Diligence Done Wrong
Even buyers who run due diligence can undermine it, by rushing, trusting unverified numbers, skipping advisors, or ignoring the factors that actually matter. Due diligence is a buyer's most important protection, so doing it poorly can be as costly as skipping it. Here are the mistakes to avoid so your diligence actually protects you.
Whether you're a buyer verifying a business or a seller preparing for scrutiny, get a broker's guidance to keep the deal on track.
1. Rushing the Process
Buyers eager to close sometimes shortcut diligence, accepting summary information, skipping verification, or compressing the timeline. Thorough diligence takes 30 to 60 days for good reason. Rushing means missing problems that surface, expensively, after closing. Give diligence the time it needs, and be wary if a seller pressures you to hurry.
2. Trusting the Seller's Numbers
The cardinal error: taking the seller's financials and add-backs at face value. Everything must be verified, reconciled to tax returns and bank statements. Sellers aren't necessarily dishonest, but optimistic bookkeeping and inflated add-backs are common. You're paying a multiple of the earnings, so confirm the earnings are real. Never buy on trust alone.
3. Skipping Experienced Advisors
Trying to run diligence solo, without a CPA to verify the financials and an attorney for the legal review, is a false economy. These advisors catch what a buyer would miss and their cost is trivial next to buying a flawed business. A broker also helps coordinate diligence and flag issues. Diligence is a team effort.
4. Ignoring Owner Dependency and Soft Factors
Buyers often focus on the numbers and neglect owner dependency, customer concentration, and other "soft" risks that determine whether the business survives the sale. A business with clean financials can still be a bad buy if it can't run without the owner or depends on one customer. These factors deserve as much scrutiny as the P&L.
5. Re-Trading in Bad Faith
The opposite error: using diligence as a pretext to aggressively re-trade the price over trivial issues. Legitimate material findings justify renegotiation, but nitpicking a deal to squeeze the seller damages trust and can blow up a transaction where you'll need the seller's cooperation during transition. Raise real issues in good faith; don't manufacture leverage. See negotiating a purchase and what happens when problems are found.
Note: This article is general educational information, not legal, tax, or accounting advice. Work with a qualified attorney, CPA, and advisors on due diligence for your specific deal.
Frequently Asked Questions
What are common buyer due diligence mistakes?
Common mistakes include rushing the process and shortcutting verification, trusting the seller's numbers without reconciling them to tax returns and bank statements, skipping experienced advisors like a CPA and attorney, ignoring soft risks like owner dependency and customer concentration, and using diligence to aggressively re-trade the price in bad faith over trivial issues.
Should buyers verify the seller's financials in due diligence?
Absolutely. Never take the seller's financials and add-backs at face value, verify everything by reconciling to tax returns and bank statements. Optimistic bookkeeping and inflated add-backs are common, and since you're paying a multiple of the earnings, confirming they're real is the core purpose of financial due diligence.
Do I need advisors for due diligence?
Yes. Running diligence solo is a false economy. A CPA verifies the financials, an attorney handles the legal review, and a broker helps coordinate the process and flag issues. These advisors catch problems a buyer would miss, and their cost is trivial next to the cost of buying a flawed business.
Is it a mistake to re-trade the price during due diligence?
It's a mistake to re-trade in bad faith, nitpicking trivial issues to squeeze the seller damages trust and can blow up a deal where you'll need the seller's cooperation during transition. Legitimate, material findings do justify renegotiation, but raise real issues in good faith rather than manufacturing leverage.
Run Diligence That Actually Protects You
Martin Navarro helps buyers run thorough, disciplined due diligence. Let's talk about your deal, confidentially and with no obligation.
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