For years I represented private equity in billions of dollars of M&A transactions. Here are things the pros do that search funds and SMB buyers should know.
You must do legal diligence, but legal due diligence kills deals for two reasons:

1) Legal diligence causes seller fatigue and creates bad blood.

2) Some lawyers think every diligence issue is a deal-breaker.

Moreover, when a lawyer bills by the hour (which I hate), it incentivizes the lawyer to spend more time and overemphasize the importance of legal diligence.

Remember, if the business was perfect, there is less opportunity for you to fix it and grow it. The business will have imperfections and that’s (usually) okay. Communicating with your lawyer about legal diligence is critical.

Here are 5 ways to talk to your lawyer about legal diligence:

1. Define the Scope. Clearly define the scope noting any areas you are worried about. If the business has 79 contracts define which contracts are material to the business. I did a big deal as a young lawyer, where the legal team reviewed the top 50 agreements. We submitted a beautiful report, and the Buyer told us they only care about two of the contracts. Alternatively, when I worked on the T-Mobile-Sprint merger, we reviewed thousands of agreements.

2. Set the Format. Describe how you want the diligence. Do you want your lawyer to spend time formatting a beautiful memo? If you want to send this to the bank, investors, etc., maybe you do, but usually, a bullet point email and a phone call are sufficient.

3. Quantify the Risk. Make your lawyer tell you what is the monetary risk of each issue. Each risk should be quantified in dollar amounts and the probability of being an issue. This way you can weigh whether it is a deal-breaker or just an imperfection.
4. Reduce the Risk. Discuss with your lawyer ways of dealing with each issue. If there is a significant issue consider adding it as a specific indemnity to shift the risk to seller. You can also insist seller corrects the issue prior to closing and make it a condition to closing.

5. Post-Closing To-Do List. Finally, use your diligence list as a post-closing legal to-do list. The legal diligence issues may not be deal-breakers, but it creates a pretty good list of issues to correct post-closing.

Legal diligence is important, but I have seen it harm the overall deal. Speak to your lawyer about legal diligence before they start.

If you would like me to cover other topics applicable to Searchers from my time in the big deal trenches, let me know.