18 . 06 . 2019
M&A Due Diligence - what exactly does it include?
18 . 06 . 2019
Although the answer may seem obvious, it is worth taking a closer look: what exactly is Due Diligence? Does this concept mean the same as auditing or examining the condition of a company? What is it done for? And, finally, who carries it out? In this article you will learn exactly what this indispensable part of every business deal consists of.
You probably already know that Due Diligence serves as an enterprise audit, which is usually requested by an investor interested in buying. It’s no secret that the investor just wants to check if the deal will be profitable for him. This type of process involves analyzing all company operations and gives an overall picture of the company to interested parties. The analysis is usually performed by external specialists: financial, tax and other, and it requires good organization and detailed knowledge so that it can work best for the benefit of all parties to the deal. Let’s see how it’s done.
What is Due Diligence?
The concept of Due Diligence is derived from the American interpretation of civil law. It was widely used in 1933 due to the adoption of the Securities Act. It is similar in meaning to the terms: legal audit, financial audit or business condition test.
Due Diligence is most often performed by the investor before making the decision of capital entry. During the investigation, the financial, commercial, legal, tax and technological condition of the enterprise is thoroughly analyzed (based on historical data) in order to objectively assess the operational situation of the company – its strengths and weaknesses. This allows to estimate the opportunities and threats arising from the transaction before negotiations start. Going further, we are able to determine potential risks affecting the value of the purchased company and what the chances of the deal success are. Due Diligence immediately precedes the negotiation stage, after which – if the talks are successful – the investment agreement is signed. Stages of a company’s sale (Mergers and Acquisitions) can be compared to a couple getting to know each other before making a wedding decision. Due Diligence is the stage of mutual “evaluation” before the engagement.
Who conducts Due Diligence?
Depending on the type of the deal, Due Diligence is carried out by lawyers, financial advisors, tax advisors, consultants, IT specialists, technical experts and other professionals. Due Diligence is probably the most important step in the merger and acquisition process for the buyer as it helps verify key information provided by the seller. According to the generally shared opinion, conducting such an investigation is a privilege of the buyer who wants to know if the subject is worth investing in. However, this process does not always brings the same results.
Obviously, the test results are of key importance to the buyer and bad results can affect the deal – let’s imagine that the buyer has identified risks and errors that have contributed to the reduction of the company’s value. Sometimes, however, Due Diligence is ultimately more important for the seller, who, by undergoing an examination, protects themselves against liability for defects in the subject of the transaction. Imagine a situation in which the seller has fulfilled their obligations by submitting to Due Diligence, provided the necessary documentation and answered all the questions asked, thanks to which they met the requirement of reliability, but the buyer incorrectly assessed the information obtained and drew conclusions unfavorable from a business perspective.
The seller can also perform such an investigation to prepare for the transaction before talking to investors. This type is called Vendor Due Diligence and allows the seller to identify potential transaction opportunities and risks (you can read more about this in our entry Vendor Due Diligence – the value of negotiation preparation).
Types of Due Diligence
Depending on the analytical perspective adopted during the investigation, several Due Diligence categories are distinguished. These analyzes are carried out by specialists in a given field, which gives a deep insight into a given area of the company’s operation and together creates a detailed picture of its overall condition. Individual studies can be carried out complementarily in order to broadly examine a given area of the company’s operation or diagnose a problem that the investor pays special attention to.
- Legal Due Diligence covers, among others, examines corporate documents to confirm their compliance with applicable law.
- Financial Due Diligence covers, among others, the analysis of company documents to obtain the necessary information about significant events that could have an impact on the financial and property situation of the Company and on tax settlements.
- Tax Due Diligence verifies, among others, compliance of the declared revenues and costs with the amounts resulting from the accounting records.
- Business Due Diligence covers the analysis of the company’s industry and market position, as well as its competition.
- Vendor Due Diligence is an analysis undertaken by the owner to identify potential transaction opportunities and risks, even before starting talks with investors.
How much time does Due Diligence take?
The investigation, its conclusion and valuation can last from a week to even several months. It all depends on the size of the company, the scope of its activity and the complexity of business processes. The time is also influenced by the need to recruit external experts, usually in a situation where the company has a niche specialization.
When should you consider Due Diligence?
The Due Diligence process begins when the buyer recognizes the potential for acquisition or when the seller decides to sell all or part of the business and is searching for investors. So, for example, Due Diligence, as a “pre-investment” operation, is most often used in the case of:
- sale of an enterprise (in its entirety or its organized part)
- sale of shares or stocks
- mergers of limited liability companies
- introducing the company to the stock exchange, the so-called IPO
- the company’s search for external investors
- restructuring
An individual Due Diligence process is carried out for each enterprise, depending on the entity’s situation and the owners’ expectations. It will look slightly different depending on the type of transaction, but its basic principles and mechanics will be the same for each of them. In a typical sales transaction, the company usually has 4 stages: preparation for the transaction, search for investors, proper Due Diligence and negotiations and, finally, signing the contract and closure. You can read more about this subject in the entry Due Diligence stages – selling your business step by step.
Did you like the article?

How many heads, so many ideas. That's why each of us contributes to making the content on our blog attractive and valuable for you. Discover a source of knowledge and inspiration for your business with Fordata.
Do you want to exchange knowledge or ask a question?
Write to me : #FORDATAteam page opens in new window
Are you preparing for Due Diligence? We know how you can improve it!
SEE HOW FORDATA WORKS! SEE HOW FORDATA WORKS!-
01 . The Shifting Landscape of Gaming M&A: A Tale of Investments, Acquisitions, and Emerging Trends
The trajectory of the gaming industry’s investment landscape has been anything but predictable. Q1 2023, marked by a cooling-off period from the frenetic growth during the Covid-boom, saw investments dip significantly.
15.09.2023
-
02 . M&A Landscape in the Middle East: Navigating Challenges and Seizing Opportunities
The Middle East has long been recognized as a dynamic and transformative region, and its M&A sector is no exception.
11.08.2023
-
03 . Energy industry 2023: Virtual Data Room in M&A transactions
The situation in the energy industry in Poland and Central and Eastern Europe is rapidly changing. What do investments in renewable energy look like?
06.06.2023
-
04 . Outlook for 2023 for M&A transactions in Scandinavia
The Nordic countries are considered stable and developed markets with strong economies. What key trends will drive the Nordic M&A market?
27.04.2023
-
05 . What do M&A deals look like in 2022?
What does influence M&A deals in 2022 besides the war? We analyze the factors that shape the global mergers and acquisitions market.
28.06.2022
-
06 . The role of the CFO in mergers and acquisitions - has it changed?
Financial directors have faced the big challenge of managing company’s funds in the uncertain reality caused by the coronavirus …
22.03.2021
-
07 . The post-pandemic outlook on M&A in the Baltic States
Like the entire M&A market, in the first half of 2020, the Baltic region was marked by lockdowns, which had a number of…
25.02.2021
-
08 . What are the benefits of the FORDATA system in M&A processes?
Global opportunities for mergers and acquisitions are expected to remain firm after the initial lockdown, as pointed out by PwC, but the new and the ongoing transactions will have to adapt to the new circumstances.
15.09.2020
-
09 . The post-pandemic outlook on M&A in Czech Republic and Poland
Coronavirus did stir up trouble for practically entire economies in Czech Republic and Poland. In general, companies…
03.07.2020
-
10 . M&A in the age of coronavirus - market at a turning point
The situation on the Polish mergers and acquisitions market today resembles a controlled lottery. Some investors and entities are withdrawing or suspending operations waiting for stabilization
29.04.2020
-
11 . CEE countries stay firm as global economy bears down
In the face of economic downturn all around, also in Europe, countries in the CEE region are expected to keep growing, especially…
16.12.2019
-
12 . Due Diligence stages - selling your business step by step
Every good investment decision is based on sound knowledge about a given company and transaction process. This applies…
25.06.2019
-
13 . Vendor Due Diligence - the Value of Negotiation Preparation
Vendor Due Diligence (VDD) is carried out only for the needs of the seller, which means that it takes place earlier than Due Diligence (DD).
09.11.2015
-
14 . How can we help you with Due Diligence?
Time plays a major role in M&A transactions. Even the smallest improvement that saves time needed to prepare and perform Due Diligence…
10.03.2014
-
15 . VDR in due diligence process
M&As are a permanent element of the economic world. Their goal is to achieve strategic and financial benefits by expanding markets, diversifying products and production processes.
27.05.2013