Following the Due Diligence findings on a transaction (assuming on the buyside), the next step would typically be making adjustments to the valuation or including contractual protection in the transaction documentation. Would anyone have a good checklist / guide on how to translate such due diligence / red flags into actual contractual provisions or adjustments in value?
I think course of action depends a lot on materiality. If there is significant risk we would likely hold back an indemnity escrow so we are covered if there is a future adverse finding. If it is a minor red flag and worst case would be low dollars we would likely let it slide. Regarding setting a level of escrow, for example, if we were concerned about potential litigation we would consult legal counsel to get a range for the downside risk and set the escrow amount at the high end of that range. Depending on the issue found, it could be possible to make resolution a closing condition and then it would be settled prior to close.