Due diligence
What it is, how it works, how much it costs, and why it is the most important step in any company acquisition. A complete guide with checklists by area.
Due diligence is the process by which a buyer comprehensively and systematically verifies all material information about the company they intend to acquire. It is the most technical phase of an M&A transaction and the one with the greatest impact on the final outcome.
For the buyer, rigorous due diligence prevents unpleasant surprises after signing: undisclosed tax contingencies, contracts with problematic clauses, excessive dependence on a single customer or supplier, or an inflated EBITDA driven by non-recurring items unlikely to repeat.
For the seller, a company well prepared for due diligence sells faster and at a better price. Transparency builds trust, and trust translates into better contractual terms and lower escrow retentions.
Blue Mountain has conducted due diligence on over 200 transactions. This guide gathers the most relevant lessons we have learned from both sides of the table.
Types of due diligence
Each area requires different specialists and produces findings with distinct impacts on the transaction.
Verification of financial statements, quality of earnings, EBITDA normalisation, working capital analysis, and debt review.
Review of corporate structure, key contracts, litigation, intellectual property, and regulatory compliance.
Review of tax compliance, tax contingencies, open audits, and available tax credits.
Analysis of processes, team, technology, supply chain, and growth capacity.
The process
After signing the letter of intent (LOI), the seller sets up a virtual data room where all the documentation requested by the buyer is deposited. The quality and completeness of this data room sets the pace for the entire due diligence process.
Specialised teams (financial, legal, tax, operational) simultaneously analyse the documentation for each area. Additional request lists (Q&A lists) are drawn up with specific questions that the seller must answer.
Meetings with the target company's management team to understand operations, culture, future plans, and resolve questions that the documentation does not clarify. These sessions are as important as the document review itself.
Each due diligence area issues a report with its findings, classified by severity: deal-breakers, price adjustments, matters to cover with warranties, and minor observations. The buyer assesses the overall impact.
Findings are translated into price adjustments, warranty clauses in the SPA, escrow retentions, or specific indemnities. A well-executed due diligence protects the buyer and facilitates a smoother closing.
Common mistakes
Avoiding these mistakes can make the difference between a successful deal and an expensive failure.
Saving 50,000 euros on a full due diligence can cost millions in undetected contingencies. The cost of DD is a tiny fraction of the transaction value.
An EBITDA inflated by non-recurring expenses, atypical owner compensation, or extraordinary income distorts the valuation and can lead to overpaying.
If the business depends too heavily on the founder (client relationships, technical knowledge, decision-making), the real value may be far lower than it appears.
Open fiscal years with aggressive related-party transactions, unjustified invoices, or incorrectly declared VAT can trigger supplementary assessments with surcharges and interest.
Change-of-control clauses in contracts with clients, suppliers, or lenders can be triggered by the sale and substantially alter the terms of the business.
A rushed due diligence is an incomplete due diligence. Sellers who push to close quickly sometimes do so to limit what the buyer can discover.
If you wish to explore a potential collaboration or present an investment opportunity, we invite you to contact us. We guarantee absolute confidentiality in all our conversations.