3 Types of Due Diligence to Mitigate M&A Risk

Successful M&As depend on the buyer’s ability to determine whether the business will fulfill its desired purpose once the deal is complete. The Mergers & Acquisitions process is complex and requires expertise to ensure a successful transaction. One of the most important steps for mitigating risk and increasing the chances of a successful purchase is to conduct detailed and thorough due diligence on the company you intend to buy.

Here are the three most important types of due diligence to consider before progressing past the Letter of Intent and signing any binding documents.


Financial Due Diligence

Despite initial reviews of a company’s financials, identifying whether there are any inaccuracies in the documentation is an essential initial step. Financial due diligence is centered around uncovering any financial abnormalities because even unintentional inaccuracies can have a major impact on the value of the business.

  • Are the seller’s accounts GAAP Compliant?
  • Are the recurring revenue streams correctly recognized and expected to hold?
  • Have any expenses been categorized as non-operational to make earnings look more impressive?
  • Are the Balance Sheet and the P&L Statement accurate?
  • Are there overdue balances that have gone unaddressed in aged accounts payable reports?

Especially if the valuation of the company is based on its EBITDA, the accuracy of the seller’s financials is essential for realistic post-sale projections. Prior to signing any legally binding documentation, begin your financial due diligence by conducting a Quality of Earnings (QoE) review to look into key details that aren’t necessarily outlined in the seller’s income statements.


Operational Due Diligence

New owners expect the newly acquired company to be able to continue operating with a similar output and productivity. However, many factors play into a company’s continued operational efficiency.

  • Is the customer base loyal and how will they be impacted by the sale?
  • How competitive is the industry and region?
  • What resources have been put towards sales and marketing?
  • What is the state of the company’s infrastructure – including IT and manufacturing equipment?
  • What percentage of positions are filled with under-qualified personnel?
  • How prepared is management for continuing to run the operations after the sale?

Issues such as avoided maintenance or necessary reorganization of the company’s human resources may add significantly to the post-sale cost of operations. Operational due diligence includes meeting the staff, seeing the facility, and getting a clear view of the inner workings of the company.


Legal Due Diligence

Thorough legal due diligence goes beyond the standard of analyzing the company’s corporate agreements, business licenses, and ownership documents. In addition to the company’s legal standing to operate and the seller’s right to change ownership, it’s important to get answers to deeper questions.

  • What are the sales & purchase agreements with each customer & vendor?
  • What are the details of debt agreements and are there liens?
  • Will ownership of the intellectual property or patents be part of the deal?
  • Are there impending lawsuits to consider?
  • Are there legal issues to consider relating to the company’s employment practices?


With over 35 years of experience, Hall & Company’s team of M&A Consultants have guided countless companies through the M&A process. Contact us via email or call our offices at: 949-910-HALL (4255).

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