Acquiring a business is a complex undertaking that can unlock significant value, but only if approached with care, diligence, and professional guidance. Buyers often face a range of legal, financial, and operational risks that, if not properly managed, can lead to costly consequences. Below are six common pitfalls to avoid, drawn from best practices in mergers and acquisitions (M&A) and the due diligence process.

‍

Failing to Conduct Appropriate Due Diligence

Due diligence is the buyer’s primary tool for uncovering risks and validating the value of the target business. It involves a comprehensive review of legal, financial, tax, operational, and commercial matters. The purpose is to identify liabilities, assess asset quality, and understand the target’s contractual obligations, regulatory compliance, and market position.

‍

A well-structured due diligence process allows the buyer to:

• Make an informed decision about proceeding with the transaction.
• Properly value the business.
• Negotiate indemnities and warranties to allocate risk.
• Structure the transaction appropriately.
• Plan for post-closing integration.

‍

Due diligence should begin at the outset of the negotiations, as soon as confidentiality agreements are in place. It typically runs concurrently with the negotiation of the letter of intent and the purchase agreement. Buyers usually engage a team of advisors, including lawyers, accountants, and industry specialists, to ensure all relevant areas are covered. Skipping or rushing this process can result in the acquisition of hidden liabilities, such as tax arrears or undisclosed litigation, the acquisition of assets encumbered by liens or security rights of the seller’s lenders or other third parties, exposure to unknown regulatory liabilities, payment for assets that cannot be validly transferred due to transfer restrictions, or the assumption of unknown contractual obligations, all of which can undermine the value of the deal for the buyer.

‍

‍

Submitting to Arbitrary Deadlines Imposed by the Seller

Sellers may impose tight deadlines to create urgency or competitive pressure. While some time constraints may be legitimate (such as deadlines necessitated by tax planning) buyers should resist deadlines that compromise the quality of their review.

‍

Time pressure can lead to superficial due diligence, missed red flags, and inadequate negotiation of key terms, all of which can lead to oversights that ultimately diminish the value the buyer expected to receive from the transaction. Buyers should insist on a realistic timeline that allows for proper investigation and preparation of appropriate closing documentation.

‍

A due diligence period of several weeks or months is commonplace in a business purchase and sale transaction, a seller unwilling to give a buyer adequate time to evaluate the target business is a seller that the buyer must be wary of trusting in other aspects of the transaction.

‍

Remember: the goal is not just to close the deal, but to close a good deal.

‍

‍

Advancing Deposits Without a Binding Agreement in Place

It is not uncommon for sellers to request a deposit early in the process, especially in private transactions. However, advancing funds before a binding agreement is signed exposes the buyer to significant risk, and advancing funds directly to the seller prior to the completion of the is rarely good practice. If the deal falls apart, recovering funds that have been paid directly to a seller can be extreme difficult, even with a binding contractual in place.

‍

To mitigate the risk of loss:

• Only pay deposits into the trust account of one of the parties’ legal representatives and ensure it is held there until the transaction completes or is terminated.
• Use contractual arrangements setting out clear terms as to when the deposit is refundable to the buyer and when it is payable to the seller.
• Avoid informal arrangements or verbal assurances.

‍

Payment of a pre-closing deposit into a lawyers trust account is nearly always preferred and is a standard practice for business purchase and sales. Lawyers are subject to ethical obligations and conditions can be more easily imposed on their receipt of funds, which gives the parties certainty that a deposit will be appropriately dealt with. Similar to best practice #2 above, a seller that demands a pre-closing deposit be paid directly to them prior to closing, especially in the absence of a written contractual agreement, is a seller the buyer must be wary of in all aspects of the transaction.

‍

‍

Failing to Have a Professionally Prepared Purchase Agreement

The purchase agreement is the definitive record of the parties’ rights and obligations. It governs the structure of the transaction, the representations and warranties, indemnification provisions, closing conditions, and post-closing obligations.

‍

Common issues that arise from poorly drafted agreements include:

• Ambiguities in the scope of assets or liabilities being transferred.
• Inadequate protection against breaches or undisclosed risks.
• Missing or unenforceable indemnity provisions or limits on liability.
• Failure to address the legal rights of third parties affected by the transaction.
• Lack of termination rights where the transaction in substantively altered by matters outside the parties’ control.

‍

Buyers should ensure the agreement is prepared or reviewed by experienced legal counsel. The agreement should reflect the findings of due diligence and include appropriate protections, such as:

• Survival periods for representations and warranties.
• Indemnity caps.
• Escrow or holdback arrangements.

‍

Templates and boilerplate agreements are rarely sufficient. Each transaction is unique and requires tailored drafting.

‍

For information on the risks of signing contracts that have not been professionally drafted and negotiated, see our article on Why Legal Advice is Essential in Business Contract Drafting and Negotiation here [Link Article].

‍

‍

Failing to Promptly Complete Post-Closing Obligations

Closing the deal is not the end of the transaction, it’s the beginning of a new phase. Many obligations arise post-closing, including:

• Delivering final documents and consents.
• Transferring licenses, permits, and registrations.
• Notifying customers, suppliers, and employees.
• Completing purchase price adjustments or earn-out calculations.
• Fulfilling indemnity obligations.

‍

Delays or failures in completing these tasks can result in breaches, penalties, or operational disruptions. Buyers should maintain a closing agenda and post-closing checklist to ensure all items are tracked and completed on time, and should insist on prompt completion of the seller’s post-closing obligations as well.

‍

‍

Failing to Promptly Investigate Potential Breaches of the Purchase Agreement

After closing, buyers may discover issues that were not disclosed or were misrepresented. These could include:

• Undisclosed liabilities.
• Breaches of representations or warranties.
• Inaccurate financial statements.
• Non-compliance with laws or regulations.

‍

Most purchase agreements include survival periods and notice requirements for indemnity or breach of contract claims. Buyers must act quickly to preserve their rights. Delayed investigation or failure to provide timely notice can limit or entirely bar recovery of losses arising from breaches of contract.

‍

Best practices include:

• Monitoring the business closely during the survival period of the representations, warranties, and indemnities.
• Maintaining records of communications and findings.
• Consulting legal counsel immediately upon discovering potential breaches.
• Using holdbacks of a portion of the purchase price to secure recovery for claims.

‍

Buyers should also be aware of sandbagging provisions—clauses that determine whether a buyer can bring a claim for a known breach. These provisions vary in scope and application and should be carefully negotiated.

‍

‍

Conclusion

Acquiring a business is a high-stakes endeavor that requires careful planning, professional advice, and disciplined execution. By avoiding these common pitfalls—especially those related to due diligence, documentation, and post-closing obligations—buyers can protect their investment and set the stage for long-term success.

‍

Whether you're acquiring a small private company or a complex enterprise, the principles remain the same: investigate thoroughly, negotiate wisely, and document everything. A well-advised buyer is a well-protected buyer.

‍

The above article is meant for informational purposes only; it is not legal advice and should not be relied on as such. Readers should seek legal advice specific to their circumstances prior to executing a business contract or agreement.

‍