Understanding the hierarchy of issues that can stop your exit in its tracks.
As Exitologists we’ve noticed that founders often worry about the wrong things when thinking about due diligence.
Not all due diligence issues are created equal. Some lead to price negotiations or warranty discussions. Others result in buyers walking away immediately.
Here’s the real hierarchy of what affects deals:
The Fatal Four
These are the absolute deal breakers – issues that cause buyers to walk away immediately, regardless of price or terms:
1️⃣ Cyber Security & Data
🚨Data breaches or ransomware incidents
🚨Loss of customer data under regulatory investigation
🚨Critical vulnerabilities in sensitive sectors
🚨 GDPR or compliance failures
2️⃣ Health & Safety
🚨HSE prosecutions for serious incidents
🚨Workplace fatalities under investigation
🚨Regulatory shutdown orders
🚨Environmental contamination requiring site closure
3️⃣ Legal & Regulatory
🚨Criminal investigations (fraud, bribery, money laundering)
🚨Regulatory actions threatening business licenses
🚨Major litigation threatening business viability
4️⃣ Fraud & Integrity
🚨Discovery of embezzlement or financial manipulation
🚨Material account restatements under investigation
🚨Going concern issues or insolvency risk
Why do these Fatal Four kill deals outright? Because they represent unquantifiable risk. Buyers can’t model unlimited liability exposure or reputational damage that could destroy the business overnight.
The “Mortally Wounded” Category
These issues typically kill deals but occasionally survive with massive price adjustments:
🟠Core intellectual property infringement with injunction risk
🟠Loss of customers representing >50% of revenue
🟠Product recalls or major safety issues
The “Manageable” Issues
Typically everything else lives here. They are manageable because they’re quantifiable. Buyers can estimate costs, secure insurance, and protect themselves through warranties and indemnities.
Industry Context Matters
The Fatal Four hierarchy shifts dramatically by sector:
➡️Manufacturing/Construction: Health & safety becomes the primary concern
➡️Financial Services: Regulatory compliance dominates
➡️Healthcare: Data breaches and clinical safety are paramount
➡️Technology: IP and cyber security top the list
The Bottom Line
Focus your exit preparation on the Fatal Four first. But note the emphasis on “avoid” – you need to start this process early. Everything else can usually be negotiated, managed, or insured against. But if you want to maximise your exit value you need to turn your attention rapidly to the other factors.
