Assuming things always get uncovered during diligence that you don't want to see (i.e. bad for buyer).
I am curious what are some general rules of thumb / your framework on deciding whether something negative you uncovered during diligence is acceptable and hence you would move the deal forward versus unacceptable that would lead you to end the deal /get out of the deal?
What is acceptable versus a deal breaker regarding diligence findings?
by a searcher from Harvard University - Harvard Business School
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In addition to the other comments, balance sheet items can also be a big issue. Do they have a bunch of inventory that can’t be sold, did they collect a lot of cash that will be recognized in future periods (deferred revenue) that they keep and you have to pay to service, did they stuff the channel so there won’t be much left to go get in the near term?
Legal claims can be another one that is a deal breaker and not necessarily tied to the integrity of the seller. Sellers are often time founders/entrepreneurs who just view risk differently than a buyer/investor. They may be in early stage litigation that they view as “easy to beat” or “not a big deal”. As a buyer, your lawyers will give you huge ranges of potential $ liabilities, which can be a gap that is hard to bridge with valuation alone.
You learn that sellers intentionally deceived you about material information, financials, contracts.
A pattern of "spin" or answering your questions but not giving you a full picture, even on minor things.
A failure to give you timely access to reporting, employees, legal issues etc.
All of the above is enough to get me to leave a deal. If I cant get information, or it is biased or potentially false then I just don't want what you are selling.
It has been my experience that sellers take their eye off the ball and results dip in the period between LOI and Close. Is that a material dip? Can it be recovered from? Is it a sign of weakening in the business? That is a case by case analysis.
Lots of other reasons to walk away, but those are going to be much more situation specific.
If you cant sleep because you have concerns that is one thing. If you cant sleep because you cant get answers to your concerns that is something else...