Due diligence is far more than a formality prior to a merger or acquisition. It is the process that determines whether a transaction makes strategic, financial and legal sense. Conducting it properly can mean the difference between a successful investment and a costly mistake.
The critical phases of the process
A comprehensive due diligence process is structured in several clearly differentiated phases. The first is the planning phase, where the scope, objectives and responsible team are defined. It is essential to establish from the outset which areas will be analyzed: financial, tax, legal, employment, environmental and operational.
The second phase involves information gathering and analysis. Here, financial statements, key contracts, pending litigation, tax status and regulatory compliance are reviewed. The quality of this phase depends largely on the seller’s cooperation and the advisory team’s ability to identify hidden risks.
Common mistakes and how to avoid them
One of the most common mistakes is underestimating the importance of employment analysis. Contingencies arising from collective bargaining agreements, pension plans or pending labor disputes can represent significant liabilities that completely alter the valuation of the transaction.
Another frequent error is not paying sufficient attention to contracts with strategic clients and suppliers. Change of control clauses, renewal conditions and warranties granted can have a material impact on the post-acquisition viability of the business.
Best practices
From our experience in over two hundred transactions, we recommend establishing a well-organized virtual data room from day one, appointing a single coordinator to centralize communications and using standardized checklists adapted to the specific sector of the target company.
Due diligence should not be viewed as a cost but as an investment in security. A rigorous process allows you to negotiate better terms, structure adequate warranties and, sometimes, make the most valuable decision of all: not proceeding with the transaction.