Legal Diligence - big vs. small firms - Looking for opinions and experience

October 25, 2023

by a searcher from University of Victoria in Vancouver, BC, Canada

Context: Just heading under LOI and into my first exclusive diligence period in a self-funded search.

I hear some of the cost estimates and budget recommendations on some of the podcasts about what to expect as well in talking with friends that have done this several times and I'm having a tough time reconciling the difference as it is many orders of magnitude difference.

I learned early in my career that accountants and lawyers are worth paying up for good advice, however I of course don't want to incur unnecessary transaction costs, especially when there's a decent probability of the deal not completing and I'm paying for it out of my acquisition capital. I'll share some average ranges that I'm hearing and would really appreciate any thoughts and experience from folks that have tried both, and/or had a strong positive or negative experience with one and would do it differently a second time.

Small firm: $10-20k - LOI review, PSA design and general legal diligence - review of key supplier and customer contracts etc.
Large firm: $75k - 100k - I guess everything, presumably with more horsepower and associates reviewing every detail

Thanks in advance!

Reply by an intermediary
from Yale University in New York, NY, USA

^redacted‌ This is a great question. We should all be thankful that we have this online community. I hate seeing people getting taken advantage of; I saw my parents in their small business career get hoodwinked. Here are some musings from my career in big PE and now. I only outsource legal and accounting due diligence when I am understaffed, attorneys & accountants are cheaper than my staff, or accountants 7 attorneys know more than me. I will always read legal documents myself directly, then hand off to attorneys when I cannot understand something. When you are running your business you should be able to understand all legal dox. For accounting, GAAP, as a language can be difficult. Please hit me up, if you want to discuss the real problems in acquisition due diligence: (1) scope QoE is not DD and (2) dead deal costs. I will help you rationalize costs on legal and accounting. Hope this helps.

Reply by a professional
from Dartmouth College in Los Angeles, CA, USA

Generally your ranges seem accurate, depending on the size of the deal. It's very difficult for large firms to do anything for less than $75k-$100k, and even for small firms you can get to $15-20k pretty quickly depending on how difficult and sophisticated the seller is. For deals with an enterprise value over $10mm or so costs tend to go up as you're dealing with larger companies with more diligence to review and more sophisticated lawyers on the other side.

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