M&A Glossary
Due diligence: what a buyer actually checks
Due diligence is the buyer’s examination of a company before closing a transaction. Its purpose is not to find a perfect business. It is to establish whether the picture presented in the information memorandum matches the documents, and whether there are risks that will change the price or the structure of the deal.
Four areas of review
Financial
- quality of earnings and EBITDA adjustments
- working capital and seasonality
- debt and off-balance-sheet items
- revenue and margin structure
Legal
- title to shares and ownership history
- customer and supplier contracts
- disputes and proceedings
- intellectual property and real estate
Tax
- related-party settlements
- transfer pricing
- audits and adjustments
- reliefs and their conditions
Operational
- dependence on the owner
- customer concentration
- team and key people
- systems and processes
How long it takes
For a company with revenue in the tens of millions of zloty, the review usually runs four to eight weeks from the moment the data room opens. It stretches when documents still have to be assembled or when answers to questions arrive a week late. This is the most common reason a sale process drags on, and the one the seller has most control over.
What happens with the findings
Findings land in three places: in the price, in the representations and warranties in the agreement, and in security arrangements such as an escrow account or deferred payment. A risk that is disclosed and described can usually be dealt with. A risk the buyer discovers alone, after the seller failed to mention it, costs far more, because it undermines trust in everything else in the materials.
Frequently asked
Questions about due diligence.
Who pays for due diligence?
The buyer commissions and funds the review. The seller bears the cost of preparing materials and of the team’s time, and sometimes of a vendor review if they want to get ahead of the questions.
What is vendor due diligence?
A review commissioned by the seller before talks begin. It surfaces problems early, so they can be fixed rather than used as leverage. It makes sense in larger processes and where several buyers are expected at once.
Can you refuse to share a document?
You can, and sometimes you should, for instance with data confidential to a competitor. A refusal needs explaining and is usually replaced by limited disclosure, later-stage access or access restricted to the buyer’s advisers.
See also
- Price chipping - how buyers cut the price after the review
- M&A glossary - 72 terms used in transactions
- How we run a company sale
- How we work and how we charge