As global mergers and acquisitions (M&A) activity rises in 2025, ensuring thorough due diligence is vital for safeguarding long-term value. Failing to perform adequate due diligence can lead to financial setbacks, overlooked liabilities, and integration challenges. Here are seven common mistakes to avoid:
1. Neglecting Red Flags in Financial Statements
- Failure to review financial statements in detail can result in unforeseen financial burdens.
- Look for potential tax liabilities, unpaid taxes, or ongoing audits.
- Investigate aggressive tax tactics or tax-related issues that could affect the deal.
- Obtain a quality of earnings report to spot one-time revenue, accounting discrepancies, or working capital needs.
- Conduct site visits to uncover issues like outdated or damaged inventory, equipment, or assets.
2. Overlooking Hidden Liabilities
- Unreported liabilities can lead to expensive surprises post-deal.
- Use forensic accounting to identify off-balance-sheet liabilities like undisclosed liens, environmental penalties, or pending legal actions.
- Ensure all potential liabilities are fully understood and accounted for before proceeding with the deal.
3. Overestimating Financial Forecasts
- Unreasonably optimistic seller projections can mislead buyers into overpaying.
- Critically assess revenue and cash flow forecasts to validate their accuracy.
- Review underlying assumptions and compare projections against historical performance.
- Stress-test financial forecasts to evaluate risks like customer concentration and sustainability of future revenue.
Ready to optimize your M&A process? Check out our Merger Due Diligence and Best Practices article.
4. Ignoring Internal Control Weaknesses
- Weak internal controls expose businesses to fraud or operational inefficiency.
- Assess issues such as poor inventory management, lack of segregation of duties, or outdated processes.
- Conduct a thorough internal control review to identify deficiencies and take corrective action.
- Ensure any internal control weaknesses are addressed before finalizing the deal.
5. Misjudging Tax Consequences
- The structure of the deal (asset-based vs. stock-based) impacts tax outcomes.
- Structure the deal to optimize tax benefits, such as using earnouts or installment sales.
- Be mindful of both federal and state tax obligations and how they affect the deal structure.
- Ensure the tax structure aligns with your client’s financial goals and compliance requirements.
6. Rushing Through Due Diligence
- Hasty due diligence can result in missing critical details that affect the deal.
- Review all financial statements, legal documents, and operational structures carefully.
- Examine the fine print of key contracts, including franchise agreements, insurance policies, and property leases.
- Take the necessary time to identify hidden risks, restrictions, or renegotiation clauses.
7. Handling Due Diligence Alone
- Attempting to conduct due diligence without professional expertise is risky.
- M&A deals are complex, and it’s important to have experienced professionals involved.
- Expert advisors can identify overlooked issues, help negotiate favorable terms and provide insights into accounting and tax implications.
- Consider involving legal, financial, and tax experts early in the process to avoid costly mistakes.
Don’t risk missing critical issues in your deal. Start your due diligence process with expert guidance today.