2025 M&A Lessons #2 - Legal Due Diligence Isn’t Checking a Box - It’s Protecting Your Neck

In the lower middle market, we have seen parties too often treat legal due diligence like an annoying prerequisite on the way to closing, instead of what it really is. It is the discipline approached to transacting that keeps your personal guarantee, your capital, and your sanity intact. If you’re using SBA or similar leverage, you are not simply “doing a deal,” you are signing up for years of risk that you do not fully control. Taking diligence seriously allows you—unless you take diligence seriously.

Lower middle market reality

Most of the businesses you’re chasing were built by owner‑operators who optimized for relationships and hustle, not necessarily systems and compliance. The best prospects look great on paper – stable EBITDA, long‑standing customers, compelling story. Under the hood, these businesses often run on handshake agreements, legacy family arrangements, and “we’ve always done it this way” shortcuts that never make it into the teaser.

Legal due diligence is how you translate that messy reality into a deal you can survive. A deal that can provide you (and your investors if you have them) with the future value that you’ve modeled out and that has you excited. It connects what you see in the financials to what is actually enforceable in contracts, what regulators will tolerate, and what your lender/investors will expect you to manage post‑close. When we say, “Watch the Ops,” this does not mean merely identifying the OPportunity. It also means using diligence to uncover how the business really OPerates, not just how the seller/broker presents it in a deck.

What non‑lawyers tend to miss

Most first‑time buyers think diligence means making sure the company really makes what the broker says and that “there are no lawsuits.” That’s the floor, not the ceiling.

Here’s what routinely gets missed (all from our real deal experience):

· Change‑of‑control and assignment provisions that let key customers walk or demand concessions the moment you close.

· In asset purchases in particular,[1] the business infrastructure/supporting assets (e.g., key employee contracts, bespoke software) that allow you to actually use/benefit from the big assets (e.g., equipment, customers relationships)

· Long‑term obligations buried in leases and service agreements that don’t show up cleanly on the balance sheet

· Misclassification, sloppy employment practices, and special deals for friends and family that blow up as soon as you try to professionalize the operation.

· Quiet regulatory and licensing gaps that have flown under the radar only because nobody has looked too closely - yet.

None of these issues sound sexy on a course sales page, but these are exactly the kinds of pitfalls that turn a “cash‑flowing asset” into a turnaround project that you never planned to undertake. You do not find these issues with vibes and alignment with Seller (as valuable as those are). You find them with structured, focused legal diligence tied to your operating plan.

Where general business lawyers fall short

As we noted in Lesson #5, not every business lawyer is an M&A attorney, let alone one experienced in the lower middle market. Full disclosure – as a former BigLaw/large cap deal attorney, I admittedly had to make real adjustments when it came to navigating some of the softer, qualitative risks of the lower middle market. We have seen plenty of smart, well‑intentioned attorneys spend their time reviewing or editing documents in a vacuum, ringing the alarm bell on every theoretical risk without asking the most important question. That is, “what is material to this specific business (and how it operates), under this specific capital structure?”

Regardless of their previous practice, you need counsel who:

· Knows how your debt, covenants, and lender realities intersect with the legal terms you’re agreeing to (a similar principle applies to equity arrangements);

· Uses what they see in the contracts and compliance to pressure‑test your post‑close operating plan;

· Understands the most important/effective levers in a negotiation—reps, indemnities, escrows, covenants, emotions and incentives – that move the needle if things go sideways.

Our job is not to turn your deal into an academic thought exercise. Our job is to help you buy a business in a way that lets you actually run it and sleep at night.

The real price of “cheap” diligence

I’ve watched too many prospective buyers balk at legal fees that are completely in line with market, only to go cheaper or DIY and run straight into avoidable land mines. They save a little up front and put millions at risk on the back end.

If you can’t comfortably budget for real legal representation, plus a financial workstream to validate the numbers, a real down payment, and your search and sourcing costs, you are not ready to buy a business. That’s not a service provider trying to generate fees. That’s math. On a leveraged or equity investor-backed deal, the true cost of “learning on the job” can be measured in blown covenants, surprise liabilities, forced sales, and in the worst cases, securities enforcement actions, bankruptcy and real‑world consequences for your family.

A solid financial review and real legal diligence can deliver an enormous return in a matter of weeks – either by validating that you should lean in on a workable deal (with some hair) or by helping you dodge a bad one entirely. The downside protection alone justifies the spend; the upside – being able to operate cleanly and aggressively post‑close because you actually know what you bought.

We’ll talk specifically about the financial side of this—how to think about quality of earnings and what it is (and isn’t) - in Lesson #1 on Thursday.

“Protect Ya Neck”

Entrepreneurship (and growth) by acquisition provides opportunity, but not without costs and risks. Even experienced, sophisticated acquirers can be sent into a tailspin by a single bad buy (we’ve seen it). If it can happen to them, it can happen to you, first-time searcher.

Diligence is not checking a box. It is how you protect your neck when you sign that personal guarantee, raise that equity, wire those funds, and step into the operator’s chair. Treat it like a cost center and you will be tempted to minimize it; understand it as an investment in the future and you will fund it appropriately.

The lower middle market does not reward bravado alone. It rewards buyers who are curious, disciplined, and locked in with advisors who understand both the law and the operations. If you are serious about buying a business, build your team, fund your diligence, and “Watch the Ops,” because the market may not give you a do‑over.

Stay tuned – our law clerk Talha Wajeeh and IP counsel, Anu Kinhal, will do a deeper dive on intellectual property diligence specifically, something that we have witnessed buyers and sellers alike overlook in “low-tech” business acquisitions.

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[1] We flag asset purchases here because we have seen many first-time buyers have been taught that an asset purchase is the default or “quick and easy” transaction structure. One downside – you have to assign each and every asset individually, and if you miss one, it does not belong to you post-close.

Disclaimer. The contents of this article should not be construed as legal advice or a legal opinion on any specific facts or circumstances. Your viewing and/or use of the contents of this article do not create an attorney-client relationship with Cadet Legal. The contents are intended for general informational purposes only, and you are urged to consult with counsel concerning your situation and specific legal questions you may have.