Due diligence in the M&A process (Source: Deminor NXT)

After signing a letter of intent ("LOI") or a non-binding offer ("NBO"), comes the in-depth review, better known as due diligence.

Due diligence is one of the most important steps in the M&A process for a buyer. It allows them to verify the accuracy of the information presented by the seller and gain a better understanding of the risks associated with the target company. Specifically, the buyer can timely identify current and future red flags and protect against unexpected costs or issues during the acquisition process. This requires a reasonable investigation into various aspects of the target, including its compliance with anti-money laundering laws.

Financial Due Diligence

An essential part of this process is financial due diligence. This involves a detailed review of the stability of financial figures (EBITDA, income, working capital, net debt, etc.).

In addition to historical results, future growth prospects are estimated and business plans are verified. Furthermore, customer contracts, loan agreements, lease obligations, and other financial commitments are examined to give the buyer as complete a picture as possible of the company's financial health and the business transactions that follow. Understanding the adequacy of the business model is also crucial in this context.

Why is FDD important?

• Understanding Profitability: Based on historical financial figures and future business plans, the buyer gains a clear view of the company's development and profitability drivers.
• Risk Management: By detecting potential risks in time (e.g., legal complications, off-balance-sheet liabilities, or incorrect financial information), the buyer can take appropriate action by including guarantees in the SPA, thus transferring responsibility to the seller. Special attention to financial records can help avoid negative impacts during the acquisition.
• Valuation: By filtering out non-recurring and exceptional items from the company's results, a more realistic evaluation is possible, which is essential for determining the transaction price and subsequent negotiations.

Who conducts it?

Financial due diligence is usually performed by independent M&A specialists or specialized accountants.

Depending on the complexity of the transaction, legal and tax experts may also be involved to provide a comprehensive view of the company's financial health during international acquisitions.

Other Types of Due Diligence

Traditionally, due diligence is divided into financial, legal, tax, and commercial analyses. In 2025, the focus increasingly shifts to technology and sustainability risks, significantly increasing the number of Tech and ESG due diligences. This development highlights the growing impact of innovation and sustainability on strategic decision-making.

• Tax Due Diligence: Examines the tax structure and history of the company, including corporate tax, payroll tax, VAT, transfer duties, and international tax aspects.
• Legal Due Diligence: Assesses legal risks that may affect the transaction, such as shareholder agreements, articles of association, partnership contracts, and contracts with key suppliers or counterparties.
• Commercial Due Diligence: Analyzes market position, competition, customer base, pricing strategies, and growth potential to understand the company's stability and future prospects in the foreign market. This may involve understanding and setting a customer acceptance policy.
• ESG Due Diligence: Examines how a company operates sustainably and socially responsibly, focusing on environmental management, social responsibility, and governance factors.
• Tech Due Diligence: Evaluates the company's technology and IT infrastructure, including cybersecurity, software quality, technological innovations, and system dependencies. This provides insight into technological stability and innovation capacity, including the role of machine learning (ML) in operations.

What is the result of due diligence?

The results of due diligence are recorded in a due diligence report, which can vary from a detailed document to a concise summary of identified opportunities and risks.

Based on the findings, the investigation may lead to a price adjustment, additional guarantees, or changes in the major transaction agreement.

Written by

Justin Asiru

Below is a table presenting the different types of due diligence, including the type of expert usually appointed for each specific due diligence.

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