Not all due diligence findings are created equal. Some warrant price adjustments. Others should stop deals entirely. Here are 20 red flags that indicate fundamental problems.
Security Deal-Killers
- Evidence of active compromise: Current breach indicators during assessment
- Undisclosed previous breach: Material breach that wasn't disclosed
- No security program: Zero formal security with sensitive data
- Critical unpatched vulnerabilities: Known critical CVEs in production, unaddressed
Compliance Deal-Killers
- Material regulatory violations: Active non-compliance with material consequences
- False compliance claims: Claiming certifications or compliance that doesn't exist
- Imminent regulatory action: Pending enforcement or investigation
Technical Integrity Deal-Killers
- Fabricated technology: Core claimed technology doesn't exist or doesn't work
- IP ownership issues: Core technology IP is disputed or not properly owned
- Open source GPL violations: May require open-sourcing proprietary code
- Fundamental scalability impossibility: Architecture cannot support thesis with any investment
People Deal-Killers
- Key person already departed: Critical person left and knowledge is gone
- Mass resignation risk: Team is planning to leave post-acquisition
- No documentation + key person risk: Single points of failure with no knowledge capture
Operational Deal-Killers
- Production instability: System is actively failing and team can't stabilize
- No disaster recovery: Single point of failure with no recovery capability for critical system
- Customer data loss: Evidence of permanent customer data loss
Business Model Deal-Killers
- Technology doesn't work as claimed: Core value proposition is false
- Unsustainable unit economics: Technology costs make the business model unviable at scale
- Critical dependency at risk: Essential partner or platform relationship is ending
When to Walk Away
Red flags warrant walking away when:
- The issue is fundamental, not remediable
- The cost to fix exceeds the deal value
- The issue indicates broader integrity problems
- The issue undermines the core investment thesis
Key Takeaway: Not every problem can be solved with a purchase price adjustment. Some issues are fundamental enough to warrant walking away. The discipline to kill bad deals is as important as the ability to close good ones.