m&a due diligence case study

Due diligence in M&A transactions: A detailed process and checklist

M&A activity is on the rise, with over 60% of CEOs planning to make at least one acquisition in the next three years.

A crucial component of every successful acquisition is due diligence — the process involving thorough examination and analysis of the target’s business.

This comprehensive guide to due diligence in mergers and acquisitions transactions aims to offer practical insights and strategies for conducting effective assessments. It also equips professionals with the M&A due diligence checklist needed to ensure efficiency throughout the process.

What is due diligence in M&A?

Mergers and acquisitions due diligence is the comprehensive assessment process of a target company’s financial, legal, operational, and other aspects. Its purpose is to evaluate the risks, opportunities, and synergies of the potential deal.

Through robust due diligence, both the buyer and seller gain a deep understanding of each other’s strengths, weaknesses, assets, liabilities, and overall viability. This process enables informed decision-making, mitigates risks, and helps negotiate terms that reflect the true value of the deal.

Ultimately, due diligence activities serve to minimize surprises, enhance transparency, and increase the likelihood of a successful transaction for all parties involved.

Additional read: Merger vs acquisition — what is the difference?

The importance of due diligence in M&A transactions

Here’s how exactly due diligence helps during the M&A process from both the seller’s and buyer’s perspectives:

This helps uncover hidden issues or liabilities early on, enabling the parties to address them before finalizing the deal and minimizing the chances of post-acquisition surprises or disputes.

By providing essential information, due diligence facilitates negotiations on deal terms, including price adjustments, indemnification provisions, and warranties, enabling parties to make informed decisions and ensuring alignment with strategic objectives.

Due diligence may foster transparency and trust between the acquiring and target companies by revealing strengths, weaknesses, and synergies, which is vital for effective integration planning post-transaction.

This includes assessing the compatibility of organizational cultures between the acquiring and target companies, which is crucial for long-term synergy realization and successful change management during mergers and acquisitions .

Types of M&A due diligence

Due diligence for mergers and acquisitions covers several distinct areas. Let’s explore each of them.

1. Financial due diligence

This examines the target’s financial performance and condition, so the review of income statements, balance sheets, cash flow statements, financial projections, and contingent liabilities is essential. It also assesses the accuracy of financial information, identifies potential risks, and evaluates the company’s financial health.

2. Legal due diligence

This reviews the target business’s legal structure, contracts, litigation history, intellectual property rights, legal compliance with regulations, and any outstanding legal or regulatory issues. This type of due diligence ensures that the proposed transaction complies with applicable laws and regulations and identifies any legal risks or liabilities.

3. Operational due diligence

The operational review focuses on evaluating the target’s operational efficiency, processes, systems, and key performance indicators. It aims to identify operational strengths and weaknesses, assess scalability, and uncover opportunities for improvement.

4. Commercial due diligence

This type of due diligence involves conducting market analysis and evaluating the target company’s market position, customer base, competition, industry trends, and growth prospects. It assesses the target’s competitive advantage, market opportunities, and potential threats, providing insights into its commercial viability.

5. Tax due diligence

This examines the target company’s tax affairs, compliance with tax laws and regulations, potential tax liabilities, and government audits. It also assesses the tax implications of the transaction, including any tax exposures, credits, or restructuring opportunities. Generally, tax due diligence ensures that the potential buyer understands the target company’s tax situation and can adequately plan for tax considerations in the deal structure.

6. Technology due diligence

This reviews the target’s technology infrastructure, intellectual property assets, R&D capabilities, and IT systems. It also assesses technology risks, identifies opportunities for innovation, and evaluates the scalability of technology assets. You can explore our technical due diligence checklist for a comprehensive review of the target company’s technology landscape.

Overview of the due diligence process in M&A

The key stages included in the M&A due diligence process are:

1. Preparation

Define the scope and objectives of due diligence.
Create a due diligence team comprising professionals from various relevant fields.
Prepare a due diligence request list outlining the specific information and documents needed from the target company.

2. Information gathering

Request documents and information from the target company based on the due diligence request list.
Review financial records, legal documents, contracts, operational data, intellectual property assets, regulatory compliance, and other relevant materials.
Conduct interviews with key personnel to gain insights into the company’s operations, culture, and future plans.

3. Analysis and evaluation

Analyze the collected data to assess the target company’s financial health, operational performance, market position, and potential risks.
Evaluate the compatibility of the target with the acquiring company’s strategic objectives and integration plans.
Identify any significant issues, risks, or opportunities that may impact the transaction’s value or feasibility.

4. Report and recommendations

Compile findings into a due diligence report detailing key observations, findings, and recommendations.
Present the report to stakeholders, including senior management and potential investors, highlighting critical issues and their implications.
Provide recommendations for mitigating risks, deal structuring, and optimizing value creation post-acquisition.

5. Negotiation and decision-making

Use the insights gained from due diligence to choose the best negotiation tactics. This will help you secure favorable deal terms, including purchase price, warranties, and post-closing arrangements.
Make decisions based on the findings of due diligence, weighing the risks and opportunities associated with the transaction.
Finalize the transaction documents and proceed with closing the deal.

Comprehensive M&A due diligence checklist

To enhance the efficiency of your due diligence investigation, we’ve compiled a comprehensive M&A checklist.

Due diligence type	What to do
Financial due diligence
Legal due diligence
Operational due diligence
Commercial due diligence
Tax due diligence
Technology due diligence

Every M&A deal is unique, so it’s crucial to approach due diligence in a way that fits the specific situation. The checklist we’ve provided can be adjusted to meet the particular needs of each deal, ensuring a proper due diligence process.

Additional read : Explore the top winning mergers and acquisitions strategies .

Common pitfalls and how to avoid them

Due diligence in mergers and acquisitions is a complex process that presents several challenges. Let’s learn how to overcome them:

Communication gaps between stakeholders can lead to misunderstandings and impatience during the M&A process. To avoid it, establish clear communication channels, define roles and responsibilities, and maintain regular updates and open dialogue.

Due diligence entails sharing and reviewing a vast amount of data. Using a data room solution can streamline the process by providing a secure platform for storing, sharing, and accessing necessary documents. This helps ensure that all relevant information is readily available to stakeholders.

Due diligence involves various complex areas, including legal, operational, strategic, and financial matters. Without adequate expertise, organizations may overlook critical issues or misinterpret information. To overcome this, engage professionals with relevant experience — transaction advisors, financial advisors, accountants, and M&A lawyers.

Not knowing what due diligence questions to ask or what documents to review can lead to oversight of critical areas. Establishing a comprehensive due diligence checklist helps to avoid this challenge. It provides a structured approach to the process and ensures thoroughness and accuracy in the assessment.

Due diligence often operates under tight deadlines, which can lead to rushed assessments and overlooked details. To address this challenge, prioritize tasks, allocate resources efficiently, and establish realistic timelines that allow for thorough review and analysis.

Cultural differences between the acquiring and target companies can pose challenges to integration and collaboration. To mitigate this, conduct cultural assessments early in the due diligence process, foster open communication, and develop strategies to bridge cultural gaps and promote cultural alignment post-transaction.

Key takeaways

Due diligence in mergers and acquisitions refers to the comprehensive assessment process of a target company’s financial, legal, operational, and other aspects. Its purpose is to evaluate the risks, opportunities, and potential synergies of the deal.
Comprehensive due diligence is crucial for informed decision-making and a successful merger or acquisition. It helps uncover hidden issues, assesses the target company’s viability, mitigates risks, and ensures alignment with strategic objectives.
The process of due diligence in M&A involves various stages, including preparation, information gathering, analysis and evaluation, reporting and recommendations, negotiation, and decision-making. Each stage requires careful planning, thorough review, and collaboration among stakeholders.
Due diligence covers several distinct areas, including financial, legal, operational, commercial, tax, and technology due diligence. Each type focuses on evaluating specific aspects of the target company to identify risks and opportunities.
Common challenges during due diligence include communication gaps, managing large volumes of data, insufficient expertise, inquiry uncertainties, time constraints, and cultural differences. Addressing these challenges requires effective communication, resource allocation, and cultural alignment strategies.

Other insights

Financial Advisory Salary Survey, Iberia 2024

Privacy Overview

Case Studies

M&a due diligence, the situation.

In a strategic move to expand its portfolio, a leading global energy conglomerate embarked on acquiring several subsidiaries of a publicly traded company, with the transaction valued at an impressive $1 billion in cash. The ambitious timeline and the complexity of the deal underscored the necessity for a meticulously planned due diligence process. The goal was twofold: ensure a seamless transition that adhered to all regulatory and financial benchmarks by the closing date, and swiftly capitalize on synergy opportunities to enhance financial outcomes.

The Intervention

To navigate the intricacies of this transaction, Stephen collaborated with the buyer's Integration Lead and senior management, orchestrating a comprehensive strategy that encompassed all facets of the acquisition process:

Team Dynamics: Cross-functional teams were formed, cutting across Legal, HR, Finance, Operations, Technology, Marketing, Product, Sales, and Executive leadership. These teams were tasked with creating and closely monitoring the execution of specific deliverables, ensuring a holistic approach to due diligence.

Synergy Identification: A key component of the strategy was to identify and prioritize potential synergies early in the process. This proactive approach allowed for the immediate kick-start of high-impact initiatives.

Governance and Adaptability: An effective governance structure was instituted, providing the executive team with the agility to make informed decisions promptly. This structure was pivotal in managing the project’s timeline, allowing for dynamic replanning in response to emerging challenges and ensuring that due diligence areas requiring immediate attention were promptly addressed.

On-Schedule Closure: The acquisition successfully closed on schedule, a testament to the efficacy of the due diligence process and the governance structure in place.

Synergy Realization: Prioritization and initiation of synergy opportunities before the close enabled the company to fast-track the realization of financial benefits, setting a solid foundation for future growth and integration efforts.

Key Takeaways for Executives

Importance of Cross-Functional Teams: The establishment of dedicated, function-specific teams is vital for covering all bases in a comprehensive due diligence process.

Proactive Synergy Management: Early identification and prioritization of synergy opportunities can significantly accelerate financial benefits realization post-acquisition.

Flexible Governance: A flexible yet strong governance framework is essential for navigating unforeseen challenges, ensuring timely decision-making, and keeping the acquisition on track.

#Synergy #MA #StrategicAcquisition

Download our Case Study

The Three Most Important Steps in M&A Due Diligence

Great diligence is the foundation for every successful deal.

By Benjamin Farmer, Amy Wall, Emmanuel Coque, and Matthew McKenna

September 05, 2024

At a Glance

An early, thesis-driven look at assets can help a company avoid chasing deals that are a poor fit.
Acquirers gain competitive advantage through proprietary insights from faster, deeper, and more focused diligence than their competitors—often using generative AI.
Top acquirers consider integration implications (timeline, costs, stakeholders) during diligence, not after.

History shows that winning companies don't wait on the M&A sidelines; they make deals. However, confidence in your acquisitions is critical. The best way to succeed is to come armed with proprietary insights from diligence that are faster, deeper, and more focused than your competitors. Superior diligence allows you to be bold where others hesitate.

Need some evidence? Consider the situation of a global manufacturing company that typically used its historical experience to estimate cost synergies for a potential acquisition. But competing for a deal, it realized it needed deeper insights and conducted an outside-in diligence, utilizing additional benchmarks, primary research, and external data scraping. This extra effort proved to be invaluable. It uncovered more than twice the original estimate of cost synergies, enabling the company to make a winning offer. The combined company eventually surpassed the synergies estimated in diligence, making the deal a clear success for shareholders.

Then there’s the lesson learned from a Fortune 500 technology company. Its investment thesis for a potential acquisition relied on the capabilities of the target’s talent base. The acquirer used outside-in mapping of the talent base (more than 10,000 employees) to understand the technical skills and training of the target’s employees. The analysis uncovered that the talent base was missing many of the technical skills that they were looking to acquire. It was a key factor in convincing the company to walk away from the deal.

The best companies focus on three key steps.

1. Be proactive: Initiate diligence early. Market leaders don’t wait for M&A opportunities to come to them; they proactively execute outside-in due diligence on priority targets even before an M&A process begins. By developing a clear deal thesis and aligning it with strategic priorities early, companies can move proactively, and with confidence. Regularly refreshing sector screens and maintaining a list of priority targets helps avoid distraction by unsuitable deals and ensures leadership is aligned and ready to move quickly on the right opportunity.

A leading life sciences company reflects best practices. The highly acquisitive company maintains a running list of its top 15 to 20 targets. Using outside-in diligence, it systematically creates a deal thesis and detailed financial model for each potential deal, updating that view as market conditions change. The company regularly refreshes its short list, looking at more than a hundred targets a year to understand the market and assess its priorities.

Similarly, a market-leading beverage company uses a data-driven view of its market to stay focused on core targets. This includes understanding competitive positioning and whitespace by geography and maintaining a view of potential synergies, cost to achieve, and speed bumps (regulatory review, capital availability, management bandwidth). The disciplined process ensures that resources are focused on the deals the company wants to make happen without wasting time on deals that don’t move the ball forward on strategic priorities.

2. Amplify value through proprietary insights. It’s crucial to go beyond high-level benchmarks and historical examples. Leading companies use advanced analytics, external data scraping, and primary research to uncover proprietary insights. M&A leaders have found some of the strongest use cases for generative AI in diligence: They use tools to accelerate and amplify insights from vast amounts of data. This deeper analysis allows them to identify hidden sources of value, confidently underwrite deal value, and make informed decisions. For example, in-depth market research and expert interviews can provide clarity on potential future growth areas and untapped market segments.

A global consumer goods company explored the potential for expanding into the alternative milk space. Lacking visibility into the out-of-home market, however, which represented more than half of the target’s business, it conducted in-person barista interviews and observations at coffee shops in major metro areas. Within a week, the company was able to unlock insights that allowed it to measure a statistically significant share of alternative milk offerings in the coffee shop channel and truly understand the market opportunity.

A medical diagnostic company considered walking away from a deal when it couldn’t agree with the target on price. When it decided to conduct additional diligence on pipeline products not yet in the market using extensive expert and customer interviews, it was able to build enough confidence in the potential future value to put forward a sweetened offer and sign the deal.

3. Plan for successful integration during diligence. Successful acquirers consider integration implications during the due diligence phase, not afterward. Unfortunately, integration planning is frequently the most underdeveloped aspect of due diligence.

The best companies identify the critical issues that underpin the value and build an early integration thesis that accurately estimates costs, timelines, and necessary resources for a successful transition. Key elements include engaging experienced leaders and prioritizing cultural considerations. This proactive approach anticipates and addresses integration challenges, boosting the chances of realizing synergies and achieving post-deal success. As a result, leadership can hit the ground running.

In a diligence, a global alcoholic beverage company focused primarily on the market fundamentals, brand health, and synergies. However, it became apparent during the process that the target had a very different culture and ways of working (see “ How to Avoid the Fault Lines Sending Tremors through Cultural Integration in M&A ” from Global M&A Report 2023 ). The company quickly focused resources on culture integration considerations and change management requirements in order to address friction points during integration. These insights were then connected back to synergy values based on which areas of the business would or would not be combined. For example, to better integrate the cultures, a foundational decision was to bring together leadership from different regions into a single headquarters.

By adhering to these three key principles, companies can enhance their due diligence processes, make more informed decisions, and ultimately achieve greater success in their M&A activities. As market conditions evolve over time, these three principles still hold the power to guide companies to the best deals and the best results.

M&A Due Diligence
Mergers and Acquisitions

How We've Helped Clients

Strategy global expansion boosts supermarket earnings and growth, mergers and acquisitions post-merger cultural issues jeopardize a deal, mergers and acquisitions extracting value by integrating business units, ready to talk.

We work with ambitious leaders who want to define the future, not hide from it. Together, we achieve extraordinary outcomes.

Contact Bain

How can we help you?

Business inquiry
Career information
Press relations
Partnership request
Speaker request

Financial Services M&A Due Diligence: A Symanto Case Study

Mergers and acquisitions financial services

Emerging reports reveal that mergers and acquisitions in the financial services market are at an all-time high. In 2021, the financial services M&A value stood at €22.6 billion . That compared with less than €2 billion just a year earlier, when there was an unexpected lack of M&A activity .

This coincided with a rise in neobanks (aka “challenger banks”) which offer a completely digital alternative to traditional banking services, and financial super-apps , which combine financial services with everyday lifestyle needs.

At the beginning of this year, Walmart announced that it is making two key acquisitions: US neobank ONE and financial benefits platform Even to form one single super-app. This app will be made available to Walmart’s 1.6 million employees and their 100 million+ weekly shoppers. 2022 may well be the year that financial super apps go mainstream.

In this fast-evolving market landscape, companies looking for M&A opportunities need to run quick and accurate due diligence and optimise their decision-making.

Using AI for Fast Investment Decisions

As a leader in natural language processing AI technology, we at Symanto have developed a tool to expedite the M&A due diligence process.

Symanto’s text analysis capabilities enable you to leverage Voice of Customer to get clear user feedback. Within minutes you can get a full report detailing ease of use, layout, customer services, expenses involved and much more from the perspective of the users themselves. Get further information about the customer base such as customer loyalty, net sentiment, and psychographic profiling.

Symanto technology is simple to use and understand and gives you deep insights into competing companies within minutes.

Neobank Case Study

Data source.

We identified three key players in the US digital financial services market: Revolut , Chime and Monzo . In total, we analysed 14 596 reviews on Google Play Store in the US market: 4840, 4666 and 4954 reviews, respectively.

Topic index

With Symanto you can choose from a variety of pre-existing use cases, or allow Symanto’s advanced text analysis to automatically identify key topics mentioned within conversations and reviews.

In this instance, the Symanto App use case measures five main topics and twenty-two sub-topics.

App attributes : app speed, compatibility, features/functions, general app, geolocation system, technical issues, UX/UI, content variety

Overall experience : brand perception, general experience, recommendation, trust/integrity

Service : approach, communication, general service, issue resolution

Process : account accessibility, account management, account security, setup/installation

Monetary : marketing/promotions, price

Net sentiment:

Mergers and acquisitions financial services_2

Symanto identified that Chime had the highest net sentiment score (32%) with 57% of topics identified within reviews measuring a positive sentiment.

Overall, Revolut received the lowest net sentiment score (13%) with 36% of topics identified within reviews measuring a negative sentiment.

Net sentiment drivers by brand and topic

Mergers and acquisitions financial services_3

Delving deeper into Symanto’s insights, we see that App Attributes drive the majority of conversation, followed by Overall Experience.

All three neobanks received generally positive feedback for App Attributes, but we can see that Revolut has the lowest overall positive sentiment here.

Revolut scores lowest across the board with the exception of Process. Here, Chime scores the lowest, with a sentiment score -34%. Given Chime’s overall positive sentiment, it’s clear that Process is a key issue for them.

In terms of Service, Monzo is the outright winner at 11% compared to Revolut and Chime negative sentiment scores.

Net sentiment drivers by brand and subtopic

Mergers and acquisitions financial services_4

Further investigation reveals the subtopics driving sentiment by topic. We can see that Revolut’s main weakness is Technical Issues while it scores well regarding UX/UI and General App.

Here we can see the value of running like-for-like comparisons across competing apps. Take a look at general service. While Chime still performs positively overall, we can see that compared to Revolut and Monzo, it scores relatively poorly. Symanto makes it easy to benchmark performance to see how a company fares against industry standards.

We can also see in more detail how Chime’s users regard Process. Compared to Revolut and Monzo, Chime scores particularly poorly on Account Security. This is a major issue for a financial services app and could ultimately cost them a sizable portion of their customers.

Finally, looking at Service, Monzo is the best performer across the board, especially when it comes to its customer service approach and general service. Within this topic, communication seems to be the biggest issue for all three brands. Resolving this type of issue would enable these brands to a better customer retention and engagement.

Symanto also enables you to delve right down and read consumer reviews relating to each topic to find out exactly what users are saying.

Consumer psychographic segmentation

Mergers and acquisitions financial services_5

Symanto assesses tonality and emotions expressed within written text to give a psychographic overview of the apps users. Here you can find out what percentage of users are loyal (with a positive emotional connection to the brand) and which are at risk (with an emotional negative response to the brand.)

In this instance, all three brands have a relatively uniform customer base. It’s interesting to note the percentage of users with an emotional connection given the nature of the apps.

Get The Full Report

Get in touch to read our full report and find out more about the performance of each brand. Discover our alternative data visualisations to help you assess each brand individually and read our list of risks and opportunities for each brand – valuable information for financial services mergers and acquisitions.

If you’d like to run a similar report or if you’d like to know more about how to use Symanto for voice of customer due diligence for mergers and acquisitions, get in touch or book your free personalised demonstration.

Symanto Communications
March 8, 2022

Mgmt. Consulting Consumer Electronics E-Commerce Tourism & Hospitality Pharma E-Sports

Commercial Due Diligence Market Insights Brand Health Voice of Customer Human Resources Product Optimisation

Symanto Brain

Custom Solution

API Consumer Personality Traits API Communication Style API Big Five Personality Traits API Text Sentiment Analysis API Aspect Based Sentiment API Emotion Text Analysis API Natural Language API

Blog Webinars Research Papers

Why Symanto Sentiment Analysis Topic Detection Emotion Detection Psychographics Industry Models

Company & Team Research Team Customers Partners Press & News Careers

GET IN TOUCH

Understanding Due Diligence in Mergers and Acquisitions

Mergers and acquisitions can position your company for significant growth. Discover how M&As can help your business access technological improvements, a broader client base, and new expertise and leadership from teams who align with your values and mission.

Mergers and acquisitions (M&A) can position your company for significant growth in several ways. Through M&A, your business can access technological improvements, a broader client base, and new expertise and leadership from teams who align with your values and mission.

Due diligence is a mandatory process for successful, lawful mergers and acquisitions. A comprehensive due diligence procedure is crucial in avoiding financial or reputational risk for your company.

The best due diligence procedures will closely analyse the M&A transaction in several essential steps. In this article, we’ll characterise due diligence in M&A, explaining the necessary steps in the process and modern best practices to overcome challenges in due diligence.

Defining Due Diligence in M&A

What is due diligence in mergers and acquisitions? Due diligence in M&A is the comprehensive analysis of the factors influencing the M&A valuation, risks, and benefits of the company being acquired or merged with. Some examples include investigations into a company’s economic standing and assessing the culture fit between employees of both companies.

There are differing philosophies regarding due diligence in mergers and acquisitions. Because of the time and cost of a thorough M&A due diligence process, some companies may perform an accelerated, high-level analysis seeking only the most glaring defects and irreversible flaws in the potential seller.

However, it’s recommended to have a more extensive process to identify M&A risks that could affect not only the short-term but the long-term health of your business. Therefore, a satisfactory due diligence process in M&A examines the company’s financial properties while also including thoughtful legal consideration and a full operational review.

Financial Assessment in M&A Due Diligence

A thorough financial evaluation in M&A can produce invaluable information. The financial risks, rewards, and liabilities should all face intense scrutiny in this crucial step of the due diligence phase.

The following examples detail how an extensive financial performance assessment informs the M&A process.

QofE reporting – When examining a company's financial history, the Quality of Earnings (QofE) financial report is often a helpful tool for negotiations. This report collects the target company’s past earnings while omitting one-time events, giving a reliable perspective on the company’s normalised income.
Interviews with financial management – Talking to both the internal financial professionals at the company and the external financial auditors can give a more precise representation of the financial health of the business you are negotiating with.
Perform projections – Understanding the target company’s prediction of how their business will grow is vital to the financial due diligence process. However, it’s also helpful to perform your own projections to compare against the target company’s—this ensures both parties have a realistic, well-aligned vision of their financial future.

When performing financial due diligence, it’s vital to assess a company’s finances from all angles: past, present, and future. Carefully scrutinise both one-time financial events as well as regular earnings to understand how the company works financially, and you will be one step closer to completing your M&A due diligence process.

Legal Considerations During Due Diligence

Lawyers play an equally important role in the due diligence procedure for mergers and acquisitions. A complete legal exploration of a target company can benefit your M&A due diligence process in the following ways.

Verification of IP, legal status, and more – The acquirer’s legal team should fully summarise the target company’s IP portfolio, patents, trade secrets, and current and past legal statuses, including pending litigations to see if there are any potential issues. Verifying these licences and properties ensures a company is operating within the law and that its reported financial information is accurate.
Overall deal structure – Legal is responsible for the draft of the acquisition agreement. Their due diligence process will inform the terms and clauses, such as any transitions of services, debt adjustments, and anything else involved in an M&A strategy .

Legal evaluation can be just as critical as financial performance evaluation in the due diligence process because legal discoveries can inform the valuation of a target company.

Operational Due Diligence in M&A

Operational due diligence involves closely examining how different teams within the target company function. For example, you might perform an operational review of the marketing team to see if there are any needs for restructuring or issues that may impact future performance or growth.

An adequate operational review can illuminate weaknesses and strengths within the target company’s divisions. It can also uncover the need for streamlined processes or better use of technology to make teams more efficient.

HR Due Diligence

HR due diligence focuses on the workforce and organisational culture of the target company and helps to align company culture with that of the acquiring company.

Specifically, HR due diligence looks at employee relations, identifies key personnel and potential retention issues, and evaluates cultural compatibility. It ensures that the workforce transition is as smooth as possible, preserving the human capital that is essential to business success.

Best Practices for Effective Due Diligence

Beyond financial, legal, and operational due diligence considerations, there are additional best practices to strive for when performing your M&A deal checklist.

Tax due diligence – All angles of a company’s tax status should be investigated, including incomes within additional countries, payroll, and available tax attributes.
Technology diligence – When the diligence team of the acquiring company performs its analysis, it should strive to determine if the acquired company’s technological standards meet its own. For example, is the target company’s network secure? Do they meet modern cybersecurity standards?
Reputational diligence – It may seem like common sense, but it’s vital to evaluate the target company’s reputation before any merger or acquisition. Uncovering charges of fraud or labour law violations, for example, could significantly impact negotiations or M&A valuation methods .

Navigating a merger or acquisition while adhering to best due diligence practices can be extremely taxing. A global HR partner like Omnipresent can lift much of that burden off your team and give you the confidence to navigate mergers and acquisitions from a more advantageous, more informed position.

Simplify Your Due Diligence

An Employer of Record can significantly streamline the HR due diligence process in M&A transactions by providing expert insights into labor laws, employment contracts, and compliance requirements across different jurisdictions.

Omnipresent’s EOR solution and global employment platform make you better placed to simplify your HR due diligence process - and forecast any related tax, financial, and operational due diligence issues.

Book a consultation to learn more

‍ Deloitte. M&A: The intersection of due diligence and governance .
‍ LinkedIn. M&A Science Newsletter: Financial Diligence in M&A . ‍
‍ Foley & Lardner. The Importance of Due Diligence in M&A Transactions .

The Omnipresent team writes informative articles on a wealth of popular topics, such as global employment and remote work. Check out our articles.

European Employment Law: A Guide for Hiring Managers

Subscribe to receive our latest posts and events on global employment and remote working straight to your inbox.

Want to onboard an international employee today? Get started.

Omnipresent makes it easy to hire, pay, and support your international team with our top-notch services including our trusted global employer of record services . Book a call with us to start building your global team today.

‍ Employ Anywhere. Be Omnipresent.

Don’t miss out

Subscribe for all the facts, tips and tricks on all things global employment, event invites, and free tools sent straight to your inbox.

United Kingdom

Gain unlimited access

Submit this form to gain full access to our OmniCalculator, so you can easily estimate employment costs across the globe.

Fill out this form and we'll be in touch. After submitting, feel free to select a time to connect.

M&A Evaluation and Due Diligence

Business- and technology-focused evaluations are critical parts of the due diligence process when firms choose to expand their footprint through acquisition. The CTO of a leading human capital management company asked Metis Strategy to help conduct pre-transaction due diligence on a targeted professional services company and help IT deepen its understanding of the target company’s product platforms, technology infrastructure, expertise, and organizational structure ahead of a possible acquisition.

The Metis Strategy team participated in the target company’s product demonstrations and subject-matter expert interviews, reviewed and analyzed all available target company artifacts, and analyzed findings from technical and infrastructure deep-dives with the target company’s stakeholders. The team took the following actions to expand the analysis:

Synthesized the target company’s weaknesses and key concerns based on stakeholder interviews and demonstrations
Developed a comparative assessment of the target company’s product platforms against industry benchmarks and existing client capabilities
Created a final report including an executive summary, product and infrastructure assessments, comments on the target company’s organizational structure, and other items

Metis Strategy’s assessments helped the client’s corporate development, product, and technology leadership identify product synergies, integration risks, and areas in which investment would be needed to ensure a smooth integration. Metis Strategy provided the CTO and his leadership team with a list of pre-close and first-100-days merger integration items as well as an estimated budget to address them.

Related case studies

Case studies, enterprise architecture strategy, business process optimization, change management, performance management.

World Class IT

Implementing World Class IT Strategy

Add to iTunes
Google Podcasts
Share on Facebook
Share on Twitter
Share on Linked In
Share via E-mail
Copy link to Clipboard

How M&A Due Diligence Plays an Important Role in Deals

Most buyers recognize that the M&A due diligence process is an important step . But for many sellers, it’s a new experience and due diligence may feel more like an unnecessary scrutinization of their business. I n any partnership it is not a matter of “if” issues will arise but rather “when” they will arise.

What is the Meaning of “Due Diligence”?

The importance of the due diligence in merger and acquisition (M&A) deals may be easily dismissed or perhaps rushed – defeating its true value and purpose: To thoroughly examine the crucial elements of a transaction to the benefit of all parties. And a “thorough examination” of a potential M&A deal could mean the difference between tremendous success or disastrous failure of a partnership.

Important Aspects of the M&A Due Diligence Process

1. some insurance firms may forego m&a due diligence.

Because of the assumption that the due diligence step will slow down the process of a deal, some firms may gloss over or rush this step because of the timing and/or cost. There are also some assumptions that experienced owners know their business or the industry so well, there is no need for outside consultation or expertise to perform due diligence. But having an experienced third-party due diligence review is more about having someone who understands the steps in the process, understands the insurance industry and can provide unbiased assessments that both parties can trust, ultimately to help everyone make informed decisions. 

2. M&A Due Diligence is Valuable to Both the Buyer and the Seller

As tiring and taxing the process may seem, having both buyer and seller really dig into the details of the transaction can benefit both parties. Unlike the early courting phase of partnerships, which can feel like speed dating, the due diligence phase allows each party to slow down and really assess how the moving parts of both businesses will work together. 

Value for Buy Side

For many buyers, they have done this before and recognize due diligence as a critical step in the M&A process. For them, it’s about understanding all of the potential risks, opportunities and business components of their potential investment or acquisition. The more informed a buyer is, the better the relationship will be through integration post transaction. 

Value for Sell Side

For most sellers, this may be the first time (or only time) they are involved in an M&A deal and might find the due diligence process inconvenient and unnecessary. But sellers should understand that due diligence provides them an opportunity to address any concerns, questions or potential risks identified during the review. In fact, a seller should consider conducting their own pre-due diligence assessment in order to be prepared for questions from the buyer. 

3. How M&A Due Diligence Gets Started

Once a letter of intent is signed with a target to exclusively negotiate on an acquisition, confirmatory due diligence begins. This phase is often driven by the buyer and/or the buyer’s advisors. Some buyers perform due diligence in-house, but most buyers involve an outside advisor to represent their interest and it is often a requirement of the buyer’s capital provider.

However, it is just as important for the seller to confirm their understanding of the buyer during this phase. After all, the end goal is a successful partnership with no buyer or seller remorse . Like dating – there will be many twists and turns, but most can be anticipated and/or avoided with proper planning. And properly planned due diligence can help prevent deal fatigue by both parties.   

4. Understanding Risk Assessment & Potential Pitfalls

Performing a risk assessment at the onset of due diligence can save time down the road, help identify what matters most, minimize the unexpected, and allow for a more efficient process. Most due diligence assessments start by looking at the “why” behind doing this transaction in the first place. What are the goals and objectives of this partnership? How will everyone define and measure success for this deal? Once these are clearly identified – next, it’s important to think about and document the potential pitfalls that could undermine the “why” of doing the deal. 

Here are some top pitfalls to watch for:

Culture clashes. Integrating people from different corporate cultures can be one of the biggest challenges and potential pitfalls to a successful deal. Healthy work cultures, team chemistry and individual personalities of senior-level leaders aren’t identified on financial spreadsheets. These are qualities that need to be examined and evaluated closely and are proven to impact M&A deal success rates. 1
HR issues. Every organization handles staffing differently – ranging from the classification of workers (i.e., full time, part time, independent contractor) to salary structures for sales personnel to restrictive covenants. It’s important to understand how a partnership may impact those existing employment structures.
Lack of strategic alignment. M&A can be a powerful tool in helping both parties achieve their strategic goals. However, it is important to ensure that both parties are aligned on their vision and objectives. Without a clear strategic fit, the deal may not deliver the benefits as anticipated by both parties.
Pro-forma disagreements. Pro forma EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization) is often a primary driver of valuation in most deals. Therefore, sellers are motivated to be aggressive in their pro forma assumptions, and buyers are motivated to take a more conservative approach. It is important for both parties to understand the methodology utilized in building the pro forma and agree on how any synergies or shared costs will be treated. Not only is this important for the initial valuation, but also for earnout purposes if contingent payments are part of the deal structure.

5. Resolving Issues in the M&A Due Diligence Process

As items are identified during the due diligence process, whether positive or negative, keep a scorecard and compare with the initial risk assessment. Keep track of how issues are handled as they arise. After all, in any partnership it is not a matter of “if” issues will arise but rather “when” they will arise. Take note on how collaborative or not your potential partner is being in determining an agreeable solution. It is better to gain this level of understanding during the engagement phase rather than after a completed transaction. 

Every deal carries a certain amount of uncertainty and risk. However, properly planned and executed due diligence can help minimize the risk for potential issues post transaction and can help keep emotions in-check. Documenting, quantifying, and analyzing the risks during diligence can help make buyers and sellers more comfortable on the day they are signing or making that wire transfer.  

Investment banking services in the USA offered through MarshBerry Capital, LLC, Member FINRA and SIPC, and an affiliate of Marsh, Berry & Company, LLC, 28601 Chagrin Blvd, Suite 400, Woodmere, OH 44122 (440) 354-3230

Sign Up For Today's ViewPoint Blog

Hear from consulting experts on the latest insurance brokerage industry trends and insights to help you navigate the complexities of advancing your firm at every stage of ownership.

1 https://www.mckinsey.com/capabilities/m-and-a/our-insights/the-flip-side-of-large-m-and-a-deals

MarshBerry is a global leader in investment banking and consulting services, specializing in the insurance brokerage and wealth management sectors. If your firm seeks expert advisory guidance to refine your business strategies, drive sustainable growth, or facilitate a sale, MarshBerry is the ideal partner to support you in making these critical business decisions. Collaborating with a trusted advisor who deeply understands your business and the industry can help you maximize value at every stage of ownership.

H2 2024 m&a activity for insurance brokerage starts off strong, key factors in balancing profit and revenue for business valuation, q2 2024 earnings wrap-up: public insurance brokers continue to see strong results, revenue for the top 100 insurance brokers in the u.s. continues to grow.

Netherlands
LinkedIn Twitter Facebook Instagram

Featured photo for MarshBerry Impact Summit

M&A 101: The role of due diligence in mergers and acquisitions

PitchBook Category: Investment Analysis

This article is one in a four part series on Mergers and Acquisitions from PitchBook.

—————————————————————————————————-

Brett Dearing, Senior Director at BNY Mellon Wealth Management, is a Certified Exit Planning Advisor and a Certified Merger & Acquistion Advisor with over 27 years of experience. His areas of focus include platform preparation, contingency planning and succession planning. He specializes in M&A, recapitalization, stock purchases and asset sales.

We caught up with Dearing to learn more about the basics of due diligence with respect to mergers and acquisitions for the fourth installment of PitchBook’s M&A 101 series. The interview below is edited for length and clarity.

PitchBook: What is due diligence?

Dearing: It is an evaluation process used by an interested buyer to better understand the selling business and the risks in potentially becoming an owner of that business, and to see if the information stated in a document referred to as a confidential information memorandum (CIM) checks out. There is a legal component that makes up about 10% to 20% of the process. The remaining 80% to 90% of this evaluation process focuses on the intangibles. The process is not only about checking financials and projections for the business, but also gaining a strong understanding of the business model; how the company conducts business, works with and services customers; vendor relationships; the talent of employees; and most importantly, how your business competes against other businesses in that industry.

A lot of times business owners are reluctant to share negative information about their company. They want to put their best foot forward, but I always share early on in my engagements that everything will come out in the due diligence process, that it’s better to get in front of the potential issues and control the narrative. A good rule for business owners to remember is that you don’t want a potential buyer to find out about potential problems in your business for the first time in due diligence. They should be disclosed ahead of time with an executable plan that you, your management team and advisors created to fix any pending issues—whether the interested buyer continues and purchases the business or not.

Why is due diligence important to the M&A process?

A lot of people will answer the question with something like, “to get the seller the best deal,” or some will say, “to get the most money for the buyer.” To some degree, these answers are both correct. However, the reason due diligence is important to the M&A process from a buyer’s perspective is to better understand how the business, its owners and its management operate. The due diligence process helps us understand synergies, potential scalability of the business with enhanced operations and more access to customers from the buyer’s company. Potential buyers will also look at ways to reduce the overall expenses of the business to increase profitability.

In my experience, it is important to remember the seller should have a business preparedness assessment conducted before even engaging an investment banker. This assessment will identify potential value-detractors in your business, as well as assisting in the preparation of key documents, business plans, growth plans and overall preparation for the M&A process. PricewaterhouseCoopers conducted a study that showed only a 20% to 30% success rate for transition planning by business owners. On average it could take 12 to 16 months to prepare a proper transition plan by a certified exit planning advisor. The study went on to conclude that a lack of pretransition planning was a large contributor to eight out of 10 companies failing the M&A process.

Who carries out due diligence?

Usually it is the buyer and their third-party advisors that carry out the actual due diligence. The process of due diligence can last from 30 days to, in some complex cases, 90 days. The third-party advisors will spend time at the main headquarters of the business under review, going through prepared information. These third-party advisors hired by the potential buyer may include a CPA firm for accounting and tax review, industry consultants to review the company’s business model and future opportunities, attorneys for legal review of the due diligence process, environmental consultants and labor attorneys—just to name a few that will be hovering around the office and the prepared data room reviewing documents.

When in the M&A process do buyers and sellers engage in due diligence?

There are five steps in the M&A process:

Exit Planning is the process where the business owner has decided to sell the business and is looking to get the business and the financial aspects of the transaction prepared to maximize enterprise value and after-tax proceeds while personally preparing the owner for the life transition
Preparation is where the transaction team begins the process of getting information together, reviewing the strategic plan for the business, material contracts, preparing audited/reviewed financial and accounting reports and the CIM
Formal Marketing is where your investment banker will send out teasers to potential buyers, negotiate confidential agreements, distribute the CIM to potential buyers, finalize the data room, complete a detailed management presentation, engage bidders and receive preliminary letters of interest (LOI)
Due Diligence & Final Bids is where the investment banker and team will assess and prioritize nonbinding bids, invite a number of bidders (three to 10) for a management presentation, site visit and access to the data room, conduct management meetings, set a deadline for offers with committed financing and circulate draft contracts
Negotiation & Closing is where you receive firm offers with marked-up contracts, select the best offer, negotiate the sale and purchase agreement and ancillary contracts, set up a last round of final due diligence, execute contract(s) and fulfill conditions leading up to closing (regulatory, accounting and legal). Up to this point, before getting to negotiations with an interested buyer, the owner could be six to eight months into the M&A process. On average it could take up to 12 months to complete and finalize the sale. There are usually two rounds of due diligence: phase one, which happens after the LOI is received and the potential buyer(s) are interested in moving forward. When you receive an LOI, there is usually a price associated with the interested buyer. As an example, let’s say the offer price is $120 million. This price, 90% of the time, will be the highest price you receive from the buyer. Within the due diligence process if the interested buyer finds issues with the business, which is defined as risk of ownership, they will look to discount the original price. The discount caused by the issues found in due diligence can impact up to 10% to 30% of the offer price, which in this case would be between $12 million and $36 million in discounts. The discounts would impact the final offer price range down to $108 million to $84 million, respectively, from the original offer of $120 million. It is easy to see how due diligence can become a major cause for a transaction falling apart.

Where does due diligence take place?

Due diligence is conducted in two places:

A data room
On-site with the business owner

A data room is cloud-based centralized file sharing system set up by the seller or the buyer where data is stored for review. The data in the data room is usually a compilation of requested information by the buyer. Third-party advisors representing the buyer will use the data room to conduct due diligence. In the case where there are ultra-sensitive documents, they may be withheld until later in the process. The data room has a file system that may be organized by financials, business plan, legal documents, growth plan, management presentation, etc. In phase two due diligence, the final phase of due diligence, there is a need for third-party advisors to conduct due diligence on-site. This may include environmental, labor and business model/management due diligence. This on-site due diligence can take up to 3-6 weeks or longer.

Examples of a few of the documents requested in the due diligence process include:

1. The last three fiscal years and the current year to date:

Company financial statements
Breakdown of sales by product/service group (in both dollars and units)
Sales and gross margin for top 25 customers
Gross margin by major product/service group
Breakdown of the cost of goods sold (e.g. material, labor, overhead), depreciation included in COGS
Breakdown of general and administrative expenses
Breakdown of selling expenses
Product development expenses
Details of any extraordinary one-time or nonrecurring items in historical financial statements
Accounts receivable aging report, write-off & bad debt history
Inventory valuation and inventory write-down history
Accounts payable aging report

2. Next year’s budget 3. Current strategic plan and five-year forecast with detailed assumptions 4. Summary of terms and covenant of existing indebtedness 5. Commitments for pending and proposed major capital projects 6. Description of major capital projects over the past three years including dollar amounts 7. Capital budget for the next three years

Like most coaches would say to their players, “The game is won in practice and in preparation for the game.” The due diligence process is set up for success through exit planning and having a real transition plan leading up to the M&A process. The M&A process is very challenging and one that most business owners are not prepared for. My parting advice: “Don’t leave money on the table.”

When selling your business, there is usually a multiple range of net earnings before EBITDA. Solid preparation and transition planning can raise offers to the higher end of the multiple range—working out to be millions of dollars. In addition, exit planning could add an “additional turn,” or even higher multiple exceeding the top range of the multiple for the seller. Take advantage of having a well-thought-out transition plan. You only have one opportunity to maximize the enterprise value of your business before the M&A process.

Take me to:

M&A 101: The difference between mergers and acquisitions
M&A 101: What investment bankers do in mergers and acquisitions
M&A 101: What antitrust law means for mergers and acquisitions

Read the article at PitchBook here .

Identify your path to CFO success by taking our CFO Readiness Assessmentᵀᴹ .

Become a Member today and get 30% off on-demand courses and tools!

For the most up to date and relevant accounting, finance, treasury and leadership headlines all in one place subscribe to The Balanced Digest .

PitchBook is a financial technology company that provides data on the capital markets to help professionals discover and execute opportunities with confidence and efficiency. We collect and analyze detailed data on the entire venture capital, private equity and M&A landscape—including public and private companies, investors, funds, investments, exits and people. Our data and analysis are available through our suite of products (the PitchBook Platform), industry news and in-depth reports.

Departments

Contributors
CFO Ed-Talks
Terms of Use

Get Rewarded for Opening an Enterprise-Level VDR.

Open an enterprise data room and CapLinked will pick up the tab on a luxury reward of your choice.

Virtual Data Room

CapLinked API

Integrations

Digital Rights Management

FTP Alternative

Secure Document Sharing

Legal Compliance

Document Management

Virtual Data Rooms

Due Diligence Data Room

Bankruptcy and Restructuring

Asset Sales and Purchases

Biotech and Life Sciences

Go beyond outdated help tickets.

CapLinked Blog

></center></p><h2>M&A Due Diligence: A Complete Breakdown</h2><ul><li>September 4, 2024</li><li>Uncategorized</li></ul><p><center><img style=

Whether hostile or friendly, mergers and acquisitions (M&As) are a trademark of the business world. These big deals often garner media attention and can take months–even years–to complete. An M&A can cost billions of dollars, depending on the parties and assets involved.

According to Statista , “As of December 2022, the acquisition of Mannesmann AG [a German manufacturing company] by Vodafone Air Touch PLC [an American telecommunications company and predecessor of what became Verizon Wireless after a series of subsequent mergers] in 1999 was the largest all-time merger and acquisition (M&A) deal with transaction value amounting to 202.8 billion U.S. dollars.”

Some quick math on the Federal Reserve Bank of Minneapolis’ Inflation Calculator estimates that this deal would now be valued at over $382.8 billion. It can be dizzying to even think about that sum, let alone imagine the due diligence process and manual administrative burden of sealing such a deal, especially with the tech available in the nineties.

In today’s modern business world, what does the M&A process look like in terms of conducting due diligence? We can’t sugarcoat it—it’s still very complicated. However, following a checklist and getting the right tools on your side can mitigate risks, reduce friction, and contribute to the mutual profitability of any merger.

Let’s break down the M&A due diligence process. First, though, let’s highlight the importance of due diligence and sort out which parties are responsible.

Table of Contents

Who’s Responsible for M&A Due Diligence and Why It’s Important

In an M&A deal, the buyer is typically the one doing the most vigorous due diligence research with the goal of ascertaining the true financial position of the company and discerning whether or not an acquisition would be profitable. That being said, M&A due diligence is not limited to the buyer.

“Due diligence is conducted to provide the purchaser with trust. However, due diligence may also benefit the seller, as going through the rigorous financial examination may, in fact, reveal that the fair market value of the seller’s company is more than what was initially thought to be the case,” says the Corporate Finance Institute . “Therefore, it is not uncommon for sellers to prepare due diligence reports themselves prior to potential transactions.”

In the case of a merger, due diligence is especially critical for both parties involved because each needs to be fully aware of the state of each other’s financial situation and operations before moving forward with a merger. As with any viable relationship, there should be transparency, compatibility, good communication, and a willingness to compromise.

Due diligence is a crucial phase in the M&A process that allows both parties to collect data, uncover the facts, assess the value of the deal from a legal and financial perspective, and decide whether or not it’s worth pursuing further.

Conducting thorough M&A due diligence not only works to protect companies from entering into an unprofitable deal but also mitigates the risks of legal repercussions and litigation.

How can merging parties or companies planning to acquire another demonstrate due diligence when navigating the complex M&A process?

A Comprehensive Checklist for M&A Due Diligence

Once you’ve reached the M&A due diligence stage, you’ve already ticked some major boxes in the M&A process , but now it’s time to get down to the nitty-gritty. Gear up to do some digging and make some spreadsheets.

Here are five critical areas for M&A due diligence and questions to answer before moving forward with a deal:

Legal Due Diligence

Buyers should investigate every nook and cranny of a company’s legal status to identify weak spots. The goal is to verify that every aspect of the firm is operating in compliance with legal requirements.

“Legal due diligence entails an in-depth investigation of the target company’s current and historical legal status,” says global law firm Foley & Lardner LLP . “It involves evaluating legal structures, ownership, securities laws compliance, stockholder agreements, management, and its authorities to enter into the transaction. Material contracts, agreements, and obligations should go through a thorough due diligence process to identify any potential liabilities.”

Questions to answer include:

Are there any red flags signaling potential fraud or non-compliance?
Are there any authorizations from regulatory bodies necessary to approve this deal?
Is there any current or past litigation against the company, and is there any potential for messy post-merger lawsuits?
Does the company own any trademarks, patents, intellectual property, trade secrets, or other assets that must be legally acquired?
Is the company operating in compliance with any relevant regulations, such as environmental or trade regulations?
Does the company have any binding contracts or obligations to other firms or stakeholders?

Financial & Tax Due Diligence

Analyzing financial statements and understanding a company’s financial position is foundational to the M&A due diligence process.

“Financial due diligence audits a company’s financial statements and books to make sure that there are no irregularities and that the company is on solid financial footing,” says Investopedia . “Tax due diligence looks at the company’s tax exposure, whether it may owe any back taxes, and where it can reduce its tax burden going forward.”

Have the company’s financial and tax documents been audited by a third party?
What do trends from the financial documents (balance sheets, cash flow statements, profit & loss reports, payroll, etc.) reveal about the firm’s financial position and prospects?
What are the company’s assets and liabilities?
Have realistic financial projections been made?
Does the company’s IT landscape, properties, or other aspects need significant upgrades?
How is the company’s budget allocated?
Who are the current customers and competitors in the market?
What products and services does the company offer, and what are the pricing models?
What are the operational costs?
What is being done to market the company’s products and services?
How are employees compensated, and what benefits do they receive?

Cyber Due Diligence

Lack of cybersecurity can be a severe liability for firms. When conducting M&A due diligence, buyers and sellers must prioritize data security and ensure that regulations are being followed.

“Cyber due diligence involves identifying and addressing cyber risks across a company’s information and data network,” explains Forbes . “Cyber due diligence helps determine if the business is adhering to the strict compliance and regulatory requirements when it comes to handling and protecting its data. This should include assessing the safe transfer of data in the case of an M&A.”

Are there any relevant data laws governing how sensitive data–including employee and customer data–can be shared between the two companies?
Is the company’s website GDPR compliant, and do they have comprehensive privacy policies and terms and conditions?
How does the company process, store, and handle customer data?
What is the company’s current IT landscape? Has it invested in cybersecurity?

Operational Due Diligence

Even if the numbers add up and a company seems to be operating in compliance with the authorities, an M&A can still fail if the two parties don’t take time to conduct operational due diligence.

“Operational due diligence provides significant advantages,” advises the Institute for Mergers, Acquisitions & Alliances . “A true understanding of the business and an early grasp of short-term value levers leads to more benefits realized faster. Looking below the surface is the key to making sure the soon-to-be purchased company provides tangible short-term synergies and quick-win improvements.”

Who are the current executives, and what will a merger look like?
What are the standard operational procedures, and how will they mesh?
What plan and capital are in place to successfully merge the operations of the two companies?
How will various departments (sales, purchasing, marketing, compliance, etc.) unite for an improved bottom line?

Cultural Due Diligence

Companies that go above and beyond to address M&A due diligence in the aspect of company culture are more likely to have a successful merger, avoiding disgruntled employees and talent retention issues.

“Cultural due diligence is crucial because it helps identify potential cultural clashes and integration challenges that could undermine the success of a merger or acquisition,” says the M&A Leadership Council . “By understanding the cultural differences and similarities between the merging organizations, companies can develop strategies to align cultures, foster collaboration, and minimize integration risks, ultimately improving the chances of a successful merger or acquisition.”

What reputation does the company have in its industry, and what is the public’s perception?
What are the company’s brand, cultural values, and ethics, and are they compatible?
What will be done to ensure that both workforces can unite effectively?
What measures will be taken to manage public relations throughout the M&A process?
What training, monitoring, and resources will be directed toward aligning the company’s post-merger culture?

M&A Due Diligence Software – How Virtual Data Rooms Promote Success

M&A due diligence is a painstaking process, but it pays for itself in the end – whether by saving you from the losses of an unprofitable M&A or by helping you identify a worthwhile investment and acting as a map to a successful merger.

Each of the above aspects of M&A due diligence requires a vast amount of data collection, analysis, and collaboration. Both buyers and sellers stand to benefit greatly from leveraging M&A due diligence software.

CapLinked offers cutting-edge M&A due diligence software to help you navigate the complexities of a merger or acquisition. Our virtual data rooms (VDRs) give you an ultra-secure, user-friendly portal for organizing, storing, and accessing all of the information you collect during the M&A due diligence process while giving you a transparent and centralized location for collaboration as you calculate your next move.

“For all transactions, the objective of due diligence is to assist a buyer in determining whether to acquire a target, if so, for how much, and to allow the buyer to ascertain the target’s risks, potential combination benefits, and overall strategic fit,” says the Institute of Mergers, Acquisitions & Alliances . “To help a buyer answer these questions, information related to a target company are made available in a data room during the due diligence stage of a transaction. Thus, the data room is an integral part of the due diligence process.”

Get the power of virtual data rooms on your side. Try our M&A due diligence software for free to see how it can help pave the way to success on your next merger or acquisition.

How AI will impact due diligence in M&A transactions

Senior Manager, International Tax and Transaction Services | EY Switzerland

Head Real Estate Transaction Tax, Swiss Certified Tax Expert and Swiss Attorney-at-Law. Supports clients in all M&A and real estate tax related questions as well as tax litigation | controversy.

Show resources

Artificial intelligence (ai) is expected to significantly transform the mergers and acquisitions (m&a) due diligence landscape. ai-powered tools are constantly improving in automating a wide range of tasks, from data collection and analysis to risk identification and quantification. .

In the near future, AI is expected to significantly improve the efficiency and effectiveness of the due diligence process by helping to identify potential problems and to make informed decisions earlier in the M&A transaction.
This requires a seamless implementation of AI technology into existing M&A due diligence procedures.
The future impact of AI on M&A due diligence goes beyond just optimizing the process, as legal concepts such as "fairly disclosed" often reference human knowledge, capabilities, and attention.

I n 1770, Austrian inventor Wolfgang von Kempelen presented the "Mechanical Turk", a chess-playing machine in the appearance of a man wearing a traditional Turkish dress. In front of an astonished and fascinated audience of monarchs and nobility, the machine won almost every game - even against seasoned chess players. The "secret" behind the machine was rather profane: the "Mechanical Turk" was steered by a person hidden in the box underneath the mechanical chess player.

More than 250 years later, another invention has captivated the audience: particularly through the development of Large Language Models (LLMs) such as ChatGPT and Bard, (generative) AI became tangible to a broad public and a wide range of businesses. This article outlines the technology's anticipated uses and limits from an M&A practitioner's perspective.

The field of play: current skills and limitations of AI in a due diligence context

The main benefit of software algorithms is their ability to mine large amounts of documents, contracts, and financial data. Accordingly, they can be trained to spot patterns, anomalies, or inconsistencies in the data available. These possibilities are neither new nor revolutionary as they have been used for years in simplified forms ( e.g ., in e-commerce, search engines, and by tax authorities). However, predominantly two areas within AI accelerate the use of this technology for a broader range of tasks:

Machine learning is a subfield of AI that focuses on developing algorithms that can learn from data without explicitly being programmed for this (mainly through reinforcement learning). Improvements in AI capabilities to learn without human intervention are essential for its efficient and cost-effective use.
Natural language processing (NLP) deals with the interaction between computers and human language. A subfield of NLP is the area of large language models (LLMs) used to generate and "understand" human language.

AI on the rise

Goldman Sachs’ forecast for global AI investments by 2025 1

From an M&A due diligence perspective, there are still some relevant limitations to the use of AI algorithms, in particular:

Accessibility of information: data in virtual data rooms (VDRs) is usually well protected and the sell side is often not willing to have their confidential information used for AI training. Also, the VDR provider is generally mandated by the seller. Hence, developing and training algorithms for M&A due diligence may be very limited "on the fly" in running transactions. Instead, this process may be based on a vast amount of public and anonymized data.
Reliability and data protection: LLMs still tend to bluntly "invent" facts (often referred to as "hallucinations") or to leak parts of the input data they have been trained on. While this is not a considerable issue if the LLM is being used to plan a family vacation or to compose Christmas cards, it is a showstopper for using sensitive data in a VDR and relying on AI findings.

The opening: analysis of publicly available information and setting up a VDR

For the buy side , the first step in a due diligence process is often to delve into the public sources available on the target. The advantage of such outside-in due diligence is the (often vast) availability of information. Further, the buy side can perform a first analysis of the target without zeitnot (time pressure). At this stage, generative AI can examine public sources such as press releases, ad-hoc announcements, financial reports, prospectuses, and media coverage for ongoing tax and legal disputes. The issues identified in such an AI-generated report may serve as customized input for the information request list and the management interviews in the due diligence process.

On the sell side , setting up a VDR is often time-consuming and burdensome, tying up substantial operational resources. AI algorithms can streamline the process by automatically organizing the uploaded documents. Further, the software may support the team by checking the documents for sensitive information and directly proposing redactions. This capability provides considerable time and efficiency benefits to the sell side, particularly for transactions involving many documents with employee details, competitively sensitive information, and intellectual property.

The middlegame: VDR due diligence

Once a VDR has been opened to the potential buyer(s), AI can play to its primary strength by detecting gaps and providing summaries of the documents uploaded. Both make extracting relevant information easier for the due diligence teams, particularly on larger transactions and across different languages.

Example: The annual report mentions that the target has sold a real estate property in FY 2022. AI can pick this up autonomously and check whether all the documentation that is common in connection with such a sale is available. In seconds, the software could flag a missing notarial deed or a tax declaration where the purchase price does not match the amounts in the financial statements.

The limiting factor is, once again, the availability of relevant data to train the AI. While there are sufficient precedents for targets involved in real estate transactions, other interdependencies are more challenging to spot for AI algorithms. Examples are the various permissions required for staff leasing and medical businesses.

One area with significant potential is the analysis of legal documents. Well-drafted agreements have a precise and logical structure similar to software code, using largely standardized language. Current AI-powered due diligence software can already look for critical clauses such as "change-of-control "and "non-compete" provisions in the target's contracts.

Hence, AI software could identify potential issues and risks such as:

The target has paid a dividend without deducting withholding tax. No treaty clearance and/or related tax forms are available in the VDR.
The target has sold a subsidiary in FY19 to an unrelated third party. The underlying share purchase agreement (SPA) has several unusual, buyer-friendly indemnity clauses.
Three of the target group's credit facilities have "change-of-control" clauses, requiring the respective entities to seek a waiver for the transaction.
The board resolutions in FY18 are not compliant with applicable corporate rules as they lack the necessary signatures.
The target did not impair trade receivables against a distressed third party .
There are significant off-balance sheet items due to ongoing product liability litigation in the US.

After identifying a potential risk, the next step is determining its probability and assessing its impact. For this, humans rely not only on legal and financial research but also on "soft" information such as their experience from similar cases, discussions with colleagues and authorities, academic training, as well as familiarity with human reactions. AI algorithms need access to this "soft" information in a digestible form, allowing them to learn the patterns and to reproduce the risk assessments.

Example: For not (or not timely) submitting a withholding tax form, the law provides fines of up to EUR 7,000, depending upon the taxpayer's level of culpability in the individual case. However, the tax authorities' unpublished practice is consistently applying the maximum fine in all cases. Unless AI is trained for this specific case or has access to a large number of fine notifications allowing it to identify the (questionable) pattern, risk quantification for a non-submitted withholding tax form may not be accurate.

Overall, compliance and (potential) findings are regularly discussed in management interviews. Such conversations are an essential source for experienced M&A practitioners to get an understanding of the target's risks and procedures. While it is still difficult for AI algorithms to participate in such management interviews, the written Q&A process may partially bridge this gap.

In the last step, generative AI can produce first drafts of due diligence reports based on the confirmed findings as well as on additional inputs from the due diligence team.

How EY can help

Transaction tax, law and workforce advisory services.

For companies considering a transaction, it is critical to develop a holistic strategy to properly react, recover and shape their futures. Focusing on the tax, legal, and workforce consequences of transformational change, we help you maximize value with integrated solutions.

A close collaboration between AI software and experienced humans will be vital to offer top-notch M&A due diligence services in the future.”

In summary, AI algorithms could frame data in the VDR in a format that significantly facilitates the due diligence team's work. Also, the software can highlight potential due diligence issues based on training and public knowledge. Assuming that there will be ways to overcome the privacy issues and the "hallucinations", the primary challenges are still the availability of relevant data and, at least in the medium term, AI's access to "soft" information. Thus, a close collaboration between AI software and experienced humans will be vital to offer top-notch M&A due diligence services in the future.

The endgame: impact on transaction agreements

The impact of AI on due diligence goes beyond just making the process more thorough and efficient. One considerable instance is the interplay with the disclosure concept in transaction agreements. In a nutshell, "European style" agreements regularly exclude the seller’s liability for damages arising from "fairly disclosed" facts and circumstances:

Example clause: "Fairly Disclosed shall mean the disclosure of a fact or circumstance in a manner which allowed or should have allowed an experienced business person, and therefore Buyer and its advisers, to reasonably identify and assess the impact of such fact or circumstance on the Target Group Companies."

With AI advancing in M&A due diligence, what will be the benchmark for a "fairly disclosed" fact? Will it still be, as in the example clause, the skills and abilities of an experienced human, thus benefiting buyers using AI algorithms in due diligence? Or, in more general terms, will due diligence performed without a close interplay of human and AI capabilities still be considered "good practice"? Also, these considerations apply mutatis mutandis to every legal concept that references human knowledge, capabilities, and attention.

Returning to the "Mechanical Turk", one could argue that it was an illusion, used fraudulently to deceive an unsuspecting audience. But there is another point of view: the machine and the human working together produced a better result than either could have achieved. In this sense, the "Mechanical Turk" is also a metaphor for using AI algorithms to deliver better and more sophisticated work products. This requires tax, legal, and financial advisors to stay on top of the developments and to implement new technologies seamlessly into existing due diligence procedures.

In a sense, a chess-playing puppet foreshadowed the rise of AI in commercial use.

https://www.goldmansachs.com/intelligence/pages/ai-investment-forecast-to-approach-200-billion-globally-by-2025.html

About this article

Media Relations

Connect with us

Our locations

Legal and privacy

Transparency report

Request for proposal (RFP)

EY | Assurance | Consulting | Strategy and Transactions | Tax

EY is a global leader in assurance, consulting, strategy and transactions, and tax services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

EYG/OC/FEA no.

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

Do you have any questions?

Welcome to EY.com

In addition to cookies that are strictly necessary to operate this website, we use the following types of cookies to improve your experience and our services: Functional cookies to enhance your experience (e.g. remember settings), Performance cookies to measure the website's performance and improve your experience , Advertising/Targeting cookies , which are set by third parties with whom we execute advertising campaigns and allow us to provide you with advertisements relevant to you .

We have detected that you have enabled the Do Not Track setting in your browser; as a result, Advertising/Targeting cookies are automatically disabled.

You may withdraw your consent to cookies at any time once you have entered the website through a link in the privacy policy, which you can find at the bottom of each page on the website.

Review our cookie policy for more information.

Customize cookies

I decline optional cookies

Legacy Modernization
Tech Executive Advisory
Solutions Advisory
Cybersecurity and Data Privacy Strategy
Technical Due Diligence
Custom Software Engineering
Cloud Native Development
MVP Software Development
Gen AI Product Development
Mobile App and Product Development
Intelligent Automation
IoT Consulting Services
Custom Software Development for Startups
Global Delivery and Staff Augmentation
Teams as a Service
CTO and VP of Engineering On Demand
Hiring Optimization
AI Team as a Service
AI Services & Readiness
GenAI Services
Data Strategy & Governance
Data Modernization
Data Engineering
Financial Services Customized and innovative software solutions for financial services, lending and payment companies
Healthcare Elevate patient care with our advanced technology solutions
Private Equity Enhance profitability and optimize operations with cutting-edge, next-generation solutions.
Banking Get expert technology consulting to accelerate your innovation with the latest banking solutions
E-Mobility Elevate your e-Mobility projects with the experienced electric software engineers
Insurance Insurance expertise, solutions and the right talent to help your organization be a leader
Manufacturing See your business in a whole new light and secure its future
Agriculture & Food Boost your agrifood operations with strategic business enhancements.
Case Studies Take a look at our client success stories
Blog Find all the latest tech insights on our Blog
Whitepapers Find detailed resources and technical guides
Podcasts Listen to our insightful business technology podcast
Events Check on upcoming networking events, conferences, tradeshows
Videos Watch all the latest tech insights in our videos
Our story Learn the story behind the Sphere Partners team
Careers Browse our open vacancies to find your next challenge
Executive Team Meet our executive leadership team
Partners View our network of technology and business partners
Testimonials Hear what our clients think about us, from our clients

Due Diligence Case Study for Mergers & Acquisitions

The client asked Sphere’s leadership team to evaluate a B2B transportation hub’s technology in preparation for an acquisition. Read our M&A due diligence case study below to learn more.

In an interesting turn of events, the client placed more value on the business assets (the customers and vendor network) than the technology that ran the business. As a result, the scope of this due diligence was maintenance focused – what are the costs to maintain the technology, transition the customers, then decommission the technology over a 12-18 month period?

The target company used an outdated operating-system as well as an external software development team. The target’s small internal team knew very little about the inner-workings of the technology. It was also learned that the external development team’s agreement included a revenue share that complicated a potential acquisition and created serious financial risk:

Finding talent familiar with the dated technology would be difficult and expensive
The old operating system was nearing end-of-life forcing an immediate migration to the cloud.
Security issues from the old OS required additional cybersecurity assessments as part of the OS migration
Re-negotiation of the external development team’s contract was mandatory.

The client was willing to take a number of risks because the business value of the acquisition outweighed the technology limitations. However, a risk mitigation plan was put into place that included:

Renegotiate the external development team’s contract
Migrate from the outdated OS to AWS
Following the OS migration, lock-down security, and run “as is” for 12 months until the transition is ready

For each risk, a mitigation plan was put in place. Understanding the risks, the client made the decision to acquire the business and technical assets of the target. The OS migration was successful. Technology mergers and acquisitions can be very lucrative if you do your due diligence.

Our M&A technology consultants bring over 20 years of experience to provide an unbiased assessment of your M&A targets’ tech stack, software architecture, security, and technical debt to identify and assess risks. Find out more about our technical due diligence services here. Find out more about our technical due diligence services , strategy & consulting services , software development , and more. Don’t hesitate t o call us if you have any questions about our due diligence case study or the M&A due diligence process .

The very latest technology news and developer insights, delivered right to your inbox.

Chicago’s Tech Leaders Discuss AI, Digital Transformation, and the Road Ahead

Small Language Models (SLMs): Tiny Outperformers

Crafting Excellence: Building High-Performing AI Teams

Sphere Partners with JFrog to Accelerate Software Delivery and Strengthen Security

Digital Twins: Use Cases, Technologies, and More

Business development

Billing management software
Court management software
Legal calendaring solutions

Practice management & growth

Project & knowledge management
Workflow automation software

Corporate & business organization

Business practice & procedure

Legal forms

Legal form-building software

Legal data & document management

Data management
Data-driven insights
Document management
Document storage & retrieval

Drafting software, service & guidance

Contract services
Drafting software
Electronic evidence

Financial management

Outside counsel spend

Law firm marketing

Attracting & retaining clients
Custom legal marketing services

Legal research & guidance

Anywhere access to reference books
Due diligence
Legal research technology

Trial readiness, process & case guidance

Case management software
Matter management

Recommended Products

Conduct legal research efficiently and confidently using trusted content, proprietary editorial enhancements, and advanced technology.

Accelerate how you find answers with powerful generative AI capabilities and the expertise of 650+ attorney editors. With Practical Law, access thousands of expertly maintained how-to guides, templates, checklists, and more across all major practice areas.

A business management tool for legal professionals that automates workflow. Simplify project management, increase profits, and improve client satisfaction.

All products

Tax & Accounting

Audit & accounting.

Accounting & financial management
Audit workflow
Engagement compilation & review
Guidance & standards
Internal audit & controls
Quality control

Data & document management

Certificate management
Data management & mining
Document storage & organization

Estate planning

Estate planning & taxation
Wealth management

Financial planning & analysis

Financial reporting

Payroll, compensation, pension & benefits

Payroll & workforce management services
Healthcare plans
Billing management
Client management
Cost management
Practice management
Workflow management

Professional development & education

Product training & education
Professional development

Tax planning & preparation

Financial close
Income tax compliance
Tax automation
Tax compliance
Tax planning
Tax preparation
Sales & use tax
Transfer pricing
Fixed asset depreciation

Tax research & guidance

Federal tax
State & local tax
International tax
Tax laws & regulations
Partnership taxation
Research powered by AI
Specialized industry taxation
Credits & incentives
Uncertain tax positions

Unleash the power of generative AI through an accounting and tax research tool. Find answers faster with dialogue-based research and quick, on-point search results.

Provides a full line of federal, state, and local programs. Save time with tax planning, preparation, and compliance.

Automate work paper preparation and eliminate data entry

Trade & Supply

Customs & duties management.

Customs law compliance & administration

Global trade compliance & management

Global export compliance & management
Global trade analysis
Denied party screening

Product & service classification

Harmonized Tariff System classification

Supply chain & procurement technology

Foreign-trade zone (FTZ) management
Supply chain compliance

Software that keeps supply chain data in one central location. Optimize operations, connect with external partners, create reports and keep inventory accurate.

Automate sales and use tax, GST, and VAT compliance. Consolidate multiple country-specific spreadsheets into a single, customizable solution and improve tax filing and return accuracy.

Risk & Fraud

Risk & compliance management.

Regulatory compliance management

Fraud prevention, detection & investigations

Fraud prevention technology

Risk management & investigations

Investigation technology
Document retrieval & due diligence services

Search volumes of data with intuitive navigation and simple filtering parameters. Prevent, detect, and investigate crime.

Identify patterns of potentially fraudulent behavior with actionable analytics and protect resources and program integrity.

Analyze data to detect, prevent, and mitigate fraud. Focus investigation resources on the highest risks and protect programs by reducing improper payments.

News & Media

Who we serve.

Broadcasters
Governments
Marketers & Advertisers
Professionals
Sports Media
Corporate Communications
Health & Pharma
Machine Learning & AI

Content Types

All Content Types
Human Interest
Business & Finance
Entertainment & Lifestyle
Reuters Community
Reuters Plus - Content Studio
Advertising Solutions
Sponsorship
Verification Services
Action Images
Reuters Connect
World News Express
Reuters Pictures Platform
API & Feeds
Reuters.com Platform

Media Solutions

User Generated Content
Reuters Ready
Ready-to-Publish
Case studies
Reuters Partners
Standards & values
Leadership team
Reuters Best
Webinars & online events

Around the globe, with unmatched speed and scale, Reuters Connect gives you the power to serve your audiences in a whole new way.

Reuters Plus, the commercial content studio at the heart of Reuters, builds campaign content that helps you to connect with your audiences in meaningful and hyper-targeted ways.

Reuters.com provides readers with a rich, immersive multimedia experience when accessing the latest fast-moving global news and in-depth reporting.

Reuters Media Center
Jurisdiction
Practice area
View all legal
Organization
View all tax

APIs by industry

Risk & Fraud APIs
Tax & Accounting APIs
Trade & Supply APIs

Use case library

Legal API use cases
Risk & Fraud API use cases
Tax & Accounting API use cases
Trade & Supply API use cases

Related sites

United states support.

Account help & support
Communities
Product help & support
Product training

International support

Legal UK, Ireland & Europe support

New releases

Westlaw Precision
1040 Quickfinder Handbook

Join a TR community

ONESOURCE community login
Checkpoint community login
CS community login
TR Community

Free trials & demos

Westlaw Edge
Practical Law
Checkpoint Edge
Onvio Firm Management
Proview eReader

How AI for M&A due diligence is changing every aspect of the deal process

Introduction
1. How is AI Transforming the due diligence process?
2. AI is accelerating M&A deals
3. AI is ensuring greater accuracy and consistency
4. AI is enabling law firms to capture a greater share of business
5. AI is opening doors to strategically advise your client
6. Can due diligence truly be automated?
7. A new era for due diligence reviews
8. About the authors

Conducting due diligence can be a study of frustration. Tight timelines, high stakes, and, in some cases, disaggregated deal teams compound a deal’s complexity. When the client outsources the document review “grunt work” to a lower-cost regional firm or alternative legal service provider (ALSP), then hands over these reviews to their primary law firm to complete due diligence, it can be difficult to control quality and deliver superior services.

Artificial intelligence (AI) will change every aspect of this process. Indeed, the AI revolution is well underway and due diligence will never be the same. AI is speeding up the pace of deals while its level of document analysis is beyond the capacities of even the most dedicated attorney. It’s ensuring better consistency in diligence and eliminating redundancies. Most of all, AI-fueled diligence enables law firms to devote more time and resources to what matters most — offering value-added services to their clients.

How is AI transforming the due diligence process?

AI is accelerating M&A deals

Ai is ensuring greater accuracy and consistency, ai is enabling law firms to capture a greater share of business.

AI opens doors to strategically advise your client

Can due diligence truly be automated and how does it affect your role?

A new era with AI for M&A due diligence

Chapter One

How is AI Transforming the due diligence process?

Bulk review of assignment and change of control clauses. Request a demo of Document Intelligence .

AI is pre-trained technology designed with input by veteran legal professionals, so it hits the ground running in terms of document analysis. An AI sweep of a document upload will pinpoint the potential risk factors within minutes. AI will also search for and document any keywords or phrases the law firm seeks.

Artificial intelligence not only reduces the labor-intensive work that junior attorneys used to spend days on, but it also dramatically improves the quality of the work. Searches are deeper, document analysis is more thorough, and the process is much faster. For example, junior attorneys often need days or weeks to do contract summaries; now, they can generate them within seconds. This, in turn, empowers legal teams to do more accurate diligence reviews at a reduced cost and in a shorter timeframe.

Document Intelligence, a powerful due diligence software for mergers and acquisitions (M&A) deals, changes the legal tech game by using pre-built AI models that work for your business on day one. They’re expertly developed by Practical Law attorney-editors, domain specific, and continuously maintained with no upkeep required from you.

Using the power of AI within Document Intelligence, lawyers can classify, extract information, and analyze documents in more innovative ways. In turn, a client gets greater speed, heightened accuracy, and more cost savings — making trade-offs a thing of the past.

Chapter Two

Given the client’s tight deadlines and cost restrictions, document review must move quickly, so lawyers may only review a subset of documents. Consequently, some potential landmines may remain undiscovered. An incomplete and incomprehensive document review exposes the client to hidden risks, but this no longer needs to be the case.

Using the power of AI, Document Intelligence rapidly analyzes, categorizes, extracts, and delivers pertinent information from documents, even if the total volume is in the thousands. Artificial intelligence software scans a document and immediately breaks it down into searchable data while extracting critical clauses and essential obligations.

Intensive document review has been a slow, arduous process, which is doubly painful when you consider “time kills all deals.” With Document Intelligence, lawyers can conduct document reviews faster and more efficiently , which could radically alter review timelines. By reducing diligence costs, law firms can provide clients with lower estimates and offer a modernized M&A due diligence process . In turn, the client will have more spend potential with your firm.

Chapter Three

One executive customer put it this way, "Prior to adopting Document Intelligence technology, by missing one obligation it cost us six figures for something that should have been so simple.”

AI speeds up the pace of due diligence and document review, giving users a deeper insight into documents. It’s a level of discovery that can be strenuous for lawyers to achieve, even via a labor-intensive physical document review. Humans were not built to read hundreds of documents line after line, searching for a needle in a haystack when the needle may not even be there.

AI makes it far easier to organize and assess documents, automatically doing so upon uploading. A user can upload stacks of leases, contracts, spreadsheets, and licenses in a single batch and the system will classify them at once, even if there are multiple documents within a single PDF file.

AI changes and improves your firm’s priorities. Using AI for menial tasks gives you a more sophisticated ability to access and explore documents, which heightens a lawyer’s ability to find landmines. In the past, they may have missed something buried in a “non-essential” document that, in truth, held a serious potential risk — such as an expired patent, a non-compete clause, or a potential labor violation. AI analysis can better detect this.

One Document Intelligence user says that, concerning diligence review, "We hit a grand slam with a $4 million find: searching for a needle in a haystack when we didn’t even know the needle was there. This would not have been possible before we had Document Intelligence technology.”

Chapter Four

By providing incredible speed, sophistication, and cost-effective options, AI enables law firms to capture more of a client’s external spend. According to a recent study, Thomson Reuters noted that Document Review was among the top five tasks outsourced to ALSPs . With Document Intelligence as a tool in the toolkit, law firms can join ALSPs in addressing a gap in the market for more cost-effective, technology-driven legal work.

Law firms with AI systems can now offer competitively priced document review services that cost-conscious clients would normally outsource to an ALSP to save on costs. These clients seek transparency and certainty about prices, and given that AI-assisted document review is more efficient, they will gravitate toward innovative firms that provide this service.

According to the research above, some law firms recognize the potential of new business models to transform the industry and have established their own in-house ALSPs to win more document review business.

Not only is capturing a higher share of external spend great for a firm’s bottom line but keeping the entire diligence process under one roof may improve overall accuracy and quality. When one segment of the diligence process is done by an external ALSP and another by the client’s primary law firm, the process disaggregates. This heightens the potential for something critical to slip through the cracks.

Chapter Five

AI is opening doors to strategically advise your client

A law firm using AI also gains greater knowledge about a transaction. Running due diligence for an acquisition, the law firm acquires substantive insight into the target company — where its most significant vulnerabilities and strengths lie. Using AI means the firm can offer its clients more valuable and precise strategic advice.

Document review undertaken by AI and machine learning will detect significant clauses from deep within a document, where risk could be buried. Now a lawyer can quickly generate a report to tally up potential red flags and then, just as quickly, classify them by category and priority — for example, sorting vendor contracts from high to low potential risk.

Armed with this information, lawyers can then map out a detailed, strategic path for their client. They can show where the biggest threats to a deal are located and where the client’s priorities should lie in terms of neutralizing them.

As one user notes, “The Document Intelligence platform opened the door to numerous possibilities and opportunities for critical research projects, process improvements, and front-end automation.”

Chapter Six

Can due diligence truly be automated?

Incorporating AI into due diligence may present a career challenge to a junior lawyer. After all, up until recent years, much of an entry-level legal professional’s job has entailed grappling with document collection, organization, and analysis. AI will indeed automate many of these tasks, increasingly making some of this clerical work redundant.

However, that’s not to say that using AI for document review and retrieval removes human beings from the equation — far from it. AI is a tool: one that requires the skills of trained lawyers to employ it to its greatest capacity.

Take the M&A due diligence checklist : AI will enable lawyers to fulfill these tasks faster and more accurately. Yet lawyers will still be responsible for managing the flow of an M&A review and verifying that they complete all tasks correctly.

AI will speed up document collocation and sharpen searches; this transformation will clear out bottlenecks and make deals close faster. But it won’t replace an expert lawyer’s crucial analysis of AI outputs.

AI does have the potential to transform the junior lawyer’s role substantially. No longer will a junior attorney be stuck sorting through documents in a deal room. Now, at the very start of their career, a lawyer can become a valuable part of innovative, rewarding client services.

By using AI essentially to clear the ground, lawyers gain more space to work. Whether at the associate or partner level, they have a new level of comprehensive data analysis that they can use to advise clients expertly. They’ll also have more time to employ these analyses, as AI eliminates the hours spent trying to find a particular clause in a contract.

Chapter Seven

A new era for due diligence reviews

AI technology is streamlining due diligence in mergers and acquisitions . Law firms adept at AI can win on several fronts; they can win more of a client’s business. They can reduce their labor costs and get projects and reviews done at a pace unforeseen even a few years ago.

Watch a webcast with expert input about closing deals faster and how Document Intelligence provides powerful due diligence and contract analytics capabilities to empower legal teams to access, understand, and activate the critical information in their documents quickly and efficiently.

Chapter Eight

About the authors

CHRIS O’LEARY

Chris O’Leary is a freelance writer and editor based in western Massachusetts. He is the managing editor of Thomson Reuters “The M&A Lawyer” and “Wall Street Lawyer,” and the author of two books on popular music.

RAEES NAKHUDA

Raees joined Thomson Reuters in October 2021 and is the head of mergers and acquisitions for the general counsel’s office. Before joining Thomson Reuters, Raees was a senior associate in the corporate and securities group at Blake, Cassels & Graydon LLP. His practice focused primarily on international and domestic capital market transactions, including public and private financings and mergers and acquisitions. Raees holds a Juris Doctor degree from the University of Toronto and a Bachelor of Business Administration degree, with a specialization in finance, from the Schulich School of Business at York University.

Related insights

Streamline your due diligence in M&A with Document Intelligence

M&A due diligence software: Key features and detailed use cases

Comprehensive M&A due diligence checklist for public and private deals

Manage complexity and close deals faster with Document Intelligence from Thomson Reuters

What is Due Diligence?

M&A and Dealmaking
Secure File Sharing
Life Sciences
Thought Leadership
Fundraising
IT Security
Product Updates
Collaboration
Investor Communications
Virtual Data Room

You may wonder why due diligence is so crucial. Simply put, it serves as a safety net, ensuring you or your company make well- informed decisions . This step helps to mitigate risks by uncovering potential issues that could impact the transaction.

Types of Due Diligence

Due diligence can take several forms, each tailored to a specific aspect of a business or transaction. The primary types include:

Financial Due Diligence

This type involves a deep dive into the financial health of the entity in question. Experts analyze financial statements, tax records, expense reports, and forecasts to ensure everything is in order. It's all about uncovering any financial red flags or opportunities that might not be immediately visible.

Legal Due Diligence

Legal due diligence focuses on the legal aspects, including contracts, licenses, legal compliance , and possible litigations. The main goal is to identify any legal risks that could impact the transaction adversely.

Operational Due Diligence

This involves examining the operational aspects of the business. You'll look at everything from the supply chain and production processes to IT systems and human resources . The aim is to evaluate how efficiently the business is operating and identify any potential areas of improvement or concern.

Commercial Due Diligence

This type assesses the market environment and competitive landscape. You'll analyze market trends, customer segments, and competitor performance to determine if the business has a sustainable market position .

Environmental Due Diligence

Focusing on environmental impacts , this type of due diligence assesses compliance with environmental laws and regulations. It's crucial for industries like manufacturing, where environmental liabilities can be significant.

Human Resources Due Diligence

This is an evaluation of the company's workforce. HR due diligence looks into employee contracts, benefit plans, and overall workforce morale. It helps in identifying potential liabilities and understanding the human capital of the organization.

The Role of Due Diligence in Investment Decisions

When you're contemplating an investment, due diligence becomes indispensable. It's not just a formality; it is a comprehensive appraisal strategy aimed at assessing the viability and potential of the investment. By meticulously examining financial records , company operations, legal standings, and market positioning, due diligence ensures that you have a clear and robust understanding of what you're stepping into.

Protecting Your Investment

Think of due diligence as a safety net. It significantly reduces the risks of financial loss by revealing hidden liabilities and verifying all claims presented by the investment opportunity. This process allows you to make informed decisions, preventing unpleasant surprises post-investment.

Ensuring Compliance and Legal Soundness

No investor wants to get entangled in legal issues. Due diligence scrutinizes the legal framework of the target investment, ensuring that all regulatory requirements and legal obligations are met. This aspect of due diligence is crucial for safeguarding your interests and ensuring the longevity and stability of your investment.

Identifying Growth Potential

But it's not just about spotting red flags; due diligence also helps you identify the growth potential and synergy benefits. By understanding the company's market position, competitive landscape, and business model, you can gauge future profitability and opportunities for expansion.

In essence, thorough due diligence translates to smarter, more secure investments. It's your toolkit for navigating the complex landscape of investment decisions, making sure that you're always a step ahead.

Steps to Conduct Due Diligence

Conducting due diligence is a systematic process. Here's a breakdown of the steps you should follow to ensure thorough and efficient diligence:

Define Objectives and Scope: Start by clearly defining the goals and boundaries of the due diligence process. Understand what information you need, why you need it, and how it aligns with your overall strategy.
Assemble Your Team: Gather a team of experts with diverse skills and knowledge relevant to the various aspects of due diligence. This often includes financial analysts, legal advisors, and industry specialists.
Gather Information: Collect all relevant data and documentation from the target company, including financial statements, legal records, and operational data. Use checklists to ensure that no crucial information is overlooked.
Analyze the Data: Carefully review and analyze the collected data for any discrepancies, risks, or opportunities. Compare it against industry standards and benchmarks.
Engage with Stakeholders: Communicate with key stakeholders within the target company to gain insights and clarification on any areas of concern. This might involve interviews or meetings with management and employees.
Prepare Reports: Compile your findings into comprehensive reports that detail the identified risks, opportunities, and critical areas that need attention. Ensure that your reports are clear and accessible to all relevant parties.
Review Legal and Regulatory Compliance: Verify that the target company complies with all legal and regulatory requirements. This includes verifying licenses, permits, and any pending litigation.
Conduct Site Visits: If possible, visit the physical locations of the target company to observe operations firsthand and identify any potential issues that may not be evident from documents alone.
Perform Risk Assessment: Identify and evaluate potential risks associated with the transaction. This includes financial, operational, legal, and market risks.
Make Informed Decisions: Use the insights and data gathered from the due diligence process to make informed and strategic decisions. Weigh the benefits and risks before proceeding with the transaction.

Key Areas to Focus on During Due Diligence

When diving into the due diligence process , it's essential to concentrate on specific critical areas. These areas encompass various facets of the business, ensuring a comprehensive evaluation.

Financial Review : This involves a thorough examination of the company's financial statements, including balance sheets, income statements, and cash flow statements. You're looking to verify the accuracy and reliability of the financial records and to understand the company's financial health and viability.

Operational Due Diligence: Assessing the company's operations is crucial. This includes analyzing supply chain efficiency, production processes, and operational costs. It's about determining the operational strengths and weaknesses and identifying potential areas for improvement.

Legal Due Diligence: Legal due diligence focuses on reviewing all legal matters related to the company. This includes examining contracts, leases, ongoing litigation, and compliance with laws and regulations. It's vital to uncover any potential legal risks or liabilities.

Customer and Market Analysis: Understanding the market in which the company operates, as well as its customer base, is key. This involves studying market trends, customer demographics, and the competitive landscape. You'll want to gauge the company's market position and its growth potential.

Human Resources and Management: Evaluating the company's management team and employee relations is another core aspect. This includes looking into the qualifications and track record of key management personnel, as well as assessing employee satisfaction and company culture.

Focusing on these areas during due diligence allows you to paint a complete picture of the company's current status and future potential. This comprehensive approach not only uncovers hidden risks but also highlights opportunities, ultimately supporting informed decision-making.

Common Tools and Resources for Due Diligence

When embarking on the due diligence process , having the right tools and resources at your disposal can make all the difference. These tools assist in gathering, analyzing, and verifying critical information efficiently. Let's explore some commonly used tools and resources in due diligence:

Virtual Data Rooms (VDRs): VDRs provide a secure online platform for storing and sharing sensitive documents between parties involved in a transaction. They streamline the due diligence process by allowing easy access to necessary files while maintaining data security.

Get Pricing

Financial Analysis Software: Tools like financial modeling software can help you assess a company's financial health by projecting future performance based on historical data. This software is invaluable in financial due diligence as it aids in spotting potential issues.
Background Check Tools: Comprehensive background checks on key personnel and the company's history are crucial. Tools such as LexisNexis or Thomson Reuters provide access to extensive databases for verifying information and spotting red flags.
Compliance Management Systems: Ensuring compliance with legal and regulatory standards is a key aspect of due diligence. Tools like compliance management software help track and verify that a company adheres to relevant laws and regulations.
Document Management Systems: Efficiently organizing and managing the vast amount of paperwork involved is essential. Document management systems help categorize and retrieve documents quickly, keeping the process smooth and organized.

Stay Deal-Ready, Always

What Is Due Diligence?

Understanding due diligence.

Due Diligence for Stocks
Due Diligence for Startups
M&A Due Diligence

The Bottom Line

Investing Basics

Due Diligence: Types and How to Perform

James Chen, CMT is an expert trader, investment adviser, and global market strategist.

Due diligence is an investigation, audit, or review performed to confirm facts or details of a matter under consideration. In the financial world, due diligence requires an examination of financial records before entering into a proposed transaction with another party.

Key Takeaways

Due diligence is a systematic way to analyze and mitigate risk from a business or investment decision.
An individual investor can conduct due diligence on any stock using readily available public information.
The same due diligence strategy will work on many other types of investments.
Due diligence involves examining a company's numbers, comparing the numbers over time, and benchmarking them against competitors.
Due diligence is applied in many other contexts, for example, conducting a background check on a potential employee or reading product reviews.

Investopedia / Ellen Lindner

Due diligence became common practice (and a common term) in the United States with the passage of the Securities Act of 1933 . With that law, securities dealers and brokers became responsible for fully disclosing material information about the instruments they were selling. Failing to disclose this information to potential investors made dealers and brokers liable for criminal prosecution.

The writers of the act recognized that requiring full disclosure left dealers and brokers vulnerable to unfair prosecution for failing to disclose a material fact they did not possess or could not have known at the time of sale.

Thus, the act included a legal defense: as long as the dealers and brokers exercised "due diligence" when investigating the companies whose equities they were selling, and fully disclosed the results, they could not be held liable for information that was not discovered during the investigation.

Due diligence is performed by equity research analysts, fund managers, broker-dealers, individual investors, and companies that are considering acquiring other companies. Due diligence by individual investors is voluntary. However, broker-dealers are legally obligated to conduct due diligence on a security before selling it.

Types of Due Diligence

Depending on its purpose, due diligence takes different forms.

Context-Specific Due Diligence

Commercial due diligence considers a company's market share and competitive positioning, including its future prospects and growth opportunities. This will consider the company's supply chain from vendors to customers, market analysis, sales pipeline, and R&D pipeline. This can also encompass a firm's overall operations, including management, human resources, and IT.
Legal due diligence makes sure that a company has all of its legal, regulatory, and compliance eggs in a row. This includes everything from pending litigation to intellectual property rights to being sure the company was properly incorporated
Financial due diligence audits a company's financial statements and books to make sure that there are no irregularities and that the company is on solid financial footing.
Tax due diligence looks at the company's tax exposure, whether it may owe any back taxes, and where it can reduce its tax burden going forward.

Hard vs. Soft Due Diligence

Due diligence can be categorized as "hard" or "soft" based on the approach used.

Hard due diligence is concerned with the numbers and data found on the financial statements like the balance sheet and income statement. This can entail fundamental analysis and the use of financial ratios to get a grasp on a company's financial position and make projections for the future. This type of due diligence can also identify red flags or accounting inconsistencies, however. Hard due diligence, which is driven by mathematics and legalities, is susceptible to rosy interpretations by eager salespeople. Soft due diligence acts as a counterbalance when the numbers are being manipulated or overemphasized.
Soft due diligence is a more qualitative approach that looks at aspects such as the quality of the management, the people within the company, and the loyalty of its customer base. There are indeed many drivers of business success that numbers cannot fully capture, such as employee relationships, corporate culture, and leadership. When M&A deals fail, as an estimated 70% to 90% of them do, it is often because the human element is ignored.

We discuss more on how these two types of due diligence are put into practice in the context of M&A deals below.

How to Perform Due Diligence for Stocks

Below are 10 steps for individual investors undertaking due diligence. Most are related to stocks, but, in many cases, they can be applied to bonds, real estate, and many other investments.

After those 10 steps, we offer some tips when considering an investment in a startup company.

All of the information you need is readily available in the company's quarterly and annual reports and in the company profiles on financial news and discount brokerage sites.

Step 1: Analyze the Capitalization of the Company

A company’s market capitalization , or total value, indicates how volatile the stock price is, how broad its ownership is, and the potential size of the company's target markets.

Large-cap and mega-cap companies tend to have stable revenue streams and a large, diverse investor base, which tends to lead to less volatility. Mid-cap and small-cap companies typically have greater fluctuations in their stock prices and earnings than large corporations.

Step 2: Revenue, Profit, and Margin Trends

The company's income statement will list its revenue and net income or profit. That's the bottom line. It's important to monitor trends over time in a company's revenue, operating expenses, profit margins , and return on equity .

The company's profit margin is calculated by dividing its net income by its revenue. It's best to analyze profit margins over several quarters or years and compare those results to companies within the same industry to gain some perspective.

Step 3: Competitors and Industries

Now that you have a feel for how big the company is and how much it earns, it's time to size up the industry in which it operates and its competition. Every company is defined in part by its competition.

Due diligence involves comparing the profit margins of a company with two or three of its competitors. For example, questions to ask are: Is the company a leader in its industry or its specific target markets? Is the company's industry growing?

Performing due diligence on several companies in the same industry can give an investor significant insight into how the industry is performing and which companies have the leading edge in that industry.

Step 4: Valuation Multiples

Many ratios and financial metrics are used to evaluate companies, but three of the most useful are the price-to-earnings (P/E) ratio, the price/earnings to growth (PEGs) ratio, and the price-to-sales (P/S) ratio. These ratios are already calculated for you on websites such as Yahoo! Finance.

As you research ratios for a company, compare several of its competitors. You might find yourself becoming more interested in a competitor.

The P/E ratio gives you a general sense of how much expectation is built into the company's stock price. It's a good idea to examine this ratio over a few years to make sure that the current quarter isn't an aberration.
The price-to-book (P/B) ratio , the enterprise multiple, and the price-to-sales (or revenue) ratio measure the valuation of the company in relation to its debt, annual revenues, and balance sheet. Peer comparison is important here because the healthy ranges differ from industry to industry.
The PEG ratio suggests expectations among investors for the company's future earnings growth and how it compares to the current earnings multiple. Stocks with PEG ratios close to one are considered fairly valued under normal market conditions.

Step 5: Management and Share Ownership

Is the company still run by its founders, or has the board shuffled in a lot of new faces? Younger companies tend to be founder-led. Research the bios of management to find out their level of expertise and experience. Bio information can be found on the company's website.

Whether founders and executives hold a high proportion of shares and whether they have been selling shares recently is a significant factor in due diligence. High ownership by top managers is a plus, and low ownership is a red flag. Shareholders tend to be best served when those running the company have a vested interest in stock performance.

The P/E ratio gives a sense of the expectations that investors have for the stock's near-term performance.

Step 6: Balance Sheet

The company's consolidated balance sheet will show its assets and liabilities as well as how much cash is available.

Check the company's level of debt and how it compares to others in the industry. Debt is not necessarily a bad thing, depending on the company's business model and industry. But make sure those debts are highly rated by the rating agencies.

Some companies and whole industries, like oil and gas, are very capital intensive while others require few fixed assets and capital investment. Determine the debt-to-equity ratio to see how much positive equity the company has.

Typically, the more cash a company generates, the better an investment it's likely to be because the company can meet its debts and still grow.

If the figures for total assets, total liabilities, and stockholders' equity change substantially from one year to the next, try to figure out why.

Reading the footnotes that accompany the financial statements and the management's discussion in the quarterly or annual reports can shed light on what's really happening in a company. The firm could be preparing for a new product launch, accumulating retained earnings , or in a state of financial decline.

Step 7: Stock Price History

Investors should research both the short-term and long-term price movements of the stock and whether the stock has been volatile or steady. Compare the profits generated historically and determine how they correlate with the price movement.

Keep in mind that past performance does not guarantee future price movements. If you're a retiree looking for dividends, for example, you might not want a volatile stock price. Stocks that are continuously volatile tend to have short-term shareholders, which can add extra risk for certain investors.

Step 8: Stock Dilution Possibilities

Investors should know how many shares outstanding the company has and how that number relates to the competition. Is the company planning on issuing more shares? If so, the stock price might take a hit.

Step 9: Expectations

Investors should find out what the consensus of Wall Street analysts is for earnings growth, revenue, and profit estimates for the next two to three years. Investors should also look for discussions of long-term trends affecting the industry and company-specific news about partnerships, joint ventures , intellectual property, and new products or services.

Step 10: Examine Long and Short-Term Risks

Be sure to understand both the industry-wide risks and company-specific risks. Are there outstanding legal or regulatory matters? Is there unsteady management?

Investors should play devil's advocate at all times, picturing worst-case scenarios and their potential outcomes on the stock. If a new product fails or a competitor brings a new and better product forward, how would this affect the company? How would a jump in interest rates affect the company?

Once you've completed the steps outlined above, you'll have a better sense of the company's performance and how it stacks up to the competition. You will be better informed to make a sound decision.

Due Diligence Basics for Startup Investments

When considering investing in a startup, some of the 10 steps above are appropriate while others just aren't possible because the company doesn't have the track record. Here are some startup-specific moves.

Include an exit strategy. Plan a strategy to recover your money should the business fail.
Consider entering into a partnership: Partners split the capital and risk, so they lose less if the business fails.
Figure out the harvest strategy for your investment. Promising businesses may fail due to a change in technology, government policy, or market conditions. Be on the lookout for new trends, technologies, and brands, and get ready to harvest when you find that the business may not thrive with the changes.
Choose a startup with promising products. Since most investments are harvested after five years, it is advisable to invest in products that have an increasing return on investment (ROI) for that period.
In lieu of hard numbers on past performance, look at the growth plan of the business and evaluate whether it appears to be realistic.

M&A Due Diligence

In the mergers and acquisitions (M&A) world, a company that is considering a deal will perform a financial analysis on a target company. The due diligence might also include an analysis of future growth.

The acquirer may ask questions that address the structuring of the acquisition. The acquirer is also likely to look at the current practices and policies of the target company and perform a shareholder value analysis.

In traditional M&A activity, the acquiring firm deploys risk analysts who perform due diligence by studying costs, benefits, structures, assets, and liabilities. That's known colloquially as hard due diligence.

Increasingly, however, M&A deals are also subject to the study of a company's culture, management, and other human elements via soft due diligence.

Performing Hard Due Diligence

In an M&A deal, hard due diligence is the battlefield of lawyers, accountants, and negotiators. Typically, hard due diligence focuses on earnings before interest, taxes, depreciation and amortization (EBITDA), the aging of receivables and payables, cash flow, and capital expenditures.

In sectors such as technology or manufacturing, additional focus is placed on intellectual property and physical capital .

Other examples of hard due diligence activities include:

Reviewing and auditing financial statements
Scrutinizing projections for future performance
Analyzing the consumer market
Seeking operating redundancies that can be eliminated
Reviewing potential or ongoing litigation
Reviewing antitrust considerations
Evaluating subcontractor and other third-party relationships

Performing Soft Due Diligence

Conducting soft due diligence is not an exact science. It should focus on how well a targeted workforce will mesh with the acquiring corporation's culture.

Hard and soft due diligence intertwine when it comes to compensation and incentive programs. These programs are not only based on real numbers, making them easy to incorporate into post-acquisition planning but they can also be discussed with employees and used to gauge cultural impact.

Soft due diligence is concerned with employee motivation, and compensation packages are specifically constructed to boost those motivations. It is not a panacea or a cure-all, but soft due diligence can help the acquiring firm predict whether a compensation program can be implemented to improve the success of a deal.

Soft due diligence can also concern itself with the target company's customers. Even if the target employees accept the cultural and operational shifts from the takeover, the target customers and clients may well resent a change in service, products, or procedures. This is why many M&A analyses now include customer reviews, supplier reviews, and test market data.

What Exactly Is Due Diligence?

Due diligence is a process or effort to collect and analyze information before making a decision. It is a process often used by investors to assess risk. It involves examining a company's numbers, comparing the numbers over time, and benchmarking them against competitors to assess an investment's potential in terms of growth.

What Is the Purpose of Due Diligence?

Due diligence is primarily a way to reduce risk exposure. The process ensures that a party is aware of all the details of a transaction before they agree to it. For example, a broker-dealer will give an investor the results of a due diligence report so that the investor is fully informed and cannot hold the broker-dealer responsible for any losses.

What Is a Due Diligence Checklist?

A due diligence checklist is an organized way to analyze a company. The checklist will include all the areas to be analyzed, such as ownership and organization, assets and operations, financial ratios, shareholder value, processes and policies, future growth potential, management, and human resources.

What Is a Due Diligence Example?

Examples of due diligence can be found in many areas of our daily lives. For example, conducting a property inspection before completing a purchase to assess the risk of the investment, an acquiring company examining a target firm before completing a merger or acquisition, and an employer performing a background check on a potential recruit.

Due diligence is a process or effort to collect and analyze information before making a decision or conducting a transaction so a party is not held legally liable for any loss or damage. The term applies to many situations but most notably to business transactions.

Due diligence is performed by investors who want to minimize risk, broker-dealers who want to ensure that a party to any transaction is fully informed of the details so that the broker-dealer is not held responsible, and companies who are considering acquiring another firm.

Fundamentally, doing your due diligence means that you have gathered the necessary facts to make a wise and informed decision.

Govinfo.gov. " Securities Act of 1933 ."

Harvard Business Review. " Don't Make This Common M&A Mistake ."

Harvard Business Review. " Human Due Diligence ."

Terms of Service
Editorial Policy
Privacy Policy

KPMG Personalization

COMMENTS

Tougher Times: Putting the Diligence Back in Due Diligence
The surest way to succeed is to come armed with proprietary insights from a diligence that is faster, deeper, and more focused than your competitors. Better diligence allows you to be bold where others might hesitate. Market leaders use due diligence in three ways to win (or avoid) deals in today's environment: They're proactive; they ...
Due Diligence in M&A Transactions [Process + Checklist]
Mergers and acquisitions due diligence is the comprehensive assessment process of a target company's financial, legal, operational, and other aspects. Its purpose is to evaluate the risks, opportunities, and synergies of the potential deal. Through robust due diligence, both the buyer and seller gain a deep understanding of each other's ...
Case Study
In a strategic move to expand its portfolio, a leading global energy conglomerate embarked on acquiring several subsidiaries of a publicly traded company, with the transaction valued at an impressive $1 billion in cash. The ambitious timeline and the complexity of the deal underscored the necessity for a meticulously planned due diligence ...
PDF Successful Due Diligence
due diligence to every acquisition. Strategic due diligence is the process of probing, pinpointing, and prioritizing the key issues that affect a potential acquisition target. It connects to other acquisition phases such as target search, explains the risks of not properly carrying out due diligence, and uses compelling case studies to demonstrate
Due Diligence: Evolving Approaches Boost the Odds of Success
Failure of due diligence to highlight issues around asset quality was the No. 1 reason for unsuccessful capability deals. Similarly, success of capability deals was attributed in great part to a deeper diligence process. The key factors for deal success and failure have not changed much, even as M&A trends shift toward scope deals.
The Three Most Important Steps in M&A Due Diligence
By adhering to these three key principles, companies can enhance their due diligence processes, make more informed decisions, and ultimately achieve greater success in their M&A activities. As market conditions evolve over time, these three principles still hold the power to guide companies to the best deals and the best results.
Financial Services M&A Due Diligence: A Symanto Case Study
Financial Services M&A Due Diligence: A Symanto Case Study. Emerging reports reveal that mergers and acquisitions in the financial services market are at an all-time high. In 2021, the financial services M&A value stood at €22.6 billion. That compared with less than €2 billion just a year earlier, when there was an unexpected lack of M&A ...
M&A Due Diligence, Post‐Acquisition Performance, and Financial
Before completing merger and acquisition (M&A) transactions, acquiring firms conduct due diligence. This process provides acquiring firms with a more informed assessment of the expected costs, benefits, and risks of an acquisition and offers one last opportunity to renegotiate or terminate an M&A transaction.
Due Diligence in M&A: Key Strategies
Due diligence in M&A is the comprehensive analysis of the factors influencing the M&A valuation, risks, and benefits of the company being acquired or merged with. Some examples include investigations into a company's economic standing and assessing the culture fit between employees of both companies. There are differing philosophies regarding ...
M&A due diligence consulting
Mergers & acquisitions due diligence. In Strategy and Transactions. We conduct financial, tax, commercial, operational, IT and cyber diligence to help you identify transaction value drivers, improve M&A deal structures and mitigate risks. We also help challenge assumptions about future performance so you can choose the right valuation. The team.
M&A Evaluation and Due Diligence Case Study
Business- and technology-focused evaluations are critical parts of the due diligence process when firms choose to expand their footprint through acquisition. The CTO of a leading human capital management company asked Metis Strategy to help conduct pre-transaction due diligence on a targeted professional services company and help IT deepen its ...
PDF M&A vendor due diligence case study
Sell-side due diligence is a crucial step in selling a business, as it provides buyers with information to streamline the transaction process. By executing a thorough sell-side due-diligence process before negotiations, Crowe helped Whitehall: Document an understanding of business operations. Develop a library of required documents to support ...
How M&A Due Diligence Plays an Important Role in Deals
Important Aspects of the M&A Due Diligence Process. 1. Some Insurance Firms May Forego M&A Due Diligence. Because of the assumption that the due diligence step will slow down the process of a deal, some firms may gloss over or rush this step because of the timing and/or cost. There are also some assumptions that experienced owners know their ...
M&A 101: The role of due diligence in mergers and acquisitions
The discount caused by the issues found in due diligence can impact up to 10% to 30% of the offer price, which in this case would be between $12 million and $36 million in discounts. The discounts would impact the final offer price range down to $108 million to $84 million, respectively, from the original offer of $120 million.
M&A Due Diligence: A Complete Breakdown
In the case of a merger, due diligence is especially critical for both parties involved because each needs to be fully aware of the state of each other's financial situation and operations before moving forward with a merger. As with any viable relationship, there should be transparency, compatibility, good communication, and a willingness to ...
How AI will impact due diligence in M&A transactions
Artificial intelligence (AI) is expected to significantly transform the mergers and acquisitions (M&A) due diligence landscape. AI-powered tools are constantly improving in automating a wide range of tasks, from data collection and analysis to risk identification and quantification. Our EY expert explains how AI algorithms could impact and change M&A due diligence in the near future.
Due Diligence in Mergers & Acquisitions
The client asked Sphere's leadership team to evaluate a B2B transportation hub's technology in preparation for an acquisition. Read our M&A due diligence case study below to learn more. Scope In an interesting turn of events, the client placed more value on the business assets (the customers and vendor network) than the
M&A due diligence checklist for public and private deals
An M&A due diligence checklist should start with the basic requirements of any buyer, but expand to incorporate information pertinent to the deal at hand. A good M&A diligence checklist is adaptive. It takes into account the nature of the merging entities, their management and ownership structures, their marketplaces and their histories. Making ...
PDF M&A due diligence workshop
James "Mark" Andrews. Managing Director M&A Transaction Services (IT) Direct: +1 215 789 2757 Email: [email protected] Location: Philadelphia, PA. Todd Wilson Managing Director M&A Transaction Services Direct: +1 312 486 3892 Email: [email protected] Location: Chicago, IL.
M&A due diligence software: Key features and detailed use cases
More value-added use cases. The lawyer using AI is able to tick off their M&A due diligence checklist quickly. → Change of control provisions. → Intellectual property holdings. → Ongoing litigation. → Employee and vendor contracts. → Document sets are scanned and reviewed within minutes. → Run multiple, more nuanced searches on a ...
Artificial Intelligence for M&A due diligence: See it in action
An overview of artificial intelligence for M&A due diligence and a product demo capturing its capabilities for a bulk review of assignment and change of control clauses. Conducting due diligence can be a study of frustration. Tight timelines, high stakes, and, in some cases, disaggregated deal teams compound a deal's complexity.
Case Interview Frameworks: Mergers & Acquisitions
As with any framework, you need to customize these basic questions below to the exact case prompt scenario you are given in your case interview. While most M&A cases are going to be focused on due diligence strategy (the yes/no question of whether one company should buy another), this framework is also helpful for any other large scale ...
What is Due Diligence?
Environmental Due Diligence. Focusing on environmental impacts, this type of due diligence assesses compliance with environmental laws and regulations. It's crucial for industries like manufacturing, where environmental liabilities can be significant. Human Resources Due Diligence. This is an evaluation of the company's workforce.
Due Diligence: Types and How to Perform
M&A Due Diligence In the mergers and acquisitions (M&A) world, a company that is considering a deal will perform a financial analysis on a target company. The due diligence might also include an ...
Esg Змінює Правила Гри На Ринку M&A
Згідно з останнім дослідженням KPMG «Global ESG due diligence study 2024» (проводиться вже третій рік поспіль), понад 600 активних учасників ринку з 35 регіонів підтвердили зростання важливості ESG факторів при ...