M&A Due Diligence Checklist: A Guide From Acquisition Experts

The key to a successful merger & acquisition process (M&A) is conducting strategic and thorough due diligence. First, sellers gather all the relevant documents. Then, the potential new business owner reviews the information, usually with a team of lawyers, financial experts, and perhaps a mentor.

Every due diligence checklist varies according to the business and industry. However, every due diligence includes documents and insights about the target company and information about market position, financial statements, or intellectual property, among other data points.

A well-done process helps buyers and sellers agree on the value of the transaction and ensures that both parties are aligned and understand the next steps.

In this article, you'll find a comprehensive step-by-step checklist for M&A due diligence. Scroll down!

Related: 7 Podcasts About M&A & Buying Businesses You Can't Miss

Planning the M&A due diligence

During an M&A, due diligence is needed to ensure everything is in order regarding financials, operation, and compliance to mitigate risk. It can also signal if the company has underlying issues or a clean record regarding anti-bribery, corruption, and environmental, social, and governance (ESG) matters.

Before jumping straight into the due diligence checklist, sellers and buyers need to align on the following:

1. Gather a due diligence team

The due diligence process demands experts. Because of this, buyers can bring in advisors with different backgrounds and specialties, including attorneys —with expertise in M&As or the business industry—accountants, bankers, PMOs, analysts, VCs, and more. The dream team for the merger and acquisition process depends on the size of the deal and the industry, as well as the acumen of the buyer.

David Cream from Coast BioVentures LLC says, "...Bringing on the right financial, legal, and operation advisors will allow the executive team to focus on their current business, as well as bring expertise to the process and ensure market-based terms are achieved for a deal."

2. Establish other goals for the due diligence process

Besides ensuring everything is in order, due diligence can support other goals, like agreeing on an exit strategy for the seller, understanding the business marketing strategy, knowing what debts are due, and even getting a better deal.

"Buyers can also close a much better deal if they perform due diligence and then they can identify areas that need attention when managing the business once they take over, says Juan Ignacio García, CEO of Boopos.

3. Create a due diligence checklist

In this section, the team involved in the M&A will start gathering relevant organizational documents and information to show that the business for sale is in an optimum state. Not all M&As require the same checklists, but you can use the following list as guidance:

M&A Due diligence checklist

1. Financial

When doing financial due diligence, these are the most common documents to consider:

• Profit margins
• Income statements
• General expenses
• List of creditors and debtors
• EBITDA
• Financial statements from up to 5 years
• Cash flow statements
• Any financing agreements

2. Tech

From the tech area, these documents are usually required:

• IT expenses
• Domain names owned and used

3. Intellectual Property

Regarding the intellectual property diligence checklist, these are the documents generally asked for:

• Patents and trademarks owned and pending applications
• Intellectual property processes
• Trade secrets
• Research and development plans

4. Customer Support

This checklist includes:

• Customer satisfaction levels
• NPS results
• Lost customers from the past years (from 5 up to 2 years)

5. Sales

Some of the necessary sales documents for the due diligence checklist are:

• Sales pipeline
• Previous discounts
• Sales terms and policies
• Sales revenue fluctuation

6. Suppliers

Regarding supplies, some of the most important documents to review are:

• Key suppliers
• Service agreements related documents

7. Material Contracts

Regarding the material contracts section, these are some of the files that might be required during the transaction:

• Owned or leased equipment
• Exclusivity agreements
• License agreements

8. Employment/HR

In the HR and employment department, some of the most common documents are:

• Organization chart
• List of key employees
• Employee contracts
• List of employee benefits
• Guides and protocols
• Signed non-disclosure agreements
• Signed no competition agreements
• Annual leave, sick leave, and other type of leaves

9. Litigation

For the legal/litigation department, the most common documents in the due diligence checklist are:

• Filed and pending litigations
• Any threatened litigation
• Matters in arbitration
• Pending or threatened governmental proceedings against the business
• Insurance claims

10. Taxes

When it comes to tax matters, the documents that are usually required are:

• Tax returns from the past 5 years
• Any correspondence with tax authorities
• Tax sharing agreements
• Tax reports
• Copies of other tax filings
• Any tax benefit agreements

11. Regulatory

In regulatory matters these can be some of the necessary documents:

• If there's a need for regulatory approval for the M&A, comply with the process
• Proof of the company's regulatory compliance
• Regulatory inquiries on the business

12. Insurance

When considering the insurance documents, these are the needed ones:

• Self-insurance arrangements
• Umbrella policies
• Employee liability insurance
• Health insurance
• Intellectual property insurance

13. Corporate Matters

When going over the general corporate records, these are the most common documents to look at:

• List of subsidiaries
• List of officers and directors
• Agreements related to stock sale
• Business plans
• Strategic goals
• Minutes of meeting with stockholders

14. Environmental Issues

Regarding environmental issues, the most common documentation that is required when doing due diligence is:

• Environmental records from audits and reports
• Environmental permits and licenses
• Claims and litigations
• Potential liabilities

15. Property

The property ownership documentation that will be looked at is:

• Deeds
• Mortgages
• Title reports
• Operating leases
• Inventory reports
• Operational assets

16. Marketing

From the marketing department, some of the necessary documents for the due diligence process are:

• Sales agreements with distributors or agencies
• Other marketing-related agreements
• Report on marketing expenses
• Plans for any future markets

17. Competitive Landscape

When going over the competitive landscape, buyers can ask for the following information:

• Current and potentially future competitors
• Existing tech or currently in development that can hurt the business
• Advantages and disadvantages over other businesses' products

18. Virtual Data Room

Throughout the due diligence process, documents will have to be stored in a virtual data room. The requirements for this online space are:

• Be available to the buyer from early on in the sale process. The selling company is responsible for doing so.
• Organized according to the due diligence checklist for a smoother documentation review
• Include a text search function
• Allow to bookmark files
• Enable printing documents

19. Disclosure Schedule

In an M&A disclosure schedules are extra documents that can impact warranties and representations in the agreement between seller and buyer. The following information and requisites can be found in this section:

• The disclosure schedule and purchase agreement should have the same information.
• Include all the material contracts and amendments.
• The contracts from the disclosure schedule should be stored in the virtual data room.
• List all contracts that can be affected by the transaction.
• Look for potential issues in contracts due to the acquisition.
• Consult with litigation for potential issues.

When should due diligence be conducted?

From a seller's standpoint, because M&A due diligence can take weeks to months, it's highly recommended that all the necessary documentation be prepared while looking for potential investors.

In the case of the buyer, it can start earlier with industry and market research. The most common scenario is to formally begin after the letter of intent.

Why comply with M&A Due Diligence?

The due diligence process can be helpful for buyers and sellers due to several reasons, such as:

1. Comply with regulations and legislation

Businesses must comply with applicable regulations and legislation and keep proof of it. In an M&A, reviewing the process is easier when both parties involved are aligned in how they approach compliance.

2. Ensure anti-corruption compliance

Anti-corruption measures are critical. Because of this, buyers must be sure that the business they're purchasing has previously followed all the books and that there are no underlying bad practices.

3. Ensuring financial success

With a due diligence process, buyers can understand how the business they're purchasing is doing financially now and how it will be in the future. By doing so, they can learn if any potential future risk compromises the business results.

4. Avoid a bad reputation

A bad reputation can damage the business' performance and future results. With well-done due diligence, buyers can review this possibility and decide what to do from there.

5. Get a fair deal

The business price can be adjusted after carefully reviewing the documentation and information that came up during due diligence.

Looking for a profitable business to acquire?

Buying a business is a complex process, especially if you don't have the right team or partners by your side. Boopos is an online business marketplace that lists profitable companies by conducting data-driven due diligence.

Since we also offer business acquisition loans, we review the businesses that we list, giving you the confidence that what you'll buy is already vetted by experts.

Browse our marketplace and find a deal today!

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