Mergers and acquisitions (M&A) represent some of the most important milestones in a company’s lifecycle. Whether it’s a strategic acquisition, a merger of equals, or the sale of a business to new ownership, these deals have the potential to transform the future of everyone involved. But before any agreement is signed, due diligence must take place.
Due diligence is the deep dive into a company’s financials, operations, legal standing, and risks. It verifies that what’s being presented matches reality and uncovers potential issues that could affect the value of the deal. While it can feel like a box to check, due diligence often determines whether a transaction succeeds, stalls, or collapses entirely.
Learn about Fully Accountable’s M&A Advisory services.
What is due diligence in M&A?
Due diligence is a comprehensive review process conducted by the acquiring party (or its advisors) before finalizing a merger or acquisition. It validates the target company’s information and highlights risks that may affect valuation, structure, or terms of the deal.
The process typically includes:
- Financial due diligence: Reviewing statements, revenue recognition, tax obligations, debt, and cash flow.
- Operational due diligence: Assessing supply chains, processes, and scalability.
- Legal due diligence: Examining contracts, compliance issues, and potential litigation.
- Commercial due diligence: Analyzing market position, customer base, and competitive dynamics.
- Human resources due diligence: Evaluating employee agreements, compensation, and cultural alignment.
Each of these areas can reveal information that impacts negotiations or even halts a deal altogether.
Why due diligence matters
The stakes in M&A are high. Buyers don’t want to inherit hidden liabilities, and sellers want to maximize valuation. Due diligence bridges that gap by ensuring transparency.
Protecting against financial surprises
Without thorough due diligence, buyers risk inheriting unpaid taxes, misstated earnings, or unsustainable revenue streams. Discovering these after closing can cause major financial damage.
Validating valuation
Deal valuations are based on assumptions about profitability, growth, and assets. Due diligence tests those assumptions. If earnings are inflated or customer churn is higher than expected, the purchase price may need to be adjusted.
Mitigating legal and compliance risks
From unresolved lawsuits to regulatory violations, legal issues can quickly derail post-merger integration. Due diligence uncovers these risks so buyers can address them upfront.
Ensuring cultural and operational fit
Beyond numbers, success depends on whether two organizations can function together. Operational and HR due diligence reveal whether integration is realistic or if misalignment will cause friction.
Building trust between parties
The process reassures buyers that they are making an informed decision and demonstrates that the seller is transparent and prepared. Trust established during due diligence often carries into the integration phase.
Common pitfalls when due diligence is weak
When due diligence is rushed or incomplete, problems emerge later that erode the value of the deal. Common pitfalls include:
- Overstated revenue due to aggressive recognition practices.
- Underreported liabilities, such as unpaid taxes or pending litigation.
- Customer concentration risks, where a few accounts represent most of the revenue.
- Inflated projections not backed by historical performance.
- Hidden operational issues, such as reliance on outdated systems.
Each of these can materially change the economics of a transaction. That’s why thorough due diligence is considered non-negotiable in professional M&A processes.
The role of accounting in due diligence
Financial due diligence is often the centerpiece of the process, and it relies heavily on accounting. Clean, accurate, and timely financial records make the process faster and smoother. In contrast, messy books or inconsistent reporting create red flags that may lower valuation or cause buyers to walk away.
Accountants involved in due diligence:
- Reconcile historical statements to confirm accuracy.
- Identify adjustments to normalize earnings (removing one-time events).
- Review revenue recognition policies.
- Assess tax compliance and liabilities.
- Provide insight into cash flow sustainability.
For sellers, preparing financials ahead of time with the support of experienced accounting professionals can significantly improve outcomes. It reduces the risk of delays, builds buyer confidence, and positions the company for stronger negotiations.
A practical example
Consider a software company preparing to be acquired. On the surface, its annual recurring revenue looked strong, and the asking price reflected high growth potential. During due diligence, however, the acquiring party discovered that much of the revenue came from short-term contracts with high churn risk.
Without this discovery, the buyer would have overpaid significantly. Instead, the due diligence process led to an adjusted valuation and more realistic deal structure. For the seller, better preparation of customer data and revenue recognition practices could have maintained more of the initial value.
Preparing for due diligence as a seller
Sellers who prepare well for due diligence increase their chances of closing deals at favorable terms. Preparation includes:
- Cleaning up financial records and ensuring consistency.
- Documenting contracts, licenses, and compliance reports.
- Organizing customer and vendor data.
- Addressing any outstanding legal or regulatory issues.
- Establishing internal controls to demonstrate strong governance.
These steps not only make the process smoother but also instill confidence in potential buyers.
The buyer’s perspective
For buyers, due diligence is about more than protecting against downside risk. It’s also about identifying opportunities. A thorough review may uncover untapped customer segments, overlooked operational efficiencies, or synergies that increase post-acquisition value.
Buyers who approach due diligence strategically often find ways to justify paying a premium because they have identified how to unlock more value after closing.
How fractional experts add value
Not every business has in-house expertise to manage due diligence effectively. Fractional CFOs, controllers, and accountants can fill the gap. They bring experience from prior transactions, understand what buyers are looking for, and prepare companies to withstand scrutiny. For buyers, they provide the analytical muscle to dig into financials quickly and accurately.
This flexible expertise allows companies to access the same caliber of support as large enterprises, without the overhead of full-time executives.
Due diligence as a driver of successful integration
The benefits of due diligence don’t stop at closing. The insights gathered during the process often serve as a roadmap for integration. Knowing where risks exist, where systems overlap, and where opportunities lie allows leadership to create smoother transitions. In this way, due diligence isn’t just about validating a deal—it sets the foundation for making the deal work long-term.
Prepare Your Business for Successful M&A
Due diligence can make or break a merger or acquisition. Companies that prepare thoroughly not only protect against risks but also position themselves for stronger valuations and smoother integration. If your business is considering an M&A transaction, now is the time to get your financials and governance in order. Fully Accountable can help you prepare with clean reporting, thorough analysis, and fractional expertise that builds buyer confidence. Schedule a call today to learn how we can support you in achieving a successful deal.
