Findings Are Normal
Finding problems in due diligence is normal, almost no business is perfect, and most findings lead to a resolution rather than a dead deal. The common outcomes are renegotiating the price, restructuring with protections like holdbacks or indemnities, adjusting terms, or, for serious issues, walking away. What matters is how material the finding is and how both sides respond. Here's how issues typically get resolved.
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. Renegotiating the Price
The most common response. A finding that quantifiably affects value, overstated add-backs, deferred maintenance requiring capital, a smaller-than-represented customer base, justifies a price reduction reflecting the real economics. This is legitimate when done in good faith on material issues (not nitpicking to squeeze the seller). Many deals close at an adjusted price after diligence.
2. Holdbacks and Indemnities
For issues involving uncertainty or potential future liability, a common solution is an escrow holdback (part of the price held back to cover the issue if it materializes) or an indemnity (the seller's contractual promise to cover specified problems). These let a deal proceed while protecting the buyer against a risk that can't be precisely quantified at closing.
3. Adjusting the Terms
Some findings are resolved by restructuring the deal rather than just the price, a larger seller note or earnout tied to retained customers (addressing concentration risk), a longer transition period, additional representations and warranties, or specific conditions the seller must satisfy before closing. Creative structuring can bridge issues that a simple price cut can't.
4. Walking Away
When a finding is material and can't be fixed or fairly priced, a fatal lease problem, unverifiable earnings, a dishonest seller, the right answer is to walk away. The willingness to walk is what gives a buyer leverage and protection. A deal that only works if you ignore what diligence found doesn't work. See red flags that kill deals.
The Right Approach
The key is proportionality and good faith: match the response to the severity of the finding. Minor issues shouldn't blow up a deal; material ones shouldn't be ignored. Buyers should raise real issues constructively and propose fair solutions; sellers should engage honestly rather than stonewall. Handled well, diligence findings lead to a fair, informed deal, or a well-timed exit. An experienced broker helps navigate this. See how to perform due diligence.
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 happens if problems are found in due diligence?
Finding problems is normal, and most lead to a resolution rather than a dead deal. Common outcomes are renegotiating the price to reflect a quantifiable issue, using an escrow holdback or indemnity for uncertain future liabilities, adjusting the deal terms (a larger seller note, earnout, or longer transition), or, for material issues that can't be fixed or fairly priced, walking away.
Do deals fall apart when problems are found?
Not usually, most findings are resolved through renegotiation, holdbacks, indemnities, or adjusted terms. Deals fall apart mainly when a finding is material and can't be fixed or fairly priced, such as unverifiable earnings, a fatal lease problem, liabilities exceeding available protections, or a dishonest seller. The severity of the issue determines the outcome.
What is an escrow holdback?
An escrow holdback is part of the purchase price held back for a period after closing to cover a potential issue, such as a possible liability or unmet condition, if it materializes. If the problem occurs, the buyer can be made whole from the holdback; if not, the seller receives it. It's a common way to let a deal proceed despite uncertainty.
How should buyers and sellers handle diligence findings?
With proportionality and good faith, match the response to the severity of the finding. Minor issues shouldn't blow up a deal, and material ones shouldn't be ignored. Buyers should raise real issues constructively and propose fair solutions; sellers should engage honestly rather than stonewall. Handled well, findings lead to a fair, informed deal or a well-timed exit.
Diligence Turned Up an Issue?
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