The Overview of Due Diligence in M&A (Complete 2024 Checklist)


Whenever you’re making any sort of merger or acquisition, or M&A for short, there is a lot of money on the line, and there is always a certain level of risk involved. The level of risk you face is complex to discern, and it varies greatly on a case-by-case basis, but it is something you will have to look out for.

The main way of minimizing risk during an M&A is to put in your due diligence.

Due diligence is more than just a fancy business term. It’s a necessity for any sort of large scale purchase or business agreement, and if you don’t handle it properly, you can face very serious consequences later down the line.

Today, we want to help you prevent that. We’re going to go over exactly what due diligence is in M&A, and then, we’ll provide you with a full M&A due diligence checklist of all the things you need to do to ensure you’re handling the process properly.

Let’s get started.

What is Due Diligence in M&A?

Due diligence is a process you go through when you’re getting ready to commit to a large purchase or even an agreement that can have major payoffs or consequences. It’s a method of investigation, verification or auditing a potential buying and selling deal in order to verify the accuracy of all relevant facts and financial details, and other information that was mentioned during the deal.

You can think of it as when you buy a house. Yes, you approach the seller or their agent, tell them about your interest, start securing funding for the home, and get the ball moving, but you don’t just wait for all that to clear and take the owner’s word for it when it comes to whether or not the house has problems.

You do your due diligence, hire an inspector, go over the repair history of the home, and generally, you try to discover the little details that the seller doesn’t want you to know, forgot about, or flat out lied about. Once you’ve done that, you can decide whether to go along with the deal or back out of it. Such as if you were to find out the house had serious structural damage and all the pipes were busted, but the homeowner never said that in their advertisements or initial conversations with you.

M&A due diligence checklist

You also don’t have to back out entirely. If you’re still interested in the purchase, but find things that make it less valuable than you initially thought, you can attempt to negotiate a better price to reflect the problems with the house.

It’s basically the same thing with mergers and acquisitions.

However, when you’re performing due diligence in M&A, you’re not looking for termites, bad plumbing, and busted water heaters, per se. Instead, you’re looking for financial pitfalls that weren’t disclosed when the deal started, potential problems with the company such as inflated numbers or dishonest representation of certain key aspects of the company, debts that weren’t mentioned, etc.

In our complete checklist below, we’ll go over every step you need to take in the M&A due diligence process.

Also, keep in mind that this information can be useful if you’re on the selling side of the transaction, too. By knowing what the other party is looking for, you can prepare ahead to ensure all of the necessary materials can be reviewed in a timely fashion, and you can think about responses you might give to concerns that are likely to pop up. Even if there’s something that isn’t exactly great for the buyer, having time to prepare for that conversation will put you in a better position.

Let’s get started.

1: Financial Statements and Accounting Information

This is where the hard numbers come in. You need to gain access to, and properly inspect, all financial statements and accounting information that the company you are buying or merging with has. If that information isn’t being provided, there’s a totally different problem to worry about.

The list of things that fall into this category is also quite extensive. You don’t just need 12 months’ worth of bank statements. You need:

  • Statement audit records
  • Profit margin growth analysis reports
  • Budget estimates
  • Upcoming capital expenditures
  • Working capital
  • Future projections
  • Accounts Receivable information if aged
  • Financial statements from at least the last five years

Any proper company keeps track of all of these things, or they can access the information within a reasonable amount of time. So, you shouldn’t have anything to worry about with gaining access to the information. If you’re on the selling side of the transaction, you can help speed up the process by understanding this is all necessary and preparing it early. This also shows confidence in your part of the agreement as you’re not trying to hide anything or stall for time.

2: Company-Owned Property Details

If you’re buying a company, you probably want to know what you’re actually getting. You don’t just buy the name and take over the daily operations, you gain all the company-owned property.

This includes things such as company vehicles, deeds, real property leases, sales agreements, real property interest, and title reports.

Not only that, but you also need to get a complete inventory of personal property within the company, and you need to see any warranties and guarantees associated with all of these forms of property. After all, let’s say something goes wrong with a major piece of production equipment. If there’s a five-year warranty still active on that piece of equipment, wouldn’t you want to know about that instead of paying out of pocket to replace or repair it?

M&A due diligence

From a seller’s point of view, everything in this category is a good thing to show your prospective buyer. The more you have to give, the sweeter the deal is on their end. So, ensure that the inventory list is as complete as possible, and nothing is being left out.

3: Intellectual Property

Intellectual property is a hot commodity in the modern business world, and almost any business you buy or merge with is going to have a lot of it. Intellectual property, at its core, consists of the ideas that brought the company’s products to life. Except, there is proof of concept that you physically take ownership over.

When you’re looking at a company’s intellectual property, it’s more than the ideas you’re looking at. You’re looking at their patents, pending patents, trademarks, EULA forms they have for software they sell, and copyrights on products they have.

That’s not all, though. You also have to understand how they currently protect that intellectual property and their business methods. Do they have NDA or non-disclosure agreements? Do they use DRM software in digital products they sell? You must understand how they’re protecting their IP to determine if it’s being done well, poorly, or in a way that can potentially push away customers.

Finally, patents and other forms of intellectual property can have liens and encumbrances placed on them. You need to know about those to ensure you know what you’re getting into. If they do have those things, they’ll be passed to you.

Like everything else, sellers should be gathering all of this information in an organized manner before the buyer even comes looking for it.

4: Biographical Chart on Management and Employees

The people who carry out the day-to-day processes of a business are the ones putting in the bulk of the work towards its success or failure. Without them, the company wouldn’t exist. So, you need to know about the company’s current culture and how its employees are treated.

The chart, or however the information is presented should be more than just the owner of the business gloating about how well they treat their employees, too. It should show grievances filed, employee dispute records, compensation schedules, employee agreements, resignations or firings that have occurred within the last year or two, and even the employee handbook.

By understanding this information, you gain two benefits.

First, you get a better understanding of the existing employees, and you can decide if they’ll be a boost to the company’s efforts or a problem. Then, you can act accordingly by keeping them on or hiring a new team.

Then, if you keep the existing employees, you start out on the right foot. You know what they’re used to and what they expect. This can go a long way towards building trust between a new owner and an existing team.

5: Company Records

If the company is publicly traded, you need to know about its stock options and stockholder meetings. Whether it is or not, you need to know about any subsidiaries it has, and you should be well-acquainted with its board of directors and their records.

6: Contracts and Insurance Policies

Every company needs various insurance policies for employees, property, etc. You’ll be assuming control over those policies, or getting rid of them in favor of your own, and it’s necessary that you understand them fully.

Existing contracts and agreements are also important. Is there a partner that might be being left out of the deal? That can produce legal problems. Are there supply chain contracts you’re going to inherit and have to abide by?

Two people performing due diligence in M&A

All of that is legally required, and you will want to know about every contract, the terms of those contracts, and the insurance policy, that the company has to avoid getting dragged into something you don’t want to deal with or being forced to utilize resources or contacts you don’t want to utilize.

7: Legal

It wouldn’t be a fun experience to purchase a company just to find out it’s embroiled in a lawsuit or criminal case right after you’ve completed the transaction and lawyers start calling.

Whether it’s civil, federal, or anything else legal, you need to know about all litigation the company is involved in or has been involved in over the past few years.

8: Environmental

The EPA might have presented fines, violations, and other things to the person selling the company. This can be related to their emissions, improper disposal of hazardous waste, not meeting EPA guidelines, etc. If you purchase the company, problems with the EPA become your problems.

Luckily, sellers are required by law to disclose any EPA notices they’ve received, waste on the property, etc. So, if you ask for it, you should have an easy time getting access to it.

9: Marketing Strategies and Competition

The company you’re buying is likely running several marketing strategies at any given time. Since you’re looking to take over the company’s operations, you need to know about the marketing strategies in place. This lets you know how much you’ll be committed to those marketing strategies for the foreseeable future, whether or not the existing strategies are working, and if you need to put in a lot of work starting from the ground up.

Competition is another big one that fits this category. Your potential seller should be able to tell you who your competitors are in both digital and brick-and-mortar environments, and they should be able to explain the history they’ve had competing with those companies.

10: The M&A’s Potential

This isn’t a four-wheeler or some other purchase you can make on a whim, get some use of, and toss away. You’re taking on a lot of responsibility by merging or acquiring a company, and there is a lot on the line. So, it’s important to figure out what exactly that company is going to provide. Will it provide tons of savings for your existing company? Will it synergize well and allow you to double your services offered? Will it take a large part of the load off your current operations or supplement your production somehow?

The purchase needs to make sense from a strategic viewpoint, and if you can’t think of some sort of strategic benefit you’ll gain from it, it’s a poor investment.

Get Help With Final Ascent

Whether you’re looking to merge or acquire companies, sell a business you’ve built, Final Ascent can help. Our team of experts can guide you through the M&A due diligence process, and we can help ensure you’re making the right decisions from start to finish. Contact us, today.