Due Diligence for Acquisition Prospects: Why? and How?

Over the past three decades, I have advised clients in literally hundreds of mergers and acquisitions. If there is one thing I have learned from this experience, it is that performing comprehensive due diligence regarding all acquisition prospects is extremely important.

Why Perform Due Diligence?

First and foremost, to avoid buying businesses that are not what the acquiror wants. If due diligence uncovers information that provides a legitimate basis for not completing the acquisition, so much the better.
Second, so the acquiror can assess the acquisition risk and then appropriately allocate it while negotiating the terms and conditions of the purchase agreement.

How Should Due Diligence Be Conducted?

I recommend that due diligence be conducted in waves. This way the acquiror gets deeper into the details regarding the acquisition prospect only after threshold issues are satisfactorily addressed. By proceeding in this staged manner, a potential buyer can often avoid performing a complete due diligence review in a transaction that is ultimately called off.
I always recommend a comprehensive and thorough due diligence review. While it is important to scrutinize everything regarding the acquisition prospect before the deal is finalized, at the very least material issues (given the scope of the acquisition) should be investigated.

Who should perform due diligence?

Because performing due diligence involves assessing acquisition risk and requires judgment, I recommend that due diligence be performed by professionals with sufficient experience and acumen to carefully identify, evaluate and assess potential problems that may arise with the acquired company in the future.

I advise all my acquiror clients to never underestimate the importance of performing comprehensive and thorough due diligence regarding the acquisition prospect.