Diligence That Ends in No

The pressure in an acquisition almost always runs one way: towards signing. The seller has a timeline. The broker is paid on a close. Everyone involved has spent time, and nobody wants to have spent it for nothing. Diligence is the one stage that is supposed to push back, and it only works if a “no” is a real possibility.

Three times in my emails, it was.

2010: a building without tenants

In the autumn of 2010 I was looking at buying a large commercial building that a bank had taken back. The bank had countered my offer in September, and by October it wanted the purchase agreement signed. The broker wrote that the bank was asking her to keep marketing the property and find other buyers, and that if I sent something back, it would show I was serious.

My concern was simple: who would rent it. I had asked to see the lease offers that were coming in, and I had contractors lined up to inspect the heating and cooling. My reply:

I am not interested in moving forward if they are looking to start a bidding war. I am simply trying to review the other lease offers to see if this is a property that would make sense for me to purchase. I am sorry if they are in a super hurry - but I don’t want to get stuck with the building without renters. I just can’t sign a purchase agreement without doing my due diligence.

The broker pointed out, fairly, that the contract would let me walk away and recover my deposit if the inspections went badly, and that it had been a month without a written response. Six days later, the morning my contractor was due at the site, I wrote back:

I think it would best serve the bank at this point to find a different party to sell the building to.

The contract would have protected the deposit. It would not have filled the building. That was the question diligence had to answer, and I could not answer it on the bank’s timetable.

2020: a software company, at half the price

In 2020 I was looking to buy an established online business, and I paid a buy-side search firm a retainer to find one. My criteria were specific: a software business with real traffic and links behind its domain, where better marketing could grow it, and one a bank would finance.

A month in, nothing had come through, and I said so. In the same exchange I told the firm how I worked:

I like to move quick on deals that are relevant, but can quickly turn deals away as I know if something will work for me or wont….

And I did. To one that did not fit the financing:

Passing on this one - need SBA opps please

One did fit. It was a small, stable business-to-business software company, and over the summer we went through its numbers and spoke with my lender. In August we made an offer. The owner countered well above our offer, with a condition: at his number, he would sign an exclusive term sheet and stop talking to the three other companies he was in discussions with.

That is a strong position, and a fair way to use it. We came back once more, at roughly half his number, with part of the price paid over time by the seller. That was where the numbers worked for me. It did not close.

Less than three weeks later I ended the search:

Honestly I haven’t seen any deals presented to me with the criteria I have requested. If you ever find one, hit me up, we can always discuss your fee structure at that time.

The firm agreed to refund the unused part of the retainer.

Paying for diligence that never happens

The 2020 search had a second advisor attached: a firm that would review any business we got serious about. In May 2021 I wrote to them:

The relationship with [the search firm] produced nothing and I haven’t gotten [your firm] to therefore review any businesses; can you please reimburse me the funds? I haven’t seen the value

Diligence you prepay for is still a cost if nothing reaches it. That was the least dramatic “no” of the three, and the easiest to forget about.

The pattern

Each time, someone on the other side had a reason to hurry: a bank that wanted a signature, a seller with other buyers, a retainer already paid. Each time, the useful question was the narrow one I had started with. Will this building have tenants? Does this business fit what a bank will finance at a price that works? Has this service produced anything?

When the answer was no, I said so and stopped. That is not a failed negotiation. It is the part of the process that keeps the next yes worth something.

Related: The 90 Days I Asked For and Before Anyone Talks About Price.