The Importance of Due Diligence in M&A Transactions

Michael Byars sitting on the edge of a pool table evaluating the essential role of due diligence in mergers and acquisitions (M&A).

One of my Students asked me to explain the importance of the Due Diligence process in their mergers and acquisitions (M&A) transaction. 

Here are a few things to think about as you look at acquiring a business for yourself.

What is Due Diligence?

Due diligence is a process a process or effort to collect and examine information before making an important decision, such as buying a company. It involves carefully researching and investigating the company to make sure you understand all the facts, risks, and opportunities. This helps you make smart decisions and protect yourself from any unexpected problems or mistakes.

In the process of an acquisition, the acquiring firm is often allowed to see the target firm’s internal books, operations and internal procedures. The acquiring firm reviews all areas of the target to satisfy their interests. Offers are made contingent upon the resolution of the due diligence process.

Why is Due Diligence So Important?

Due diligence is an essential part of the M&A process, yet many organizations still overlook its importance. In a recent survey, it was found that nearly 40% of mergers and acquisitions that fail, fail due to poor due diligence. Here’s why due diligence is so important:

  • Identifying Risks – Due diligence allows you to identify potential risks and liabilities associated with the target company.
  • Valuing the Target – It helps you understand the target’s financial and operational performance and determine a fair price.
  • Improving Decision Making – Due diligence provides you with the information you need to make informed decisions about the merger.
  • Protecting Your Business – By conducting proper due diligence, you can reduce the chances of making a bad investment and protect your business.

Due Diligence Checklist: Key Factors to Consider When Acquiring a Business

Here are 5 things not to forget during the due diligence process.

  1. Know Your Exit Strategy – Consider whether you’ll need a lengthy transition, or if the sale can be finished relatively quickly. And also know what will happen to your employees after the sale is complete, so you can make sure their needs are met during the sales process.
  2. Be Thorough in Your Request Lists – As you start to review the information you are provided during due diligence, make sure it’s complete and accurate. Check it once, then check it again. It’s critical that you make sure everything stated in the purchase agreement is accurate and true.
  3. Follow-up with Any Requests for Additional Information – If you’re not sure why something was excluded, ask questions. Pay special attention to the items that are most important to you. Don’t rely on the buyer’s prioritization of documents or requests for information. You might miss something critical if you don’t review and understand it in depth.
  4. Seek Guidance and Support – If you’re new to mergers and acquisitions and want to be especially cautious not to miss anything, reach out to an industry expert and request them to look over your deal and see if they come across any glaring red flags that you might have overlooked.
  5. Hire an Attorney – Don’t sign anything without the review of a trusted legal advisory. A good attorney will help you to understand what you are signing, and if they find something they feel is consequential to the sale, they will be able to negotiate it into a more favorable position for your needs or provide you the justification of exit if necessary. It’s important to protect yourself and your investment from bad business and ignorance.

The Take Away

The due diligence process plays a crucial role in mergers and acquisitions transactions. It involves conducting thorough research and investigation to understand the target company’s financial, operational, and legal aspects. By identifying risks, valuing the target, and improving decision-making, due diligence helps buyers make informed choices and protect their business interests. Following a due diligence checklist, seeking guidance from experts, and involving an attorney are essential steps to ensure a successful acquisition.

If you’re interested in learning more about the mergers and acquisitions process and gaining insights into business acquisition, feel free to reach out to us at [email protected] or get started here. We’re here to support you in your journey towards a successful business acquisition.