How deep should the extent of due diligence be in cases of small acquisitions?
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How deep should the extent of due diligence be in cases of small acquisitions?
The extent of due diligence required certainly depends on the nature and the scale of the transaction. Regardless of the size of the target company, due diligence should be thorough and tailored to the specific circumstances. I think that the following elements of Due Diligence are inseparable and must be included in any M&A process.
• Financial Review
• Legal and Compliance Review
• Operational Review
• Physical Assets and Real Estate
• Environmental and Safety Compliance
Perhaps the most important point to make here is that regardless of the size of the transaction, no element of the Due Diligence process should be either discounted or overlooked.I am also interested in hearing the responses. Our DD seems to be very short (1-2 weeks) for small acquisitions but I’d be interested in other’s opinions.
Even in small acquisitions, due diligence should be comprehensive, covering financial, legal, operational, physical, and environmental aspects. The process should be scaled appropriately, focusing more deeply on areas with higher risks or strategic importance. Ensuring that no part of the due diligence process is discounted or overlooked helps protect against unforeseen liabilities, supports accurate valuation, and facilitates smooth post-acquisition integration.
However the extent and focus of the due diligence process can indeed be influenced by the acquirer’s level of diversification. Companies that are well-diversified across different industries or markets may have a higher risk tolerance because their exposure is spread out. This allows them to absorb potential losses from a single acquisition more easily than a company that is not diversified.In smaller acquisitions, the due diligence process should still be thorough but more focused. You might not need to dive as deeply into areas like financial complexities or large-scale compliance matters as you would with a major acquisition, but core areas such as legal standing, financial health, customer contracts, and key employee retention should be prioritized. The depth of due diligence should be balanced with the size and strategic importance of the deal, ensuring you cover essential risks without overburdening the process.
For me, it depends on the size of the acquisition in relation to the buyer company: assume the target company is worth $100M and the buyer company $1B; or scenario 2: he target company is worth $100M and the buyer company $50B; I think the relation matters to declare a target company small or big.
But my preference would always be, and therefore my advice: go through all layers of DD, and decide based on your culture and the risk which DD areas need more time and consideration than others. In case a) you might find the legal DD more important than a deep-deep dive into the finances, because of the rather small size of the company and the focus of the acquisition being buying IP.
While small acquisitions may require less extensive due diligence than larger deals, it’s crucial to conduct a thorough review of essential areas such as verifying financial health, assessing legal and tax compliance, reviewing core operations, and evaluating customer and supplier relationships. By balancing depth and efficiency, you can identify potential risks and opportunities without incurring excessive costs or delays.
It’s a great question, one I have asked myself many a time especially when compiling our Due Diligence request list. I always come back to using a comprehensive list and conducting a thorough dd process. My experience is that many of the dd items simply do not apply or they can be quickly reviewed and determined to be low risk or low priority. It is also helpful to identify the key drivers for the acquisition or consider what red flag items might kill the deal and put additional emphasis on those areas. Additional management calls can help you understand the business better especially when proper documentation is lacking.
The extent of due diligence for small acquisitions should be thorough enough to identify potential risks and ensure alignment with strategic goals, but it can be streamlined compared to larger deals. I would suggest focusing on key areas such as financial health, legal compliance, and integration challenges to avoid unnecessary delays or costs.
Often small acquisitions should also mean that the amount of data to be processed is also less, and hence a lower cost to incur on due diligence. I think it is useful to think of the critical red flags (deal-breaker) that would make the buyer change his/her mind. For instance, necessary legal due diligence topics include business certification, licenses, permits, as well as any outstanding litigation. Finance due diligence can be performed on a more narrow scope to focus on key areas (such as PPE or accounts receivable ageing).
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