4 Keys for Successful M&A Due Diligence

M&A transactions can be incredibly rewarding, but they also come with significant risks. One of the most critical phases in ensuring a successful deal is due diligence. M&A due diligence is the process that allows you to dig deep into a target company’s details and evaluate whether the acquisition aligns with your strategic goals. In this blog post, we’ll explore four keys to running a successful M&A due diligence and offer some insights for navigating this complex terrain.

1: Understand Exactly What You Are Acquiring

Before diving into any M&A deal, it is crucial to have a clear understanding of what you’re acquiring. This goes beyond just the surface-level aspects of the target company. You should delve deep into its financials, operations, contracts and more. Understanding the full scope of what you’re acquiring will help you make informed decisions, avoid surprises down the road and ensure the deal aligns with your overall strategic objectives.

A successful due diligence process should enable a potential acquirer be able to answer to any question from three distinct areas:

  1. Commercial & strategic rationale for the transaction
  2. Risks reduction (which may result in “deal breakers”)
  3. Deal execution technicalities for closing the transaction successfully

2: Consider “Deal-Breakers” or “Deal-Amenders”

It might sound obvious, but during this process, it is essential to keep an eye out for potential deal-breakers and deal-amenders. Deal-breakers are issues with the target company that are so fundamental that they make the transaction unviable. In such cases, it might be best to abandon the deal altogether. One best practice is to request periodic reporting of findings during the due diligence process – that way your team can highlight deal breakers immediately as they are discovered and the appropriate remedying action can be taken. A strong understanding of the sector in which the Target is based will maximize the chance of spotting key issues, price reducers or potential deal breakers.

On the other hand, deal-amenders are issues that can bring about major changes in the structure, terms, or price of the transaction. Identifying these early allows you to proactively address them and negotiate more favorable terms.

3: Give Due Attention to the Retention of Key Staff

In many M&A transactions, the talent within the target company is a valuable asset. It’s crucial to assess the importance of these staff members during the due diligence process and have a plan in place to retain them after the acquisition. Losing key personnel during the transition period can disrupt operations, hinder the integration process and lead to lost value. By taking note of key staff and their contributions to the target company, your team can plan to create incentives for them to stay, assess the likelihood of retention and ensure a smoother post-merger integration.

4: Be Prepared to Walk Away

Perhaps one of the most challenging parts of M&A due diligence is that it requires a willingness to walk away. If significant issues are uncovered, sometimes the best course of action is to step back and call off the deal. 

It’s natural to become emotionally invested in a transaction, especially after investing time and resources in due diligence. However, if the due diligence team uncovers problems that are insurmountable or fundamentally change the deal’s viability, you need to be prepared to abandon the transaction. Avoiding a problematic deal is often more prudent than trying to fix it after the fact.

Final Thoughts

Due diligence is a critical phase in the M&A process that should not be taken lightly. The key takeaways above provide an outline for ensuring that your due diligence efforts are effective and lead to successful M&A transactions. For a more comprehensive roadmap to the due diligence process, see our earlier piece: A Guide to M&A Due Diligence

Valuation is a fundamental aspect of any M&A deal. However, relying solely on financial models and estimates can lead to inaccurate valuations. Effective due diligence is the bedrock upon which valuations should be built. Thoroughly examining the target’s financial statements, assets, and liabilities ensures that you arrive at a fair and accurate valuation, reducing the risk of overpaying or undervaluing the target.

By understanding what you’re acquiring, identifying deal-breakers and deal-amenders, retaining key staff, and being prepared to walk away when necessary, you can navigate the complexities of M&A with confidence and strategic foresight.

Learn How Midaxo Can Power Your Dealmaking

Contact us for a live demo or simply to discuss how Midaxo can improve the productivity of your team