What are the most common deal killers that arise in due diligence?

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March 30, 2020

by a searcher from Emory University - Goizueta Business School in San Antonio, TX, USA

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Reply by a searcher
from Westminster College of Salt Lake City in Salt Lake City, UT, USA
I agree with everything above & I'd add:

1. Founder valuation expectations, they think it's worth 5x more than a fair 3rd party valuation. This sort of goes hand-in-hand with financial due diligence, revenue, usage, # users, engagement, recurring revenue, etc. are frequently inflated, not scrubbed for inactive users, year 1 revenue added to recurring revenue before a contract has had time to renew, etc.

2. Transparency & full disclosure, when due diligence begins, founders/management holding their cards close to their chest. or not wanting to hand over the keys.
2.a. Every time I've seen this, it was because skeletons were in the closet. A fraud case waiting to happen, deliberate misrepresentation of material facts to persuade someone to buy or sell an asset. If I get pushback during DD, red flags fly & I drill down significantly deeper. After catching them inflating, covering something up, etc. I've never had a deal close.
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Reply by an investor
from IESE Business School in Paris, France
Due diligence, if professionally handled, will always outline a lot of aspects and “problems”. Why? A lot of aspects or decisions in companies can be argued, discussed by tax authorities or could be done using other methods, thus producing different outcomes. Fraud set aside; your most important decision is “what are you going to do about it?” No seller fully discloses, no one does, it would take ages and a perfect memory. But it does mean it was on purpose or it’s problematic. On the other hand, full access to all and total transparency is mandatory. Then, you read the due diligence report and you’ll have a feeling if it breaks the deal or not but most of the time it’ll be a lot of aspects leading to deal price renegotiations or seller's warranty terms and level discussions.
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