A Short Guide to M&A Due Diligence

January 2023

A Short Guide to M&A Due Diligence

Looking for a new business is exciting but it can also be overwhelming! You must consider the options carefully, filter down your choices, and check that you’re making a good investment.

Whether you’re a budding entrepreneur or a seasoned CEO, performing due diligence is a must before you put in an offer. But what is due diligence and how can it help you find a good business to acquire?

What is M&A due diligence?

The Corporate Finance Institute describes M&A due diligence as:

“A process of verification, investigation, or audit of a potential deal or investment opportunity to confirm all relevant facts and financial information.”

Basically, due diligence can verify the information that the seller has provided. This helps the seller build trust with the buyer by assuring them that their expectations will be met.

Why is M&A due diligence essential?

Higher success rate

Did you know that between 70-90% of M&A deals fail? Having a sale fall through is a nightmare for all parties involved.

While there are always some risks involved, M&A deals that undergo significant due diligence have a much higher chance of success.

Verified information

Completing a due diligence checklist will give the buyer peace of mind that they will get what they expect from the transaction. This will help them feel more confidence at execution.

Buyer trust

From the seller’s perspective, performing due diligence for M&A provides the purchaser with trust. If there is a strong relationship between seller and buyer, issues can usually be resolved swiftly.

Informed decisions

The due diligence process provides quality data which enables well-informed decisions. Due diligence is a critical stage of any business acquisition and helps to avoid issues later down the line.

How to create the ultimate due diligence checklist

Making a due diligence checklist should be the first step when narrowing down your choices and identifying businesses with the highest chances of success.

Whilst creating one takes time, you’ll reap the rewards further down the line.

Let’s look at some key areas to cover in your diligence checklist:

  • Business model
  • Products and services
  • Competitor analysis
  • Existing operations
  • Financial reports
  • Shareholder research
  • Marketing strategy
  • Company trademarks and other IP

TIP: You will need to adapt your due diligence checklist to reflect the type of business you want to acquire. For instance, operations and inventory management will be key components of due diligence when purchasing an eCommerce business.

M&A due diligence example questions

Asking a variety of questions will help you collect the information needed to complete your due diligence checklist to qualify a business.

Business Model

  • What is the business model and how does it operate?
  • How does the business generate revenue? What sales processes are in place?

Products and Services

  • How many products are on offer?
  • Are there any products in development?

Competitor Analysis

  • Who are your direct competitors?
  • What differentiates your company?

Existing Operations

  • What are the business operations in place and who is responsible for what?
  • How long has the business been established?

Financial Reports

  • How much revenue has the business generated in the past three years? Note: As part of your financial due diligence checklist, make sure you ask for financial records going back at least three years to gain a good understanding of the company’s financial health.
  • Are the business taxes up to date? How much tax is paid?

Employee & Shareholder Research

  • Who is the owner? You can verify this information and check whether there have been any recent changes in ownership using a tool like whois.domaintools.com.
  • Who are the employees? What are their responsibilities? Do they know that the company is being sold?

Marketing Strategy

  • What marketing channels does the business rely on?
  • Are marketing campaigns automated?

Company Trademarks and Other IP

  • Is there a trademark for the business name or logo?
  • Does the business have other intellectual property (IP)?

Final thoughts

Asking the founder M&A due diligence questions will give you lots of valuable information and help you decide if a business is worth buying. If a business passes all your risk checks, you can be more confident that you’re making the right choice.

Interested to learn more and explore some great opportunities? Join our online marketplace and start your own due diligence.

You can also browse our M&A advisor directory if you want to connect with M&A due diligence experts and get personalised advice.

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