You are weeks into the process of buying a new business. The Letter of Intent (LOI) is signed, the excitement is building, and you can already picture yourself running the company. But then, your accountant or attorney calls with bad news.

The “clean” business you thought you were buying has issues. Maybe the inventory count is off, key employee contracts are missing, or there is a looming zoning issue.

Do not panic. In the world of Mergers and Acquisitions (M&A), finding problems during due diligence is not a failure—it is the system working exactly as intended. Finding the dirt now saves you from buying a lawsuit later. Here is how to handle “deal-killers” without necessarily killing the deal.

1. Categorize the Defect

Not all problems are created equal. You need to weigh the discovery against the overall value of the business.

• Deal Breakers: These are foundational issues. For example, if the seller doesn’t actually own the Intellectual Property (IP) they are selling, or if the primary customer (80% of revenue) just cancelled their contract. In these cases, you walk away.
• Valuation Shifters: These are real problems that can be fixed with money. If the HVAC system in the warehouse is broken, that’s a quantifiable cost.
• Structural Risks: Legal liabilities like pending lawsuits or potential tax audits.

2. The Power of the “Retrade”

Sellers hate the word “retrade,” but it is a necessary tool. If due diligence reveals that the Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) was inflated, or equipment needs replacing, the price must change.

You are not backing out of your word; you are adjusting the price based on new reality.

• Price Reduction: Lower the purchase price dollar-for-dollar based on the cost of the issue.
• Seller Note Increase: If cash is tight, ask the seller to finance more of the deal to cover the risk.

We often assist clients in these sensitive renegotiations. A skilled buying and selling businesses attorney can present these findings objectively, removing the emotion so the seller understands why the price drop is justified.

3. Using Escrows and Holdbacks

If the problem is a “maybe”—like a potential lawsuit or a warranty claim—you don’t have to guess the cost. You can use a Holdback.

Instead of paying 100% of the cash at closing, you place 10%–20% into an escrow account for 12 to 24 months.

• If the problem arises, you use that money to fix it.
• If the problem never happens, the seller gets the money later.

This allows the deal to close while protecting your downside. This is a standard feature in our asset purchase agreement services.

4. The “Specific Indemnity” Clause

Standard contracts have general indemnification (protection). But if you find a specific skeleton in the closet—say, a dispute with a former employee—you need Specific Indemnity.

This is a clause that says: “Regardless of any deductible or cap, the Seller agrees to pay 100% of any costs related to the dispute with Mr. Smith.” It isolates that specific risk so it doesn’t touch your investment.

5. When to Walk Away

Sometimes, the hidden problem isn’t financial; it’s cultural or ethical. If the seller hides documents, lies to your due diligence legal team, or tries to block you from speaking to key staff, these are character flaws.

You cannot write a contract that protects you from a dishonest partner. If the trust is gone, the deal should be too.

Research: Understanding the depth of this process is key. The Wikipedia entry on Due Diligence offers a comprehensive look at the different types (financial, legal, operational) you should be conducting.

Finding problems is stressful, but it’s better than finding them after the check clears. Use the data to negotiate a better deal or to save yourself from a bad one.