M&A Due Diligence: Complete Investigation Guide
Comprehensive due diligence process to uncover risks, validate assumptions, and ensure successful M&A transactions
Get DD SupportDue Diligence Areas
Financial
Analysis of financial performance, accounting practices, and cash flows.
- • Historical financial statements
- • Revenue and profitability trends
- • Working capital analysis
- • Cash flow verification
- • Accounting policies review
Legal & Regulatory
Review of legal structure, compliance, and regulatory matters.
- • Corporate structure and governance
- • Material contracts and agreements
- • Regulatory compliance status
- • Litigation and legal issues
- • Intellectual property rights
Operational
Assessment of business operations, processes, and capabilities.
- • Business model and operations
- • Management and organizational structure
- • IT systems and infrastructure
- • Supply chain and vendor relationships
- • Quality control and certifications
Commercial
Evaluation of market position, customers, and competitive landscape.
- • Market analysis and positioning
- • Customer base and relationships
- • Competitive landscape assessment
- • Sales and marketing effectiveness
- • Growth prospects and strategy
Financial Due Diligence Checklist
Revenue & Profitability
3-5 years audited financial statements
Monthly/quarterly management accounts
Revenue recognition policies and practices
Gross margin analysis by product/service
Operating expense breakdown and trends
EBITDA and cash flow normalization
Balance Sheet & Cash Flow
Working capital analysis and trends
Debt structure and covenant compliance
Asset valuation and depreciation policies
Cash flow forecasts and projections
Off-balance sheet items and commitments
Tax provisions and planning strategies
Legal Due Diligence Areas
Corporate Matters
- • Articles of incorporation and bylaws
- • Board resolutions and meeting minutes
- • Shareholder agreements and structures
- • Subsidiary and affiliate relationships
- • Corporate compliance and governance
Contracts & Agreements
- • Material customer and supplier contracts
- • Employment and compensation agreements
- • Real estate leases and property rights
- • Financing and credit agreements
- • Partnership and joint venture agreements
Risk & Compliance
- • Pending or threatened litigation
- • Regulatory compliance and violations
- • Environmental liabilities and permits
- • Insurance coverage and claims history
- • Intellectual property protection
Due Diligence Process
1
Planning
DD team formation, scope definition, checklist preparation
2
Data Request
Information request, virtual data room setup
3
Investigation
Document review, analysis, management interviews
4
Reporting
Findings summary, risk assessment, recommendations
Due Diligence Red Flags
Financial Red Flags
- • Declining revenue or profitability trends
- • Aggressive accounting practices
- • Significant related party transactions
- • Unusual working capital fluctuations
- • High customer or supplier concentration
- • Inconsistent cash flow patterns
- • Auditor changes or qualified opinions
Operational Red Flags
- • High management turnover
- • Regulatory compliance issues
- • Pending or threatened litigation
- • Outdated technology or systems
- • Environmental liabilities
- • Labor disputes or union issues
- • Key person dependency
Due Diligence Best Practices
Preparation
- • Assemble experienced DD team
- • Define clear scope and objectives
- • Prepare comprehensive checklists
- • Establish timeline and milestones
- • Set up secure data room access
Execution
- • Systematic document review approach
- • Conduct thorough management interviews
- • Verify key assumptions and claims
- • Follow up on all material issues
- • Maintain detailed investigation logs
Reporting
- • Provide clear risk assessments
- • Quantify financial impacts where possible
- • Prioritize findings by materiality
- • Recommend mitigation strategies
- • Support decision-making process
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