Essential Due Diligence Questions To Ask Before M&A Deals

In an increasingly digital world, mergers and acquisition (M&A) deals are no longer confined to straightforward corporate mergers. Instead, they comprise strategic alliances, minority investments, and cross-border transactions, each presenting its own set of challenges. The proliferation of disruptive business models, and the growing emphasis on environmental, social, and governance (ESG) goals have further heightened the complexities of M&A transactions.

As a result, the need for thorough due diligence has become more imminent than ever. Now, it is more about comprehensively examining economic metrics, legal compliance, cybersecurity resilience, operational efficiency, and even cultural alignments.

Acquirers must dig deeper into the intricacies of each transaction to uncover hidden risks and potential synergies. Sellers too must recognize the importance of thorough due diligence to strengthen their bargaining position and ultimately secure better deals. Failure to do so can result in missed opportunities, undervaluation of assets, and even legal repercussions.

Covering All Grounds: Key Risks To Keep In Check

During any M&A activity, both parties must undergo a series of negotiations where they confront numerous risks and find preventive measures. These risks may entail anything, from escalating threat of cybersecurity breaches to decreasing employee retention rates.

Acquirers must also scrutinize the intangible aspects of target companies, such as organizational culture and leadership dynamics. Toxic cultures characterized by unethical behavior, workplace harassment, or poor governance can undermine post-merger integration efforts and erode shareholder value.

It is only through a holistic look at due diligence that companies can uncover hidden value, manage risks, and ensure a successful transaction.

Looking to invest in a startup? Here are some questions you should ask before investing in a startup. Read here.

Questions Every Business Leader Should Ask While Working On A Due Diligence Report

Qualitative Questions to Assess Growth and Value drivers

1. What market trends and opportunities does the target capitalize on?
2. How does the target differentiate itself from competitors?
3. What is the target’s approach to product development and innovation?
4. Are there untapped markets or expansion opportunities that the target could pursue?
5. What are the primary value drivers for the target’s business?
6. How effectively does the target leverage its assets, capabilities, and intellectual property?
7. Are there opportunities to optimize operations, reduce costs, or enhance margins?
8. What strategies can be implemented to maximize shareholder value post-acquisition?

Commercial Due Diligence Questions:

1. Are the current industry margins sustainable?
2. What are the strengths, weaknesses, and unique selling points of the products/services compared to the target market?
3. How does the business plan align with the acquirer’s strategic objectives?
4. What is the company’s customer experience like?
5. What is the average customer acquisition cost, and how does it compare to the market average?

Financial Due Diligence Questions:

1. How strong is the target’s finance team? 
2. What is the overall strength of financial data and its underlying systems? 
3. Are there any off-balance sheet liabilities or contingent liabilities that need to be disclosed?
4. What assumptions were used in developing these projections, particularly regarding revenue growth, operating expenses, and capital expenditures?
5. Are there any segments or product lines that are more or less profitable than others, and what is driving these differences?

HR Due Diligence Questions:

1. Who is the direct supervisor of the senior human resources executive? 
2. Are human resources personnel actively engaged in strategic business decisions?
3. What is the total count of employees designated as temporary? 
4. What criteria define an employee as temporary, and under what circumstances and conditions are they classified as such?
5. Have there been significant fluctuations in the number of employees within each of the aforementioned categories over the past year? 
6. Are there any anticipated changes in staffing levels?
7. How many job vacancies currently exist across the various employee categories? 
8. Are there any notable shortages in specific employee categories that are impacting business operations adversely?

IT Due Diligence Questions:

1. What is the current state of the target company’s IT infrastructure, including hardware, software, networking, and cybersecurity systems?
2. Are there any ongoing IT transformation initiatives within the target company, such as system upgrades, digitalization efforts, or process optimizations? If so, what is their progress and expected impact?
3. How do the target company’s IT capabilities align with the acquirer’s IT strategy and objectives?
4. What are the key performance indicators (KPIs) used to measure the effectiveness and efficiency of the target company’s IT operations?
5. How scalable is the target company’s IT infrastructure to accommodate future growth and expansion plans?

Cybersecurity Due Diligence Questions:

1. How does the target company handle data protection, privacy compliance, along with other regulations such as GDPR or CCPA?
2. Are there any past incidents of cybersecurity breaches that the target company has experienced, and if so, how were they addressed and remediated?
3. What is the level of employee training and awareness regarding cybersecurity best practices within the target company?
4. Does the target company have an established incident response plan in place to address cybersecurity incidents effectively?
5. How does the target company ensure the security of sensitive data, including customer information, intellectual property, and financial data?

Operational Due Diligence Questions:

1. What opportunities for operational integration have been identified within the target company’s operations?
2. How are overlaps in operations, processes, and resource allocation being assessed to quantify potential collaboration?
3. What strategies are in place to streamline operations and optimize resource allocation post-merger to achieve cost efficiencies?
4. How will transition costs be minimized during the integration process, and what efforts are being made to negotiate favorable transition service agreements?
5. What steps can be taken to ensure efficient and timely integration of operations to realize identified synergies quickly while minimizing disruption to business operations?

Regulatory Due Diligence Questions:

1. What regulatory risks have been identified that might affect compliance or the value of the transaction?
2. How thorough have the regulatory reviews been, and what specific industry regulations have been assessed for compliance?
3. Are there any legal or regulatory hurdles that could potentially impact the transaction, and if so, how are they being addressed?
4. What strategies are in place to ensure compliance with regulatory requirements and proactively mitigate associated risks?
5. How are regulatory requirements being factored into the overall integration strategy to ensure a smooth transition and ongoing compliance post-transaction?

Tax Due Diligence Questions:

1. How is the transaction being structured to ensure it is tax-efficient and aligns with our commercial objectives?
2. What tax-efficient structures, such as mergers, acquisitions, or reorganizations, are being considered to optimize tax planning opportunities?
3. How are we coordinating tax considerations globally to ensure alignment with our broader investment rationale and compliance with tax laws and regulations across different jurisdictions?
4. Are there any specific tax risks or challenges associated with the transaction, and what strategies are being implemented to address them?
5. What measures are in place to ensure ongoing tax compliance post-transaction?

Deal-Breaker Questions:

1. Are there any material liabilities or contingent risks that could significantly impact the target’s financial health?
2. How dependent is the target on key customers, suppliers, or contracts?
3. Are there any unresolved disputes, litigation, or regulatory investigations involving the target?

As the global business landscape continues to evolve, effective due diligence will remain an indispensable tool for all companies initiating an M&A transaction. It serves as the ultimate reality check, providing a sober assessment of the target company’s financial health, operational integrity, and legal standing. After all, in the world of M&A, where fortunes are made and lost with a stroke of pen, ignorance is not bliss!