But the truth is, a crack in one often signals a flaw in the other.

Imagine this: A private equity firm is evaluating a promising software startup. On paper, their data privacy policies are perfect. They’ve got user consent forms, updated privacy notices, and a privacy policy that could pass a bar exam. But dig a little deeper, and you find that their cybersecurity posture is a house of cards – unpatched servers, outdated firewalls, and an IT director who’s stretched thin wearing many hats that don't fit.

The issue? Legal compliance means little if security is weak. One breach, and all those carefully crafted legal defenses collapse under the weight of lawsuits, regulatory fines, and a very public reputational hit. The takeaway? Privacy and security are intertwined – ignore one, and you’re setting yourself up for a nasty surprise when the other fails. That’s why it’s critical to spot these risks early – before they become your problem – and that’s exactly where privacy diligence comes in.

Privacy Red Flags to Watch for During M&A Due Diligence

Privacy risks are sneaky. They hide in places no one thinks to check: tucked into vendor contracts, buried in data flows, or quietly ignored in day-to-day operations. Miss one, and what should’ve been a smooth integration could quickly become a post-acquisition mess. Here are three major red flags to watch for during diligence that should have you hitting pause.

Red Flag #1: Non-Compliance with Privacy Laws

A company’s privacy policy might look polished on the surface, but don’t let it fool you – appearances can be deceiving. If those policies aren’t backed by actual practices, you could be stepping into a legal minefield.

What to Look For:

• 📜Outdated Privacy Policies and Notices: If their policies don’t reflect recent updates to CPRA or the Schrems II ruling on international     data transfers, it’s not just sloppy governance – It’s a red flag that the company may have slapped together some legal language years ago and hasn’t touched it since.
• 🚫 Missing or Weak Consent Mechanisms: Privacy laws often require explicit consent – especially when dealing with health or financial data.     If they’re still relying on old-school “click-to-accept” banners with no clear opt-out, they’re skating dangerously close to non-compliance.
• 🔓 Inadequate Security Measures for Protected Data: GDPR and CCPA aren’t just about privacy – they mandate solid security controls too. If encryption or access controls are missing, you’re not just looking at a technical gap – you’re looking at a lawsuit waiting to happen.

Red Flag #2: Incomplete or Missing Data Maps

Running a business without knowing exactly where data lives is like trying to defend a fortress with no idea where the walls are or which gates are open. Yet you’d be surprised how many companies struggle to answer basic questions about their data – where it’s stored, how it’s processed, and who can access it. I get a lot of nervous (& annoyed) chuckles when asking these questions of high-growth start ups.

What to Look For:

• 📄 Comprehensive Data Flow Diagrams: If the company can’t provide a clear map of where sensitive data resides and how it moves through the organization, assume they’re flying blind.
• 🗣️ Institutional Knowledge Gaps: Talk to both the security and legal teams separately. If their understanding of key questions don’t match – or     worse, they’re relying on unwritten knowledge instead of referencing formal documentation – you could be dealing with unaccounted data and a major compliance risk.

Red Flag #3: Weak Vendor Management and Data Sharing Practices

If navigating privacy rules for one company feels complex, throw in a dozen third-party vendors and things get even messier. Many companies rely on external providers – cloud services, SaaS platforms, marketing firms – to handle sensitive data. But if one of those vendors drops the ball, it’s not their problem... it’s yours. Your customers. Your data. Your responsibility.

What to Look For:

• ⚖️ Missing or Weak Data Processing Agreements (DPAs): Every vendor that touches personal data should have clear and enforceable contracts that spell out their data protection responsibilities. If those agreements are outdated or vague, don’t expect much help in the event of a breach.
• 🔍 No Vendor Oversight Program: Responsible companies regularly audit their high-risk vendors. If there’s no evidence of this, or if the target     has no vendor management program, assume their data is being handled with as much care as a glass vase at a toddler’s birthday party.

Wrapping Up the Red Flags: Knowing When to Hit Pause

Looking for these red flags might feel like overkill – after all, who’s got the time to dig into every data map and vendor agreement during due diligence? But trust us, it’s the kind of effort that pays off. Privacy risks may seem like a distant problem when you’re focused on closing the deal but overlooking them now can leave you wading through lawsuits, fines, and more audits than you’d care to remember.

The good news?.. You don’t need to become a privacy expert overnight. Incorporating privacy checks into your due diligence process doesn’t have to be a burden. When done right, it becomes just another way to protect your investment and avoid headaches down the line.

Now that we’ve flagged the big risks, let’s talk about how to bake privacy diligence into your overall process so that we can ensure it’s efficient, effective, and saves you from unpleasant surprises post-close.

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Fitting Privacy Due Diligence into the Flow of the Deal

For small and middle-market private equity firms, weaving privacy due diligence into your deal process doesn’t have to feel overwhelming. You don’t need to become a data privacy guru to protect your investment but you do need a clear framework to identify potential issues and know when to bring in the right experts. A phased approach (similar to our Cyber Threat Due Diligence Methodology) makes it easy to assess whether privacy is an exposure worth addressing, without slowing down your timeline or adding unnecessary complexity.

The first phase is all about understanding if data privacy is even a meaningful risk for the company you’re evaluating. Start by asking the basics: Does the target company collect, store, or process sensitive data, such as health information, financial details, or geolocation data. If the answer is no, you can likely move on – privacy risks aren’t worth over analyzing for companies with minimal exposure. However, if the company does handle sensitive data, this is your signal to dig a little deeper.

In the second phase, your goal is to spot any red flags that could indicate potential privacy trouble ahead. You don’t need to do a deep dive – this is where your standard checklist gets a slight privacy upgrade. Look for things like outdated privacy policies, inconsistent answers from legal and IT, or a lack of clear vendor oversight. These quick checks won’t answer every question, but they’ll help you gauge whether the company’s privacy posture is sound or if there’s something lurking beneath the surface. At this point, if everything checks out, great – you’ve mitigated the risk enough to move forward.

But if red flags pop up? That’s where the third phase comes into play. Rather than trying to sort through complex privacy laws yourself, this is the time to pull in experts. Most M&A attorneys have data privacy attorneys in their network who specialize in untangling these issues. They’ll help assess the extent of the exposure, focusing not only on compliance but also on how the risk impacts the broader deal terms. Their insights can shape indemnities, escrow amounts, or even price adjustments, giving you the confidence to move forward with your eyes open – or walk away in the unlikely event that the exposure is too great.

By breaking privacy diligence into these manageable phases,you avoid getting bogged down in legal minutiae and keep your focus where it belongs: closing the deal. If privacy isn’t an issue, you’ll move through quickly. If it is, you’ll have a clear process to escalate concerns and bring in the right expertise without derailing the timeline. But here’s the real opportunity: this isn’t just about avoiding risk. A thoughtful approach to privacy diligence can uncover hidden value that turns what used to feel like a compliance headache into a strategic asset that strengthens your investment and builds trust with regulators, customers, and investors alike.

Final Thoughts: Privacy Isn’t Sexy, but It Sure Saves You Headaches

Let’s be real: no private equity firm sees data privacy as a competitive edge. You’re focused on scaling the business, squeezing out inefficiencies, and securing strong exits – and rightly so. But hopefully you see that ignoring privacy is risky. In today’s regulatory environment, a misstep can lead to lawsuits, fines, and customer churn... all of which erode deal value.

Smart firms embed privacy diligence into their playbooks early. When you treat privacy risks like any other operational challenge – addressing them strategically, using them to adjust deal terms or set escrow provisions – you reduce the chance of nasty surprises. A company with sound privacy practices is more than compliant; it’s resilient, trustworthy, and poised for smoother operations, making it a stronger candidate for buyers.

At BlackSwan Cyber, we collaborate with law firms and private equity teams to uncover privacy risks early, ensuring smoother due diligence and stronger outcomes. Privacy might not steal the spotlight, but when handled right, it eliminates roadblocks and safeguards your bottom line. And that’s a win every firm can get behind.