Red Flags
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There are a few red flags:
1) Non compliance to laws, licenses, IP, tax laws
2) Violations to laws (eg tax evasion)
3) Huge liabilities
4) Litigation
The phrase “don’t ask don’t tell”, when doing due diligence and there is a legal requirement for something with customers but the target company says they customers/partners haven’t asked if we have that so we won’t tell them we don’t.
Our primary red flags were related to land rights. Whenever feasible, we addressed these concerns by incorporating warranties into the contract.
In due diligence, the biggest red flags include financial inconsistencies, unresolved legal issues, and signs of non-compliance with regulations. A red flag becomes a showstopper if it poses a significant legal or financial threat that cannot be mitigated. If the issue can be addressed through negotiations or adjustments in the deal terms, it’s more of a challenge than a dealbreaker.
I think some of the biggest red flags are undisclosed potential litigation, HR issues and potential director liabilities.
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