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Comment by vonmoltke | Hacker News Reader

I don't understand. Why doesn't the amount of work required to perform all the due diligence activities not scale with the size of the company?

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I'm foxed too. Due diligence is about assessing risk. The lower the valuation the less you're risking. Hence I'd expect early acquires to require far less due diligence. What am I missing?

Liabilities. While a lower valuation company would presumably be less likely to rack up some huge liabilities somehow, that is not necessarily the case.

Because they're not evaluating the things that scale. They're evaluating the founders, which is constant, and also the legal paperwork, which grows only linearly. The cost of valuating the company, negotiating, getting board consent, etc., are all basically constant.

> Because they're not evaluating the things that scale. .. also the legal paperwork, which grows only linearly

Um, that is something that scales.

> The cost of valuating the company, negotiating, getting board consent, etc., are all basically constant.

I don't see how that can be, though. If the company is just my friend and I, your "board consent" is just getting the two of us to say yes (assuming we are not structured as an LCC, in which case it is irrelevant). The cost of appraising a purchase is generally related to how much it is claimed to be worth. Ditto with negotiating; a higher price tag or larger organization brings more things to haggle over.

Even worse, why doesn't the amount of work scale with the selling price of the company?

I smell people not capable of doing cost-benefit analysis.

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