Top 3 Key Takeaways
- Unresolved business issues can kill a deal.
Buyers conduct thorough due diligence, and if they uncover major financial, legal, or operational problems, they may either offer significantly worse terms or walk away entirely. - Transparency and accurate documentation are critical.
Inconsistent financials, unclear records, or undisclosed liabilities raise red flags and erode buyer trust, making a successful sale much less likely. - Sellers should fix or clearly quantify problems before going to market.
Addressing solvable issues and understanding potential risks ahead of time helps improve valuation, strengthens buyer confidence, and increases the chances of completing the sale at a favorable price.
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When an owner is contemplating selling their business, the prospect of being able to turn any ongoing issues over to the buyer and walk away may be as enticing as the anticipation of a large payout. Unfortunately, those two scenarios can be mutually exclusive at a minimum, and the existence of lingering problems in the business (or uncertainty about whether there might be such issues) may completely deter buyers from an acquisition.
As we have written about before, thorough due diligence is an essential step in any merger or acquisition, one in which the buyer is attempting to gain a full picture of not only what they are ultimately acquiring but any risks or liabilities they might be taking on in the process. Think of it as the inspection prior to the sale of a home: an inspection confirming only minor cosmetic fixes are needed is unlikely to influence the purchase price much, whereas one that uncovers concealed water damage that hints at a mold problem may tank the sale completely.
Similarly, if due diligence uncovers issues that will be expensive or time-consuming to resolve, that could threaten the financial stability or viability of the business, or that make it impossible for the buyer to know if lurking financial or legal problems exist, the best result possible could be low-ball offer with unfavorable terms for the buyer. Realistically, a buyer is more likely to react by walking away. Rather than indulging in wishful thinking that a buyer will clean up business issues that a seller has left unaddressed, serious sellers need to take an unflinching look at their business through the other side’s eyes and mitigate problems before seeking offers.
What Issues Can Make Buyers Walk Away from an Acquisition?
In any business acquisition, there is an element of risk, because even the most advantageously aligned purchase can fail produce the looked-for results based on factors that were not knowable at the time of purchase, such as changing macroeconomic conditions. Buyers, therefore will do their utmost to ensure that they have a full, clear picture of what they are acquiring to limit the likelihood that something they should have been able to anticipate will negatively impact the value of their purchase. Among the top red flags from their perspective are:
| Due diligence issue | Warning signs | What buyers see |
| Financial issues | Inaccurate, inconsistent, or unaudited financial statements. Differences between financials and tax returns Cash flow problems | Lack of financial control, possible financial risks, lack of financial stability |
| Legal and regulatory risks | Pending or past lawsuits Violations of labor, environmental, or industry-specific rules | Ongoing financial and reputational risk; fines, penalties, and legal expense |
| Customer and suppler concentration | Overreliance on key vendors Overreliance on a small number of customers | Loss of key vendors or customers threatens revenue and increases business risk |
| Intellectual Property (IP) problems | Unclear ownership of IP assets Unregistered IP Infringement issues | Financial risk, legal uncertainty, and possible litigation threats |
| Employee and culture problems | High turnover Lack of retention plans for key talent Cultural misalignment | Inefficiency, difficult post-deal integration, disappointing post-acquisition performance |
Do realistic buyers expect perfection in target organizations? No. But they do expect transparency and clarity from sellers. Unclear or incomplete documentation raises the reasonable concern that the business is not as represented. Undisclosed (or worse, deliberately concealed) liabilities erode trust. Sellers wanting a successful transaction must at a minimum demonstrate that existing liabilities and their financial impact are known and quantified. Addressing the issues that can be solved pre-sale will help improve the odds of concluding a mutually advantageous sale and achieving the looked-for price on the transaction.
Expert Legal Guidance for Your Domestic or International Business Sale
If you’re contemplating selling your business, achieving the best value for your transaction means you must know exactly what due diligence will reveal to potential buyers before the process starts. The expert M&A attorneys at Bridge Law LLP can help you prepare effectively for a sale and negotiate a deal that allows you to exit on your preferred terms. To find out more, contact us to schedule your consultation.
Frequently Asked Questions
Buyers may abandon a deal if due diligence reveals serious problems such as inaccurate financial records, lawsuits or regulatory violations, heavy dependence on a few customers or suppliers, intellectual property disputes, or high employee turnover. These risks can threaten the business’s future performance and value.
Buyers review financial statements, tax records, debts, legal documents, contracts, intellectual property, operational processes, and employee information to verify the business’s financial health and uncover hidden risks before completing the acquisition.
Sellers should organize financial and legal records, resolve known issues, ensure transparency, and assemble advisors (such as accountants and lawyers) to help prepare documentation and respond to buyer requests efficiently.
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