Deal-breakers in due diligence
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Hello All,
After completing due diligence, have you ever recommended walking away from a deal – and what was the finding that made it a clear no?I have walked away from opportunities when due diligence revealed significant regulatory, compliance, or governance concerns that were not disclosed early in the process. Another major red flag is when management representations do not align with the supporting documentation or operating realities of the business. Financial issues can often be negotiated through pricing adjustments, earn-outs, or indemnification provisions. However, a lack of transparency, weak controls, unresolved compliance risks, or concerns regarding management credibility are much more difficult to mitigate. Once trust is lost during the due diligence process, it becomes very difficult to move forward with confidence.
I have not personally recommended walking away from a deal or recommended it, as at my current level I am more involved post-merger, but I believe significant unresolved people risks could justify that decision. Examples could include major employment liabilities, the likely loss of critical leaders, or a culture that is fundamentally incompatible with the buyer’s organization. If these risks cannot be resolved before closing or adequately reflected in the deal terms, the expected value of the acquisition may not outweigh the integration risk.
Yes, I have recommended to walk away from a deal because it didnt pass the financial due diligence expectations. When conducting the quality of earnings, I didn’t agree with the add backs that the company was doing to the adjusted ebitda calculation as they were not necessary non-recurring items. The impact pulling out the certain add backs was material impacting the valuation analysis.
Yes I have recommended walking away from a deal post due diligence. Coincidentally it was not diligence related but rather culture related. The strategic buyer which we were working with had planned a change in leadership that was not disclosed. We did not find this out through the buyer and when we did find out and discussed it with the buyer, they were very aggressive and confrontational about it. The potential incoming executive was one that had a very different view of the acquisition and was difficult to deal with. As it was not a full 100% divestiture but rather the acquired still retained a significant minority equity position. That produced 2 risk factors that were deal breakers: the first was the risk the deal would not be closed should the new executive assume leadership and the second was if it did close without that executives buy-in and they then took control it would lead to significant culture clashes. Given the significant minority position post acquisition, the completion and culture risks were too great and became deal-breakers that ended the process, though diligence was sound.
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