Deals rarely fail for one reason alone. More often, they unravel when diligence uncovers risks that threaten timing, financing, valuation, ownership of key assets, or post-closing operations. This alert highlights several issues that can stop a transaction in its tracks, including financing and intellectual property (IP) concerns, data rights, and workforce compliance, and explains why identifying them early can preserve optionality before the deal window closes.
Financing: When the Deal Is Dead on Arrival
An acquisition can look perfect on paper and still be dead-on-arrival for the lender writing the check. From a leveraged financing perspective, the risks that matter do not always wait until after closing. They can torpedo the transaction by blowing up the timeline, corrupting deal economics, or raising collateral issues that make financing unattractive or unobtainable. Commitment letters and exclusivity periods both have drop-dead dates, and anything that pushes closing past them may hand the seller a walkaway right.
Illinois bulk sales tax compliance is a prime example: if outstanding liabilities surface late in diligence, obtaining a tax clearance certificate can add 45 or more days, enough to blow past the outside date. Employment-related surprises can have the same effect, with pending wage-and-hour class action or significant WARN Act exposure forcing renegotiation and delaying execution beyond the deal window.
Timeline risk is not the only thing that can sink a deal. Asset deficiencies can make financing unachievable as well. A lender’s credit committee will underwrite the target’s assets, and what it finds determines whether financing is available at all. Unreliable inventory records, flawed receivables aging, or financial reporting built on faulty premises can reduce the collateral package the loan depends on.
IP can be just as vulnerable: patents subject to prior liens, trade secrets improperly assigned from founders who have since cut company ties, or core technology subject to exclusive licenses may be excluded from the borrowing base and broader collateral package. Operations that rely on artificial intelligence (AI) have add another layer of risk by introducing regulatory and infringement exposure that underwriting methodologies are quickly catching up to. If the structure does not give the lender confidence in downside protection, the lender may reprice, restructure, or simply decline.
Sponsors who close are the ones running interdisciplinary diligence early, ideally before the financing term sheet is inked. Employment, IP, data, tax, finance, and regulatory counsel should be in the room with the deal team as early as possible. Every issue caught early is one fewer reason for a lender to balk, reprice, or walk away. The time to find out that a deal has a fatal flaw is when it can still be fixed, not when financing, and potentially reputation, is already on the line.
IP: When Key Assets Become Deal Risk
Few issues can derail an acquisition faster than discovering that the target’s core IP is subject to a meritorious infringement claim. If diligence shows that a third party has asserted, or is likely to assert, that the target’s key IP or technology infringes patents or misappropriates trade secrets, the buyer faces significant risk. These claims are expensive, protracted, and unpredictable, and an adverse judgment could strip the target of the very assets that made it attractive in the first place. Buyers should also investigate any plan to expand the target’s core IP into new markets or geographies, where expansion may trigger infringement exposure against third-party rights that were not previously at issue.
Equally dangerous are situations in which the target lacks sufficient ownership or exclusivity rights in its core IP. A common red flag is the absence of proper invention assignment agreements with employees or independent contractors, leaving open the possibility that the people who created the IP may assert competing ownership claims.
These disputes can call into question ownership of the target’s most valuable assets and create uncertainty that is difficult to resolve on a tight deal timeline. A transaction may also become untenable if the target has granted overbroad, exclusive, or perpetual license rights in core IP to a third party, particularly where that licensee operates in markets competitive with the target’s business or the buyer’s post-closing strategy. In that scenario, the buyer may discover that the IP it is paying to acquire is effectively controlled by, or shared with, a competitor.
Finally, it is critical that the acquiror confirm that the target’s IP covers the commercial product or service. Too often, IP prosecution and commercial development diverge, and the IP protection does not cover the product or service driving the deal’s value.
Data: When Valuable Assets Create Deal Risk
In data-rich transactions, especially where companies have developed or deployed innovative technologies such as AI, the target’s data assets may represent a substantial portion of deal value. A seller may possess troves of personal information, behavioral data, or proprietary datasets without holding sufficient rights to transfer, license, or monetize that data post-closing. This “dirty data” problem can arise from inadequate consent management or non-compliance with privacy laws comprising a rapidly maturing patchwork of state statutes or laws similar to the European Union’s General Data Protection Regulation (GDPR).
Non-compliance with specific regulatory frameworks such as the Health Insurance Portability and Accountability Act (HIPAA)/Health Information Technology for Economic and Clinical Health (HITECH) Act, or data-restrictive terms of service and privacy policies pose further data valuation risks. Data scraped from publicly accessible sources may have been collected in violation of copyright, privacy, or data use restrictions. These risks are amplified where the target has trained or fine-tuned AI models using tainted data. Where data assets drive valuation, the gap between what the seller lawfully possesses and what it can legally convey can fundamentally undermine deal economics.
Buyers should treat data rights diligence with the same rigor they apply to IP ownership. That means going beyond surface-level representations and warranties to review the target’s current and historical data privacy and protection practices, consent mechanisms, data processing agreements, and regulatory correspondence or enforcement history. Particular attention should be paid to whether the target’s privacy notices permit the contemplated post-closing use of the data, including integration with the buyer’s existing datasets, cross-selling, and analytics. Where gaps exist, buyers should consider re-consenting campaigns, structural solutions such as holding acquired data in a segregated environment, or purchase price adjustments that account for diminished utility. Buyers should also consider indemnities and special escrows covering the estimated cost of retraining an AI model on clean data if required by regulatory enforcement or third-party claims. Failing to surface these issues before signing can leave a buyer holding an asset it cannot lawfully use, turning what looked like a data goldmine into a significant liability.
Immigration: When Workforce Compliance Becomes a Deal Risk
Depending on the business being acquired, employment diligence may reveal immigration compliance issues that require immediate attention. One sensitive area is the target’s onboarding process, particularly where many employees may not be U.S. citizens. U.S. immigration rules require employers and employees to complete Form I-9 to verify identity and work authorization. The employee must attest to employment authorization no later than the first day of work and present proper documentary evidence no later than the third day. By that same third day, the employer must examine the documents to determine whether they reasonably appear genuine and relate to the employee, then record the information on Form I-9.
In buyer-side diligence, the acquirer’s Human Resources (HR) team and employment counsel should confirm that the target’s onboarding procedures include a fulsome Form I-9 verification process. If diligence raises compliance concerns, mitigation options can be nuanced and complex. Employers generally are prohibited from asking for employment authorization documents after hiring, except in narrow circumstances such as a properly conducted internal I-9 audit. Depending on the workplace, those audits can create substantial workforce disruption and staffing challenges. Mishandling immigration questions can also create exposure for employment discrimination and retaliation claims. Potential purchasers are best advised to tread carefully and consult experienced counsel promptly when immigration issues arise during the transaction process.
Should you have any questions regarding the factors that can derail a deal, please reach out to Tom Campbell, Josh Klein, Sonya Rosenberg, Alfred Tam, David Wheeler, Brian White, or your Neal Gerber Eisenberg attorney.
The content above is based on information current at the time of its publication and may not reflect the most recent developments or guidance. Neal, Gerber & Eisenberg LLP provides this content for general informational purposes only. It does not constitute legal advice, and does not create an attorney-client relationship. You should seek advice from professional advisers with respect to your particular circumstances.
