Ma Due Diligence

M&A Due Diligence

Required Inputs

• Target Company: Name, industry, size (revenue, EBITDA, headcount), and brief description.
• Transaction Type: Buy-side (acquirer's perspective) or sell-side / vendor DD (seller preparing for market).
• Deal Thesis: Strategic rationale — why this acquisition makes sense (synergies, market access, capability, scale, vertical integration).
• Deal Structure: Asset deal vs. share deal; expected consideration type (cash, stock, earnout).
• Timeline: Expected DD window (typically 4-8 weeks); exclusivity expiration date if applicable.
• Budget / Scope Constraints: Which workstreams are in scope; any areas requiring specialist advisors.

Execution Steps

1. DD Scoping

Scope varies significantly between buy-side and sell-side engagements.

Buy-Side DD Focus:

Sell-Side (Vendor) DD Focus:

2. DD Workstream Details

Workstream 1: Financial Due Diligence

Quality of Earnings (QoE) Analysis:

Start with reported EBITDA and systematically adjust:

Adjusted EBITDA Bridge:
Reported EBITDA                         $___M
+ Non-recurring expense add-backs       $___M
- Non-recurring revenue subtractions   ($___M)
+ Owner / related-party adjustments     $___M
+/- Accounting policy normalizations    $___M
+/- Pro forma adjustments               $___M
+/- Run-rate adjustments                $___M
= Adjusted EBITDA                       $___M

Working Capital Normalization:

Net Debt Bridge:

Workstream 2: Commercial Due Diligence

Market Sizing Cross-Reference:

Validate the target's stated TAM/SAM/SOM using at least two independent methods:

• Top-down: Industry reports, analyst estimates, government statistics.
• Bottom-up: Customer count x average spend x penetration rate.
• Triangulate: Check that the target's revenue as % of SAM is plausible.

Customer Concentration Analysis:

Red flag thresholds:

• Top 1 customer > 20% of revenue: High concentration risk.
• Top 5 customers > 50% of revenue: Moderate-high concentration risk.
• Top 10 customers > 70% of revenue: Moderate concentration risk.

Competitive Moat Assessment:

Workstream 3: Legal Due Diligence

Workstream 4: Operational Due Diligence

Workstream 5: Technology Due Diligence

Workstream 6: HR & Cultural Due Diligence

3. Red Flag Identification and Classification

Every finding must be classified by severity. Use strict definitions:

4. Integration Complexity Scoring

Score integration complexity across 8 dimensions (1-5 scale):

Overall integration complexity: Average of dimension scores.

5. Data Room Request List

Organized by workstream. Send this to the target as the initial information request.

Financial (40-50 items):

• Audited financial statements (last 3-5 years)
• Monthly management accounts (last 24 months)
• Revenue by customer, product, geography (last 3 years)
• Detailed cost breakdown by category (last 3 years)
• Working capital detail (monthly, last 24 months)
• Debt agreements and amendments
• Capital expenditure schedule (actual and planned)
• Tax returns and correspondence with tax authorities (last 3-5 years)
• Budget and forecast (current year and forward plan)
• Related-party transactions detail

Commercial (20-30 items):

• Top 20 customer contracts
• Customer list with revenue, tenure, and contract terms
• Sales pipeline and bookings report
• Pricing history and scheduled price changes
• Churn analysis and customer loss reasons (last 3 years)
• Market studies or analyst reports referenced in management materials
• Competitor analysis and win/loss data
• Channel partner agreements

Legal (30-40 items):

• All material contracts (>$[X] annual value)
• Litigation summary (pending, threatened, settled in last 5 years)
• IP schedule (patents, trademarks, copyrights, domain names)
• Employment agreements for key executives
• Lease agreements for all facilities
• Insurance policies and claims history
• Regulatory licenses and permits
• Data processing agreements and privacy policies

Operational (15-20 items):

• Organization chart with headcount by function
• Key supplier contracts and terms
• Quality certifications and audit results
• Facilities list with lease terms and capacity utilization
• Business continuity and disaster recovery plans
• Key operational metrics and KPIs (last 3 years)

Technology (15-20 items):

• Technology architecture diagram
• Third-party software licenses and contracts
• Security audit reports and penetration test results
• Development roadmap and backlog
• System uptime and incident history (last 12 months)
• Data architecture and data flow diagrams

HR (15-20 items):

• Employee census (name, role, tenure, compensation, location)
• Organization chart by function and level
• Benefits summary and costs
• Employment agreements, non-competes, and change-of-control provisions
• Attrition data (voluntary and involuntary, last 3 years)
• Engagement survey results (last 2 surveys)
• Outstanding equity grants and option pool

6. Management Presentation Question Bank

Critical questions to ask the target management team (minimum 25):

Strategy & Market:

1. What is your sustainable competitive advantage and what threatens it?
2. Which competitors worry you most and why?
3. What is the single biggest risk to your business in the next 3 years?
4. How would you grow the business with $[X]M additional investment?
5. Which customers are you most at risk of losing and why?

Financial: 6. Walk us through EBITDA adjustments — what do you consider truly non-recurring? 7. What is your typical cash conversion cycle and how has it changed? 8. Where are the largest areas of management judgment in your financials? 9. Are there any off-balance-sheet commitments or contingent liabilities? 10. What is driving the trend in gross margin over the last 3 years?

Customers & Revenue: 11. What would it take for your largest customer to leave? 12. How do you acquire new customers and what is the cost of acquisition? 13. What is your net revenue retention rate and how is it trending? 14. Are any material contracts up for renewal in the next 12 months? 15. How much of your pipeline is committed vs. speculative?

Operations: 16. What breaks if the business doubles in size? 17. Where are the key person dependencies and what is the succession plan? 18. What are the top 3 operational improvements you would make with more resources? 19. Have you experienced any significant supply chain disruptions? How did you respond? 20. What is your biggest quality or delivery challenge?

Technology: 21. What is the most significant technical debt and what would it cost to fix? 22. How would you rate your cybersecurity posture on a 1-10 scale? 23. What is on your technology roadmap for the next 18 months and why? 24. Are there any open-source license compliance concerns? 25. What systems or technology would need to change in an acquisition?

People & Culture: 26. Who are the 5 people you cannot afford to lose and why? 27. How would you describe the company culture in 3 words? 28. What has voluntary attrition looked like and what are people leaving for? 29. Are there any outstanding employment disputes or union matters? 30. What would change about the culture under new ownership?

7. DD Timeline Template

Standard 6-week DD timeline with gated milestones:

Timeline adjustments:

• Compressed (4 weeks): Competitive process or exclusivity pressure. Cut depth, not breadth. Focus on deal breakers.
• Extended (8 weeks): Complex carve-out, multi-jurisdiction, or regulatory approval required. Add weeks 5-6 for specialist workstreams.

8. Finding Summary with Deal Impact Quantification

For each material finding, quantify the deal impact:

Impact quantification methodology:

• EBITDA impact: Annual recurring impact on adjusted EBITDA (positive or negative).
• EV impact: EBITDA impact x deal multiple (e.g., $1M EBITDA hit x 8x multiple = $8M EV impact).
• One-time costs: Integration or remediation costs not reflected in EBITDA (deducted from EV separately).

Output Template

## Due Diligence Report: [Target Company Name]

**Date**: [Date] | **Transaction Type**: [Buy-side / Sell-side]
**Target**: [Company] | **Industry**: [Industry] | **Revenue**: $[X]M | **EBITDA**: $[X]M
**Deal Thesis**: [One-sentence strategic rationale]

### Executive Summary
Due diligence on [Target] identified [N] findings: [X] deal breakers, [Y] material issues,
[Z] manageable items, and [W] noted items. Adjusted EBITDA is $[X]M vs. reported $[Y]M,
a [Z]% reduction driven by [key adjustments]. Net debt is $[X]M. Integration complexity
is scored [X/5] ([Low/Moderate/High/Very High]). The deal [remains viable with adjustments /
should proceed with caution / should not proceed] based on the findings below.

### Quality of Earnings Summary
| Item | Amount ($M) | Notes |
|---|---|---|
| Reported EBITDA | $___M | As per management accounts |
| Non-recurring expense add-backs | +$___M | [Detail] |
| Non-recurring revenue subtractions | -$___M | [Detail] |
| Owner / related-party adjustments | +$___M | [Detail] |
| Accounting normalizations | +/-$___M | [Detail] |
| Pro forma / run-rate adjustments | +/-$___M | [Detail] |
| **Adjusted EBITDA** | **$___M** | **[X]% vs. reported** |

### Net Debt Bridge
| Item | Amount ($M) |
|---|---|
| Funded debt | $___M |
| Lease liabilities | $___M |
| Other debt-like items | $___M |
| Less: Cash | ($___M) |
| **Net Debt** | **$___M** |

### Working Capital Analysis
| Component | Normalized Level ($M) | Peg Mechanism | Variance to Peg |
|---|---|---|---|
| [Component] | $___M | [Trailing X-month avg] | $___M |

### Commercial DD Summary
- **Market**: [TAM/SAM/SOM validated? Growth rate confirmed?]
- **Customer concentration**: Top 5 = [X]% of revenue. [Assessment]
- **Competitive moat**: [Assessment — strong/moderate/weak with evidence]
- **Revenue durability**: [Recurring %, contract length, retention rate]

### Findings Register
| ID | Workstream | Finding | Severity | EBITDA Impact | EV Impact | Action |
|---|---|---|---|---|---|---|
| F-01 | [WS] | [Finding] | [Severity] | $___M | $___M | [Action] |
| F-02 | [WS] | [Finding] | [Severity] | $___M | $___M | [Action] |

### Integration Complexity Assessment
| Dimension | Score (1-5) | Commentary |
|---|---|---|
| Systems overlap | X | [Note] |
| Geographic overlap | X | [Note] |
| Customer overlap | X | [Note] |
| Product integration | X | [Note] |
| Cultural distance | X | [Note] |
| Regulatory complexity | X | [Note] |
| People integration | X | [Note] |
| Operational integration | X | [Note] |
| **Overall** | **X.X** | **[Low / Moderate / High / Very High]** |

Estimated integration timeline: [X] months
Estimated integration cost: $[X]M ([X]% of deal value)

### Deal Breakers and Material Issues (Detail)
#### [F-XX]: [Finding Title]
- **Description**: [Detailed description]
- **Evidence**: [What was reviewed]
- **Impact**: [Quantified impact on EBITDA and EV]
- **Recommended action**: [Walk away / Price adjustment / Indemnity / Escrow / Integration plan]

### Recommendations
1. **Proceed / Do Not Proceed**: [Recommendation with rationale]
2. **Price adjustment**: Reduce offer by $[X]M based on QoE adjustments and identified risks
3. **Structural protections**: [Indemnities, escrows, earnouts, reps & warranties to negotiate]
4. **Integration priorities**: [Top 5 Day 1 / Week 1 / Month 1 actions]

### Cross-References
- Valuation analysis: See `valuation` skill output for DCF, comps, and precedent transactions
- Financial model: See `financial-modeling` skill output for detailed projection model

Quality Checks

• DD scope explicitly defined as buy-side or sell-side with appropriate focus per workstream.
• All 6 workstreams covered: Financial, Commercial, Legal, Operational, Technology, HR/Cultural.
• Quality of earnings analysis includes full adjusted EBITDA bridge with every adjustment categorized and quantified.
• Working capital normalized using trailing 24-36 month analysis with peg mechanism defined.
• Net debt bridge includes all debt-like items (leases, pensions, contingent liabilities, tax), not just funded debt.
• Customer concentration analyzed with specific revenue percentages and red flag thresholds applied.
• Competitive moat assessed across multiple moat types with evidence and sustainability rating.
• Every finding classified by severity using the four-level scale (Deal Breaker / Material / Manageable / Noted).
• Material findings quantified in terms of EBITDA impact and enterprise value impact using deal multiple.
• Integration complexity scored across all 8 dimensions with implied timeline and cost estimate.
• Management presentation includes at least 25 questions across strategy, financial, customer, operations, technology, and people.
• Data room request list organized by workstream with sufficient specificity to be sent to the target.
• DD timeline is realistic (4-8 weeks) with gated milestones and clear deliverables per week.
• Cross-references to valuation and financial-modeling skills included where applicable.
• Recommendations section provides clear proceed/no-proceed guidance with price adjustment and structural protections.