M&A due diligence checklist: What documents to include?
Table of contents
What is M&A due diligence? What is a due diligence checklist, and why is it essential for successful due diligence? Key M&A due diligence steps M&A due diligence checklist example How to collect due diligence documents? Common pitfalls of M&A due diligence Ideals VDR for M&A due diligence Key takeaways
M&A due diligence can be challenging for both deal sides. Sellers often grapple with data preparation, managing frequent buyer requests, and mitigating disclosure risks. Buyers, on the other hand, may struggle with time constraints, incomplete or inaccurate data, and uncovering hidden liabilities.
At the same time, due diligence, especially financial one, remains one of the most important elements in achieving deal success for about 40% of dealmakers.
How can dealmakers navigate this crucial stage effectively? A well-structured M&A due diligence checklist is one practical solution.
For buyers, such checklists streamline document collection and help ensure no critical details are missed. For sellers, creating a checklist ensures they provide all the necessary data in an organized manner, reducing potential back-and-forth with buyers.
In this article, we explore the fundamentals of M&A due diligence, overview what a typical checklist for M&A due diligence contains, and why having one is critical for deal success.
What is M&A due diligence?
M&A due diligence is a process where buyers and sellers review and verify important information about a business before completing a merger or acquisition. It involves examining financial records, legal documents, operations, and other key areas to ensure there are no hidden risks or surprises.
This step is crucial because it helps buyers make informed decisions, assess the true value of the business, and identify any potential problems. For sellers, due diligence builds trust with buyers and ensures the deal goes smoothly.
In short, it’s a way to reduce risks and set the stage for a successful transaction.
What is a due diligence checklist, and why is it essential for successful due diligence?
A due diligence checklist is a detailed list of documents a buyer requests from a seller during the due diligence stage.
Before the due diligence, an acquiring company prepares a due diligence checklist that lists all the documents an acquirer wants to review. This ensures the target company has all the necessary information prepared, and the buyer has access to it. Thus, it significantly accelerates the deal outcomes, which is beneficial for both sides.
You can structure M&A due diligence checklist documents by investigation areas, including but not limited to:
- Legal
- Financial
- Intellectual property (IP)
- Sales
- General corporate information
- Tax information
- Human resources data
- Property and equipment
- Marketing
Key M&A due diligence steps
Let’s now briefly review the key steps of the due diligence process and preparation of the due diligence checklist M&A. The process will slightly differ depending on whether it’s a public or private company.
However, the major stages of the M&A due diligence process typically include:
- Handling initial issues
It includes defining the type of the deal (vertical or horizontal merger, etc.), its nature (hostile takeover or merger of equals, etc.), parties involved, deadlines, and expected end product. - Building the due diligence team
At this stage, the buy-side assembles a team of specialists in such areas as law, real estate, intellectual property, environmental audits, HR, etc. - Submitting the due diligence request
The buy-side submits a due diligence request and shares the due diligence checklist with the sell-side. - Distributing and organizing the documents
All the data required for the due diligence process is prepared and organized according to the due diligence checklist requirements. At this stage, parties also define the way data will be shared and whether the hardware is needed. One of the common options is a virtual data room (VDR). - Cooperating on the due diligence findings
It implies defining the channels and process of the buy- and sell-side cooperation during the due diligence, if there’s such a need. - Reviewing the key sources of information
This implies reviewing such critical information as SEC filings or regulatory compliance documentation (SOC compliance, for example). - Proceeding with additional specialist’s review if necessary
For certain documents review, outside specialists’ consultation might be required. This is especially applicable to various legal documents or intellectual property findings.
How long does M&A due diligence take?
M&A due diligence typically takes 30 to 90 days, depending on the deal’s complexity and the size of the business.
Smaller or more straightforward deals may take less time, while larger or more complicated transactions can take longer. The timeline also depends on how quickly both parties provide and review the required information.
M&A due diligence checklist example
Typically, before any deal, an acquirer creates the M&A due diligence checklist template to use during the upcoming due diligence process.
The buy-side can use templates offered by various resources on the web (like this one from Smartsheet) or create the deal-specific due diligence checklist on their own.
Below, we offer an example of a checklist to use when drafting one for your upcoming deal.
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Get startedList of due diligence documents for M&A: Key 8 areas
You should focus on the following information while conducting due diligence.
1. General information
Buyers collect general corporate records to familiarize themselves with target businesses.
| Area | Documents |
| Organizational documents | Organizational chart Articles of incorporation and corporate structure documents Restructuring and reincorporation documents Certificate of Good Standing List of authorized jurisdictions List of subsidiaries, partnerships, and joint ventures List of company’s shareholders Agreements related to preemptive and registration rights Management and ownership structures |
| Business materials | Business plans and board packs Annual reports for the last three-five years Corporate bylaws and their specifications |
2. Legal due diligence
During legal due diligence review, companies collect legal documents to eliminate the litigation risks and the risks of inheriting legal issues of acquired businesses. Often, sides involve a law firm for professional assistance.
| Area | Documents |
| Legal disputes and litigation | Concluded, active, pending, or threatened litigation against or initiated by the target company Judgments, injunctions, consent decrees, governmental investigations, and similar documents Copies of all settlement documents related to the company or its subsidiaries |
| Agreements and material contracts | Company contracts and consulting agreements Franchise and licensing agreements Copies of all guarantees provided to or by the target company Indemnification agreements and contingent liabilities Auditor’s correspondence and corporate attorneys’ letters to auditors |
| Loans and obligations | Copies of all security agreements, mortgages, letters of credit, contingent obligations, and leases Copies of all outstanding letters of credit and other bonds List of all banks, creditors, and lenders, or guarantors a target company deals with All documents relating to outstanding debt, indemnification, guarantee, or other agreements |
3. Accounting and financial
Financial due diligence helps verify whether acquiring a company will be profitable for your business in the long run.
| Area | Documents |
| Financial documents and income statements | Market capitalization and equity documents, including stock purchase agreements, balance sheets, cash flow statements, and deferred revenue Three years of audited and unaudited financial statements Budget plans, including operating and capital budgets Copy of the general ledger, including accounts payable and accounts receivable Bank statements for all business accounts |
| Control methods and material agreements | List of internal control procedures Insurance coverage Insurance policies and audit reports Accounting methods, including amortization and depreciation methods for the past five years Credit agreements, including lines of credit and loans |
| Tax information | Tax structure and tax returns for the last three years Copies of all tax sharing, transfer pricing, or tax benefits agreements Description of all tax audits involving the target company for the last three tax years Statements of property taxes paid by the target company Government audits |
4. Sales and marketing
Buy-side companies collect sales and marketing due diligence documentation to ensure that the target company can generate forecasted profits.
| Area | Documents |
| Customer insights | List of top active and former customers with revenue records Customer analysis Copies of material customer contracts and long-term sales contracts Records and summaries of warranty claims |
| Marketing insights | List of top suppliers, distributors, and resellers Market research records Marketing agreements, strategies, and plans |
| Products and advertising materials | List of existing and unreleased company products and services Advertising materials, including sales sheets, press releases, brochures, and TV commercials Sales analytics |
5. Human resources
Human resources due diligence documents help determine a target company’s key talents and integration opportunities.
| Area | Documents |
| Employee insights | Current employee demographics CVs of key employees Employee benefits and handbooks |
| HR contracts | Non-disclosure, non-compete, and non-solicitation agreements Employee skills and competence evaluations Employment contracts Payroll documents, deferred workers compensation plans, and pension plans HR policies and practices Labor disputes |
6. Intellectual property
Conducting due diligence on the target company’s intellectual property structuralizes its IP portfolio and ensures there are no hidden IP rights issues.
| Area | Documents |
| Patents and software | Patents, patent applications, proprietary software and IT systems, trade secrets, and their descriptions Copies of patent research and development, licensing, and collaboration files Licensing revenues and expenses |
| Ownership information | Trade names, trademarks, and copyrights (both material and unregistered) Chain of title records List of websites and social media accounts |
| IP protection information | Documents regarding IP protection measures Claims and threats around IP |
7. Property and equipment
Property due diligence helps you verify the target company’s tangible physical assets to determine the acquisition value.
| Area | Documents |
| Company’s property audits | Copies of inventory listings at the end of the fiscal month and year Documents regarding inventory storage practices Lists of leased and owned properties, real estate, and fixed assets with specifications (date acquired, location, cost, etc.) |
| Legal information | Equipment leases and property deeds Copies of equipment appraisals UCC filings |
8. Strategic fit assessment
Strategic fit due diligence helps a buyer understand the target company’s total value and determine whether the deal is profitable in the long run. You should decide whether the target company fits your strategic plans by evaluating due diligence findings in other areas.
To do so, evaluate the following:
- Acquisition value drivers, including technology, markets, products, and intellectual property
- Assessments of marginal costs following the company’s acquisition
- Evaluations of synergies in sales, management, production, and other areas
- Review of acquisition risks
- Availability of complementary products to the buyer’s products
How to collect due diligence documents?
Businesses employ a step-by-step approach for collecting due diligence documentation:
- Time frame negotiations
You should decide on approximate due diligence deadlines and discuss guidelines for emergencies. - Team formation
Delegate document collection to accountants, attorneys, and M&A experts. Each due diligence team might follow a dedicated due diligence checklist in financial, legal, marketing, and other investigation fields. - Document collection
Collaborate with sell-side teams, send request checklists, and collect documents in a virtual data room. - Findings evaluation
Carefully analyze due diligence findings to minimize overlooked benefits and risks of the upcoming merger or acquisition.
Common pitfalls of M&A due diligence
Here are three of the most common mistakes to avoid during M&A due diligence.
1. Treating document collection as a simple audit
According to the Bain M&A Report 2024, about 65% of buyers claim that a gap in valuation expectations affects deal outcomes. This often originates from improper, rushed investigations and misleading conclusions about business sellers.
It happened to Bank of America, which lost over $50 billion due to the collapsing mortgage market and fraud settlement after acquiring Countrywide Financial.
You can avoid such scenarios by emphasizing and evaluating the deal’s benefits and risks discovered during the due diligence process.
Completing checklists for due diligence is crucial, but the whole process is a deep analysis of the target company, not a simple audit.
2. Failing to involve industry experts
It’s okay if your compliance team lacks experience in all dedicated due diligence areas. However, you might risk overlooking critical issues if you delegate due diligence document collection to general analysts.
Instead, hire third-party professionals to compensate for your team’s knowledge gaps.
3. Failing to recognize inapplicable documents
There is no one-size-fits-all approach to collecting due diligence documents, even though it might seem that way when using due diligence checklist templates.
You can use them as a reference to set the due diligence direction and speed up the process by developing organization-specific checklists. Otherwise, you may end up reviewing irrelevant documents.
Ideals VDR for M&A due diligence
Ideals virtual data room is a go-to solution for buyers and sellers when conducting due diligence.
The due diligence process involves a lot of sensitive document sharing, which is why a high level of data security is of paramount importance. Ideals allows not only to store and share large volumes of data on the cloud but also do it securely thanks to the various security measures and granular access controls.
Source: Ideals
Besides that, Ideals virtual data room for due diligence allows buyers and sellers to:
- Track user activity
Ideals offers user activity and engagement monitoring functionality. It allows sellers to always spot what documents bidders view the most so that they can react proactively when there’s a need. - Establish effective collaboration
Thanks to Q&A functionality, the sell-side and buy-side can effectively communicate in real-time and solve any arising issues in a breeze. - Optimize the document review process
User and data management features such as drag-and-drop upload, automatic indexing, bulk user invitation, advanced search, and smart indexing allow users to streamline the document review process. - Optimize due diligence checklist management
Ideals offers a dedicated due diligence checklist functionality that allows uploading existing XMSL checklists to VDR and effectively working on them further. This ensures accurate file versioning and alignment of all involved parties. - Close deals faster
All the abovementioned offerings, including effective collaboration, easy document management, user activity tracking, and due diligence checklists, allow working on the review process more productively which leads to closing deals faster.
Key takeaways
- The M&A due diligence checklist is a list of documents an acquirer requests from the target company during the due diligence stage of mergers and acquisitions.
- The M&A due diligence checklist aims to ensure that no critical data is missed during due diligence. This, in turn, significantly boosts the chances of a successful deal closure.
- The contents of the due diligence checklist depend on the type of the deal, its objectives, and the parties involved. The typical areas of documents to add to a due diligence checklist include financials, human resources information, marketing and sales materials, tax data, legal documents, and more.