Buyer-side due diligence is not a mere formality as far as acquisition is concerned. It is the most critical of all protections to certify value, risk discovery, and plan to integrate. It is typically broken down into steps, purpose and considerations. This blog is a walkthrough of the key steps along with the key factors that a buyer needs to consider at every stage, followed by a summary.
The first step is clarifying why the acquisition is being pursued and what risks matter most. This stage involves aligning on the strategic rationale. The buyer may want to enter new markets, expand capacity, acquire technology, or capture synergies. At this point, the scope of the investigation must be set. Balance is key, since due diligence must be thorough but also cost and time effective.
Due diligence begins in earnest when the seller provides access to a virtual data room. It usually contains corporate, financial, tax, legal, HR, and operational documents. The buyer’s team should request supplemental records and clarifications early. Gaps discovered too late can slow the process.
Financial analysis is the cornerstone of diligence. The buyer must test whether reported earnings reflect sustainable operating performance. A Quality of Earnings review is often needed. This strips out one-time items, owner-related expenses, or unusual adjustments to calculate normalized EBITDA.
Tax exposures can erode deal value if ignored. Buyers should review tax compliance across corporate income tax, indirect taxes like GST/HST or VAT, and payroll. Deferred tax assets, loss carry forwards, and credits should be tested for realizability.
Legal due diligence will provide the buyer with clean ownership and awareness of the risks in the contract. It involves an overview of corporate structure and ownership records and governance documents. It maintains the fact that the seller has the power to sell.
The step affirms the reality of the business in the market. Changes in technology, regulators, and industry trends that can influence growth should be analyzed by the buyers. One of the biggest risks is customer concentration when you have too many customers and out of them there are a few who are very important. Supplier dependence can be similar if alternatives are scarce.
Operational diligence checks on the business are to be conducted. It has to do with supply chains, logistics, facilities, equipment and IT systems. A buyer is to test scalability and discover bottlenecks. Internal controls, risk management and continuity planning can be regarded as resilience.
A special consideration should be given to IT and cybersecurity. There can be high integration risk as well as high integration cost. This is done so that buyers can make assumptions about the price and the issues that may be absent in the numbers.
People are often the most valuable asset. Diligence should cover workforce structure, compensation, and benefits. Retention of key management is critical, since losing founders or executives can destabilize operations.
Buyers must also assess pension liabilities, stock options, and compliance with labor laws. Cultural fit matters too. Even financially strong deals can fail when cultures clash. A clearer understanding of workforce stability develops when turnover, employee engagement, and union relations are considered as a whole.
Technology and IP are likely to be the real drivers of value in knowledge-based sectors. Buyers should ensure that they have owned, registered and secured patents, trademarks, copyrights and proprietary technologies.
There are also risks of cybersecurity and privacy compliance to consider. Lastly, IT integration preparedness should be validated in order to minimize unnecessary post-closing costs.
Environmental, Social, and Governance factors are now central in acquisitions. Environmental compliance is essential, as contamination or hazardous material liabilities can impact value. Governance practices, such as board structures and transparency, affect the long-term stability of the investment.
Social factors matter as well. These include labor practices, diversity, and community relations. Neglecting ESG exposes buyers to liability or reputational harm post-closing.
All findings feed into valuation. Adjustments for normalized earnings, working capital, tax, and legal risks refine the buyer’s models. Valuation does more than set price. It informs deal protections too.
Buyers often negotiate price adjustments, escrow accounts, indemnities, or earn-outs to mitigate risks. Whatever the deal structure, be it an asset purchase, a share purchase, or a merger, it should maximize the favorable tax outcomes and minimise the liabilities.
The last stage is a transition between hard work and action. The planning should not begin after the close but in the process of diligence. Buyers need to get ready to operate on Day-1 to provide continuity to the customers, suppliers, and employees.
Integration into culture is not always easy. An effective communication strategy works. The IT integration, harmonization of HR and alignment of processes should be sequenced. Even an acquired company that is well negotiated may lose its value within a short period without a roadmap.
Some themes that define effective due diligence include:
Faber performs deep dives into financial statements to test accuracy and sustainability. This includes reviewing historical performance, earnings quality, cash flow, and accounting policies. They flag discrepancies, unusual trends, or aggressive practices. This helps the buyer understand the true financial position of the target.
Faber evaluates compliance and exposure in corporate tax, GST/HST, payroll and cross-border requirements. Our analysis can help buyers predict the risks and design tax-efficient structures.
Faber looks beyond numbers. We examine internal controls, processes and dependence on key persons or systems. This gives buyers insight into integration challenges, cost savings, and risks in scaling operations.
Faber works with legal advisors to review contracts, licenses, and filings. They help identify obligations or liabilities that could affect value or integration.
Faber can pinpoint risks and measure exposures by integrating financial, tax, operational and legal perspectives. We additionally suggest mitigation measures. Our input can cover contingent liability situations, working capital adjustments or post-acquisition liabilities.
Checks valuations, vets deal terms and designs to achieve the highest efficiency. This contains information on earn-outs, purchase price adjustments and financing.
Lastly, Faber creates detailed due diligence reports with action intelligence. We point out strengths, weaknesses, opportunities and risks.
These reports support boards and management in making confident acquisition decisions.
