What is M & A Due Diligence?

Answer: The textbook definition is: Due diligence is an investigation, audit, or review performed to confirm the facts of a matter under consideration. In the financial world, due diligence requires an examination of business financial records before entering into a proposed buy/sell transaction with another party.

But, what are some real world examples where this is extremely important? In my experience, business Sellers tend to avoid disclosing information that might decrease the value of the business they intend to sell. Therefore, take for example, a situation where a Fortune 500 corporation wants to buy one of it’s major competitors for billions of dollars. In an effort to quickly close the transaction they rushed their Due Diligence team to rapidly wrap up their work and they took shortcuts to finish quickly. The buyer proceeded to immediately close on the transaction. After they had owned this company for only a few months they eventually realized that the Seller had materially overstated profitability and significantly under-funded the employee Pension Plans and this item alone ended up costing them more than an additional $5 billion to purchase the company! Therefore, the value and importance of a highly skilled M & A Due Diligence team in the acquisitions process cannot be overstated!