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March 18, 2025
By: Robert E. Harig

Mergers and acquisitions (M&A) present exciting opportunities for growth, but they also come with risks. Before finalizing a deal, buyers conduct due diligence, a thorough review of the target company’s finances, contracts, operations, and legal obligations. The goal is to uncover any hidden risks that could impact the deal’s success.

Sometimes, due diligence reveals serious red flags—issues that could derail the transaction or require renegotiation. Here are some of the biggest warning signs that can kill an M&A deal.

1. Financial Irregularities

One of the first things buyers examine is the target company’s financial health. If the numbers do not add up, that is a major red flag. Warning signs include:

  • Inconsistent or inaccurate financial statements. If revenue, expenses, or profit numbers do not match up across reports, it raises concerns about a lack of financial control.
  • Unexplained debt or liabilities. Vague debt arrangements or undisclosed tax obligations can create major financial risks for the buyer.
  • Cash flow problems. A company that struggles to pay suppliers or keep up with operating costs may not be financially stable.

2. Legal and Compliance Issues

A business that does not comply with laws or industry regulations can become a costly liability. Some common legal red flags include:

  • Pending or past lawsuits. Active lawsuits or a history of legal disputes could mean ongoing financial and reputational risks.
  • Regulatory violations. If the company has violated labor laws, environmental regulations, or industry-specific rules, fines and penalties could follow.
  • Intellectual property (IP) problems. If a business does not own or properly protect its trademarks, patents, or copyrights, the buyer could face legal challenges down the road.

3. Weak Customer and Supplier Relationships

A business is only as strong as its customers and suppliers. Due diligence should reveal whether these relationships are stable and sustainable. Red flags include:

  • Overdependence on a single customer or supplier. If a company relies too much on one key customer or vendor, losing that relationship could be disastrous.
  • Lack of contract assignability. If a supplier or customer contract cannot be assigned to the buyer without third party consent, it might mean that the buyer will have to re-negotiate such contract on less than favorable terms.
  • Unfavorable contract terms. Unfavorable terms like automatic price increases or restrictive agreements can cause problems for the new owner.

4. Employee Issues

M&A deals often fail due to employee-related issues. Key warning signs include:

  • High employee turnover. If employees are leaving at a high rate, it could indicate poor management, low morale, or dissatisfaction with working conditions.
  • Lack of key talent retention plans. If essential employees leave after the deal, the company may struggle to maintain operations.
  • Poor workplace culture. Conflicts, complaints, or a toxic work environment can make post-acquisition integration difficult.

What to Do If You Spot a Red Flag

Not all red flags mean a deal is dead. In some cases, buyers can renegotiate terms, request additional protections, or require the seller to fix certain issues before closing.

Spotting red flags early can save time, money, and headaches. At Robbins DiMonte, Ltd., our M&A team helps buyers conduct thorough due diligence to identify risks before they become costly surprises. Whether you are considering an acquisition or need guidance on a deal, we are here to protect your interests. Please contact us to discuss how we can support your next transaction.