Due Diligence Doesn't Prevent Bad Deals (Here's What Does)

A 2024 analysis of 40,000 acquisitions over 40 years found that 70-75% fail to achieve their stated objectives. This aligns with decades of prior research: Clayton Christensen at Harvard Business School, Roger Martin at Rotman, and multiple Bain studies have all landed on similar figures.

Every one of those deals had due diligence. Often extensive due diligence, from reputable providers, at significant cost.

The DD didn't stop them.

According to Bain's 2020 Global M&A Report, 60% of executives attributed deal failure to poor due diligence that did not identify critical issues. This isn't because DD providers are incompetent. It's because the system isn't structured to produce "no" as an outcome.

The fee structure. Research by Robyn McLaughlin in the Journal of Financial Economics found that 80% of M&A advisory fees are contingent on deal completion. Only 6% of bidding firms use fixed fees. This isn't hidden: it's industry standard.

The market share dynamic. P. Raghavendra Rau's research found that bank market share is positively related to contingent fee payments and deal completion rates. Critically, there was no relationship found between contingent fees and post-acquisition performance. Advisors who close deals get more business. Advisors who kill deals do not.

The valuation bias. A 2013 study by Cain and Denis in the Journal of Law and Economics found that acquirer advisors exhibit positive valuation errors significantly greater than target advisors. The people advising buyers systematically overvalue targets.

Kisgen, Qian, and Song's 2009 study in the Journal of Financial Economics examined fairness opinions: third-party assessments meant to validate deal terms. They found that acquirer announcement returns are 2.3% lower when acquirers have fairness opinions. Investors are skeptical of transactions with fairness opinions, especially at high premiums.

The market has learned to price in the conflict. When an advisor says a deal is fair, investors discount it.

The deals that get stopped usually have one thing in common: someone asked the uncomfortable question early. Not at the end of a 200-page report, but before the process gained momentum.

Some firms define upfront what would make them walk away. Others separate the people gathering information from the people making the call. The common thread isn't a specific methodology. It's creating space for "no" to be a legitimate outcome.

The question isn't whether your DD provider is good at their job. It's whether the process you've built together allows for an answer you don't want to hear.