Due Diligence: When Do You Call Off the Deal?

Cultural due diligence is a critical task in the acquisition process. It exposes hidden problems and risks, but also may identify opportunities. However, if you do uncover red flags, you may need to reevaluate the deal. Sometimes you must simply call it off.  We have walked away from a transaction when due diligence revealed a problem.

Huge Ethical Difference

The most obvious reason to back out is when there is a huge difference in ethics or values.  At one meeting with an owner, we asked to see the company’s books and were asked: “Well, which set of books do you want to see?” Of course we wanted to see the accurate ones. More investigation revealed a culture of cutting corners. People weren’t hesitant about stepping over the line in ways that to us were clearly out of bounds. Changing this culture – holding the staff to our ethical standards – was too great a challenge. We had to walk away from the deal.

Incompatibility in the Workforce

An incompatibility in the workforce may raise a different red flag. We found that the employees at another company were not very technologically advanced or trained in automation. Given our client’s highly sophisticated, automated and computer-led environment, upgrading the workforce would have required too drastic a change.

While these examples may help, there’s no clear rule about when to back away. Every strategic acquisition is slightly different and your reasons for saying “no” may vary from ours.

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