What Reduces a Company's Valuation the Most in Due Diligence?
One of the questions I hear most often from founders is:
"What is the biggest issue buyers discover during due diligence?"
My answer is almost always the same:
It's usually not the issue itself that reduces the purchase price - it's the uncertainty surrounding it that hits the hardest, and even makes buyers walk away.
Sophisticated buyers understand that no business is perfect. They expect to find risks. What they struggle to price is uncertainty, poor documentation and poor communication from the target company, and unresolved legal questions. Every unanswered question increases perceived risk, and increased risk often translates into a lower valuation, a larger escrow, extensive warranties and indemnities, or, in some cases, that the buyer walks away.
Here are four of the most common valuation killers I see in M&A transactions.
1. Incomplete or poorly managed commercial contracts
Revenue is only as valuable as the contracts supporting it. I've seen businesses with impressive revenue figures but no signed agreements, or unclear and outdated terms and conditions they no longer apply. It can also be contracts that automatically terminate upon a change of control in situations where there is no leverage to ask for a waiver, or key customer relationships based almost entirely on personal trust.
To a buyer, this raises an obvious question: "Will these revenues still exist after closing?" If the answer is uncertain, the valuation will often take a big hit.
2. Weak corporate governance
Many founders underestimate the importance of corporate records in my experience. Missing board approvals are not a big deal for a buyer, but undocumented share issuances, unsigned shareholder resolutions, or inconsistencies in the company's cap table can create bigger concerns during due diligence. If there is a risk for disputes between current and former shareholders or other rights holders in relation to the company, then there is a clear issue.
These issues are often fixable, but fixing them under the pressure of a live transaction is expensive, time-consuming, and can undermine a buyer's confidence in the business. Often the buyer will require a specific indemnity where you are liable post-transaction if any dispute or loss arises due to the issue. That means you could face a clame and have to “pay back” part or all of the share purchase price.
Good governance rarely increases the purchase price - but it makes you attractive as a target, and poor governance can certainly reduce it.
3. Intellectual property that isn't properly secured
For many modern businesses, intellectual property is the company's most valuable asset.
Yet it is surprisingly common to discover that software developers never assigned their IP, consultants retained ownership of critical code, trademarks were never properly registered, or important licences are missing. And trade secrets are often not protected - meaning that they lose their status as trade secrets.
If ownership of the company's core assets cannot be clearly demonstrated, buyers may legitimately question the value of the target company.
4. A business that depends too heavily on its founders
Founders often are the business in its early stages. However, from a buyer's perspective, excessive founder dependency represents key man risk.
If one individual holds all the customer relationships, operational know-how, supplier contacts, and strategic decision-making, the business becomes much harder to buy and scale without the founder onboard long-term.
The most attractive companies are those that can continue to perform successfully even after the founders step away, so if you are the business - start working on routines, structure, and knowledge transfer.
The best time to prepare is before a transaction begins
One of the biggest misconceptions about due diligence is that it starts when a buyer appears with a fixed term sheet. In reality, the strongest companies prepare years in advance.
Maintaining organized corporate records, documenting key commercial relationships, protecting intellectual property, and establishing sound governance are not merely legal exercises—they are value creative strategies. They mean more cash in hand at exit.
In my experience, the companies that achieve the best outcomes in M&A processes are rarely those with the fewest issues. They are the ones that understand their risks, address them early, and present a business that gives buyers confidence.
Because in every transaction, risk will be priced in to what a buyer is willing to give you for the business.
This is not legal advice - it is knowledge sharing. If you are looking to build your company to sell it, about to sell it, or looking to buy a company - send me an email at kat@stgcommerciallaw.com to discuss M&A readiness, due diligence and how to structure the share purchase agreement to mitigate risk.
Katarina Strandberg
Lawyer | STG