Due diligence is essential to all M&A transactions, particularly acquisitions. Buying a business is an intricate process that requires full concentration and attention to detail. Unfortunately, due to the sheer amount of data, it is also pretty easy to overlook certain aspects of the deal and make the wrong decision. 

due diligence questions to ask

To stay focused throughout the transaction, it might help to follow a structured strategy of asking specific due diligence questions when buying a business.

Questions for due diligence

Although the due diligence processes often fall into similar patterns, each transaction is unique. Therefore, the best practice for the buyer is to come up with due diligence questions that reflect the deal’s nature and the deal-making practices of both parties.

This way, the first stage of due diligence is outlining the buying company’s goals, values, and strategies. As long as the buyer understands their preferences and expectations, it becomes easier to streamline the transaction and know what questions to ask during due diligence.

  • Main takeaway: Before figuring out what due diligence questions to ask, the buyer must understand their own objectives and action plans.

The next step is to adopt an existing approach to using M&A due diligence questions. Once again, while there’s no one-size-fits-all structure to follow, there are several must-inspect areas.

Key due diligence questions for acquisition

Disregarding the industry of operation and the company’s size, there are a few universally crucial categories when it comes to due diligence questions for acquisition. Below are the six most important question groups to consider:

1. Finances

Profit is the ultimate purpose of any M&A. That’s why finance-related due diligence questions always have to come first. As a rule of thumb, the buying side will be requesting financial records for the last five years.

The questions will concern operating costs, investment and accounting policies, profit margins, debt, inventories, and more. Reviewing tax documents is vital at this stage when asking due diligence questions when buying a business.

Finance due diligence questions:

  • What was your expense ratio in the past years?
  • How do you plan your budget, and what tools do you use in the process?
  • Can you provide details of your capital expenditures for the upcoming year?

2. Legal

The buyer needs to meet with the seller’s lawyers to discuss legal M&A due diligence questions. Past and current litigations are the priority in acquisition decision-making, and it’s a good idea to explore them first.

Other topics to discuss with the legal team are licenses, insurance, and permits. In some cases, the buyer will also want to see environmental reports and health and safety notices.

Legal due diligence questions:

  • Do you have any contractual limitations on conducting business?
  • What regulation authority oversees your operation?
  • Did your company face any lawsuits?

3. Company

Before diving into the specifics of the front-end of the seller’s operation, it is important to examine the company’s structure first. The buyer will study the sell-side’s by-laws, ownership specifics, competition profiles, recent annual reports, and more.

Company due diligence questions:

  • How long have the key decision-makers in the company served in their positions?
  • Who are the board members, and what was their input like for the past five years?
  • What are the channels of communication with stakeholders?

4. Employees

A closer look at the seller’s organization will also include assessing the employees outside of the executive circle. The quality of the staff is an extremely valuable asset to the potential buyer as they drive the operation forward.

When putting together the due diligence questions to ask human resources, working alongside the integration team might be beneficial. Keeping the upcoming post-transaction procedures in mind helps focus on the most crucial aspects and express consideration to the employees who will be affected by the acquisition.

Employee due diligence questions:

  • Can I see a complete employee review with lengths of services and job descriptions?
  • How often do you assess the employees’ performance, and what approach do you take?
  • What are the stages of recruitment and hiring processes?

5. Product

Product or service-related questions to ask during due diligence mainly concern the descriptions, competitors, and marketing strategies. However, the buyer should always look past the catalog specifications and dig into the production costs and particularities, the major challenges, and evolution plans.

Product due diligence questions:

  • What are your supply channels?
  • Did you ever have product recalls, and why?
  • Do you have any patented products?

6. Customers

Customer profiles are just as important as employees’ and deserve the same level of recognition and appreciation. The buy-side will look at the general sales information, with a special focus on the most loyal clients.

In the B2B sector, the top customers might be represented by their attorneys, and the data they provide will be subject to an NDA agreement.

Customer due diligence questions:

  • What are your customer acquisition and retention strategies?
  • How are the contracts with customers structured?
  • What kind of feedback have you been getting from the target clientele?

A prepared due diligence question list

Lately, most M&A due diligence takes place online via virtual deal rooms. Some deal room software providers have more experience and knowledge in the merger and acquisitions sector and offer guidance to buyers and sellers.

The buyer can request a due diligence question list from the deal room company to arrange and streamline the process. Although, as mentioned before, every transaction comes with its own specifics and technicalities, following a checklist saves a good deal of time and effort.

  • Main takeaway: going along with a pre-made due diligence question list can significantly improve an M&A transaction’s agility.

At the same time, the seller can use the due diligence question list to get all the necessary information ready beforehand and further reduce the deal-making time.

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