DD and M&A success
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How can proper financial and legal due diligence impact the success of an M&A transaction, and what are the risks of neglecting this phase?
Financial and legal due diligence are largely regulatory and compliance driven. Risks of neglecting this phase can significantly impact the business through government and regulatory fines, employment legal and customer retention challenges. This is a highly critical day-1 function.
From a legal perspective, I can confirm that omitting such an analysis can be very risky, both in terms of failing to properly assess ongoing litigation and in terms of potential litigation risks or regulatory sanctions for current or past operations. In this regard, it is crucial to check the contracts proposed to clients and those used in corporate transactions.
Proper financial and legal due diligence ensures a clear understanding of the target company’s financial health and legal standing, helping avoid hidden risks. It prevents unforeseen liabilities, legal issues, or regulatory penalties. Neglecting this phase can lead to financial losses, legal disputes, and potential transaction failure
I’ll add that both DD (as well as other DD as Tax, HR, IT, Operations) are a support to adjust the purchase price and not overpay. Also to identify one-time costs after closing (e.g. investing in new IT licencing).
As mentioned above, due diligence feeds into the deal negotiations, potentially reveals issues to be fixed pre/post closing, but can also be utilised to verify assumptions and to refine an integration plan.
Legal DD, especially intellectual property and trademark due diligence is super important, especially in the life science spaces. If not done well, you may end up spending a lot of money for something you may not ultimately have exclusive rights to.
Proper addressing those fronts will benefit the following topics – not limited: (i) Risk Mitigation, (ii) Valuation accuracy, (iii) Strategic Fit Assessment, (iv) Integration Planning, (v) Regulatory compliance, (vi) Stakeholders Assurance, (vii) contractual safeguards, among others.
In addition to the risks already mentioned, neglecting this phase can also lead to unexpected financial liabilities, such as unpaid taxes or hidden debts, which can derail the integration process. From an operational standpoint, the lack of proper due diligence might also result in misaligned business models or incompatible systems, making the integration more challenging than anticipated.
In addition to the risks already mentioned, there is one thing often overlooked during financial and legal due diligence – it can reveal hidden cultural or operational issues. In addition to uncovering debt or pending lawsuits, looking at employee contracts, supplier agreements, and customer deals can provide insight into potential challenges after the deal is done. For example, if there’s a restrictive non-compete on a key employee or a customer contract that limits price increases, it could affect the future value or growth of the company.
In my role as a financial professional, I can confirm that financial and legal due diligence are deeply interconnected and critical for a successful M&A transaction. Financial upstream reporting provides the parent company with a clear and consolidated view of the target’s financial health, while downstream reporting ensures alignment with strategic goals and compliance post-acquisition. Legal due diligence is heavily tied to tax and accounting, ensuring that all potential liabilities—such as fines from procedural errors or undisclosed risks—are identified. It also plays a crucial role in establishing safeguards like retroactive price adjustments to account for impairments or hidden issues, whether intentional or accidental, ensuring the deal remains sound and value-creating.
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