Free tool · Due Diligence
Price, Condition, Indemnity or Warranty? A Due Diligence Risk Allocator
When due diligence finds a problem, the deal documents give six ways to respond. If the problem is fatal, walk away. If the loss is certain or very likely and can be calculated, adjust the price. If the seller can fix it before closing, make the fix a condition. If the problem is known or suspected, may be costly and cannot be fully quantified, take a specific indemnity. If the risk is unknown or unlikely, rely on the general warranties. If it is small, accept it. The choice depends on whether the problem is known, whether it is curable, how large the loss could be and what the seller will bear. A known problem should not be left to the warranties, because in some systems a buyer who knew of a problem before signing may have its claim reduced or barred. The limits of each protection, such as caps, baskets, time limits and retentions, decide how much it is worth.
Tool · Risk Allocator
5 findings with a total expected cost of 3,732,400.
Main factory licence expires in six months with no renewal in sight (expected cost 2,700,000)
Make it a condition or pre-closing covenant
- It goes to the heart of the deal, so the buyer should not be bound to complete until it is cured: make the cure a condition.
Key customer can terminate on a change of control (expected cost 720,000)
Specific indemnity (with escrow or retention)
- The problem is known and quantifiable but uncertain: a specific indemnity from the seller, backed by an escrow or retention, puts the cost on the person who knows the risk best.
Unpaid holiday pay owed to staff (expected cost 216,000)
Reduce the price
- The problem is known, the cost can be estimated and it is likely to happen: take it off the price.
Possible infringement claim over a supplier’s software (expected cost 90,000)
Cover by a warranty (and warranty insurance)
- The risk is uncertain and hard to estimate: ask for a warranty (and consider warranty insurance), so the seller bears the loss if the risk materialises.
Minor errors in the register of trade marks (expected cost 6,400)
Note and accept
- The cost is small in relation to the deal. Record it in the report and move on.
- Expected cost is the amount multiplied by the likelihood. It is a way to rank findings, not a forecast: a 40% chance of 1,800,000 either costs 1,800,000 or nothing.
- The mechanism is a suggestion based on the facts you enter. The real choice depends on the negotiating position, the seller’s covenant, the structure of the deal and the law, and has to be agreed by the lawyers and the principals.
- A finding with a small expected cost can still be a deal-breaker. Do not rely on the number alone.
Turn diligence findings into deal protection. For each finding, enter the potential cost, the likelihood and a few facts (is it known, can it be quantified, can the seller fix it, does it go to the heart of the deal, can the seller pay). The tool ranks the findings by expected cost and suggests a mechanism: a price reduction, a condition, a specific indemnity with security, a warranty, a note to accept, or a conversation about the deal itself. It is a way of thinking about allocation with invented figures: the real choice is negotiated by lawyers and principals. Runs in your browser; nothing is stored or sent.
How to use it
- Enter each finding with its amount and likelihood.
- Mark whether it is known, curable, quantifiable and a possible deal-breaker.
- Read the proposed response for each finding and the reasons.
- Change a fact and see how the response changes, then decide whether you agree.
Common questions
Why not rely on warranties for every problem?
A warranty covers what the buyer did not find. For a problem the buyer knows about, the claim may be reduced or barred depending on the governing law and the contract, so price, a condition or an indemnity is safer.
What is a specific indemnity?
A promise by the seller to compensate the buyer for a named problem if it arises, usually without the buyer having to prove a breach of warranty.
Is the tool’s answer legal advice?
No. It shows the usual logic for matching a finding to a protection. The right answer in a real deal depends on the facts, the negotiation and the law that governs the documents.
Learn the law behind the tool
This tool is part of our Due Diligence course, with lectures, concept maps, flashcards, interactive exercises and a capstone case. Due Diligence and Data Rooms: From Findings to Deal Protection.
More free law tools
General information, simplified, mainly on American law, not legal advice. States and countries differ, and real cases turn on facts that a tool cannot capture.