The broad purpose of conducting due diligence for transactions is twofold: first, to give confidence to a buyer that a target company is what the seller of that company holds it out to be, and second, to ensure that the target is materially compliant with laws that regulate the business of the target. Accountants and corporate lawyers typically focus on the first part, and subject matter legal specialists are engaged for the second part, which typically includes tax, environmental, intellectual property, information technology, real estate, executive compensation/ERISA, and labor and employment.

Where non-compliance is discovered in the course of due diligence, there are two issues: (1) What is the financial risk of exposure if government action is taken, or a lawsuit (perhaps a class action) is filed and (2) what is the cost of coming into compliance (and how will that cost affect EBITDA)?

Labor and employment (L&E) due diligence rarely can, but sometimes does, cause a buyer to walk away from a deal. For example, a large chain of small retail stores has one store manager per store, and a number of "assistant store managers," who are classified as being exempt from the laws requiring payment of overtime, even though they are scheduled to work 10 hour days, six days a week. L&E due diligence reveals that there are fewer than two full time equivalents reporting to the assistant store managers, and that they spend almost all of their time stocking shelves, helping customers, and running cash registers, which means that they are almost certainly misclassified as being exempt from overtime. Both the exposure is enormous (about a year's pay for each misclassified store manager), and the cost of coming into compliance would require either paying the assistant store managers overtime pay for the 20 hours they work in addition to 40 in a week (or another 30 hours of pay, based on an overtime rate of time and one-half), or hire another employee or two per store, to make up the hours over 40 in a week worked by the assistant store managers. Retail has a very thin profit margin. In this situation, the buyer valued the company as a multiple of its EBITDA, and the cost of compliance would have had a material impact on the EBITDA, which warranted a price reduction. When the seller would not give it, the buyer decided not to go forward.