4 Ways To Kickstart Your M&A Due Diligence Process

Due diligence is the crucial stage in the deal life-cycle where an acquirer builds the full picture of financial, tax, legal, operational and human resource realities within a target company. But so commonplace is the idea of basic due diligence that companies often get lulled into complacency.

Consider the implication of the due diligence stage on a deal. Here a company discovers an answer to the critical question: is the deal ROI in the right proportion to the risks, requirements and expected management effort that is uncovered through the M&A due diligence process?

This investigative process is the basis of deal discovery. It is conducted to safeguard against catastrophic risks by revealing the state and opportunities within financials, technology and intellectual property, customers and sales, regulation environment, human resources, culture, corporate structure, compliance, marketing and competitive outlook. It facilitates informed decision making in a way few other deal life-cycle events do.

But because due diligence efforts are often massive in scope they can be prone to chaos, inefficiency, disorganization and communication breakdown. Or, they are built and left to become the status quo.

To improve deal success, Midaxo recommends examining existing due diligence tools and capabilities. This may begin in general with a scored assessment of process maturity, but should be reviewed through four primary lenses. Even for companies with reasonably effective due diligence processes, the pace of global change and cross-border cultural realities require consistent review of existing practices. The following approaches will be explored in detail below:

  • Understanding The Why
  • Establishing Assessment Priorities
  • Evaluating Team
  • Building Execution and Reporting Capabilities

Understanding The Why

By hurrying to evaluate a target, companies can easily miss the essential first step that is the ultimate harbinger of success: understanding the why. Due diligence should only commence when the reason for acquisition (or investment) is clear and the rationale for target pursuit is compelling. To evaluate a prospect's suitability with respect to organizational acquisition strategy, ask yourself the following questions:

  • Does this deal accelerate corporate objectives?
  • What revenue and/or cost benefits are realizable?
  • How is the target or deal specifically beneficial to the broader strategy, goals or mission?

As clarity around these questions is gained, M&A teams should undertake a soft transaction “sense check” on the target. This step is a basic business review and should be viewed as a prerequisite to any additional planning and due diligence. Here, teams are considering financial, market, management and corporate structure basics to determine if the target is fundamentally suited to deliver in the affirmative on the question of why.

Understanding the why and undertaking a basic diligence process can help a company steer-clear of value-destroying transactions. And while areas like post-merger or investment integration are generally blamed when deals fail, it is useful to consider whether the deal should have even been pursued in the first place.

Establishing Assessment Priorities

While the M&A due diligence process should first provide assurance that further review is worthwhile, it should also immediately move to delivering a deeper understanding of the operational considerations that will drive a suitable go, or no-go decision. For every company and every target, the areas of emphasis in this step change. In M&A, not all areas of diligence are created equal. That is, the required level of detail and areas of focus to suitably address risks and opportunities shift from deal to deal.

For example, when a company’s objective is deriving value from a target’s technology, then specific technology-related due diligence needs to prioritized in the assessment phase. Companies should perform deeper dives here to assess the stability, extensibility and validity of the target’s technological capabilities. These will also help the company support post-merger integration. Focusing on technological assessment may also cover the following:

  • Expandability and scalability
  • Lifespan
  • Costs to operate and support
  • Support methods and stability
  • Company dependency on the technology
  • Risks
  • Planned initiatives
  • Capital investment required
  • Software licensing and ownership of all technologies
  • Nature of IP and ownership
  • Infrastructure requirements

By performing diligence systematically and in order of priority, teams increase deal review efficiency; a detailed, specific due diligence checklist can be invaluable in facilitating this process. In the above case, if technological issues are a primary concern, it is better to understand the implications earlier in the process rather than later, after resources have been wasted on less-critical evaluations.

Evaluating Team

The due diligence team should consist of skilled business leaders that have the financial, legal and operational expertise to manage the full scope of due diligence. External advisors should be considered when in-house resources lack the bandwidth or expertise to deliver transaction support. Often, companies supplement existing staff with, legal, accounting or investment-banking support.

What is critical, however, is to evaluate where business support is lacking and build up resource support to manage work streams and deliver diligence in that area. Companies that struggle in effective, holistic due diligence may do so because they lack the expert-level, functional leadership to work alongside corporate development or M&A team leads.

For example, considering the human resource implications during target due diligence may require input from someone with a nuanced and in-the-seat perspective. The right support person from the HR department can quickly access relevant information around employment law compliance, contracts and other employment related aspects in an efficient way. As well, they can better orient diligence efforts within a particular functional area if they are firmly and in advance partnered up with deal-team leaders and M&A staff.

Building Execution and Reporting Capabilities

Few steps play a more important role in deal success than how a company coordinates the execution of due diligence work streams. Regardless of deal size, there will be commercial, legal and operational due diligence efforts competing for attention and resources. Firing off generic information-gathering requests to targets or internal stakeholders and expecting complete, accurate and timely responses is a sure way to slow deal progress.

Companies need to regularly review their execution capabilities and plans for communicating deal progress. A starting place for many companies is by improving the software tools used to drive due diligence gathering. Here, the use of a virtual data room, or “VDR,” is recommended.

A VDR is a software solution that acts as a central hub for communication, task-assignment and progress display. By implementing a VDR, M&A teams reduce the deal-stalling that comes with endless email relay, disconnected question and answering, untrackable stakeholder tasks and accountability gaps. In essence, a VDR equips deal teams to conduct virtual due diligence.

While comprehensive checklists bring new levels of deal thoroughness and help surface pre-deal risks, checklists alone are not indicative of efficiency. VDRs help the M&A project team link findings directly to integration activities, use partner resources effectively and move through diligence categories more systematically. Practically, companies need to scrap the old model of disconnected data repositories and ad-hoc Excel files. Establishing a central platform reduces buy and sell-side workloads and represents one of the most significant growth-points for due diligence excellence.

Moving deal activity out of email into M&A software also results in sharing and reporting gains. Today’s VDR solutions deliver confidential, easy access to files and task or project status reports. With administrative controls, M&A teams can provision access to the right person for the right thing. Automation improvements, like email alerts, mean modernized exchanges with stakeholder audiences that don’t clog up the to-do list. And options for SaaS deployment mean no software has to be installed and ease of use.


The complexity and dynamism of M&A environments make it imperative that anyone involved in the M&A process has the right information at the right time. Decision making needs to be data-driven, incorporating the macro and micro factors that add up to success. This requires due diligence competence that cannot be had without proper preparation and incorporation of tools and M&A best practices.

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