Prepare and execute the deal: Due diligence
Understanding the M&A lifecycle
Closing the deal - getting signatures on the dotted line - is often celebrated as the defining milestone in an acquisition. It is the result of months of effort, and for good reason: it is a moment worthy of recognition. But this is merely one step in a bigger scheme: the M&A lifecycle. A successful acquisition hinges on the many steps and decisions made both before and after signing. In this article we will take a closer look at the second step of preparing and executing the deal: due diligence.
Highlights:
- Modern due diligence is not merely about identifying the proverbial 'skeletons in the closet', but increasingly about uncovering growth opportunities, synergies, and scalability within M&A targets.
- Expanding beyond financial investigations, due diligence should integrate aspects such as Tax, Commercial, Operational, HR, Technology, Legal and ESG to form a comprehensive understanding of an acquisition’s value.
- For scalable growth, evaluating the adaptability of technology platforms and the security of IT systems is pivotal. Identifying necessary investments early ensures operational stability and expansion potential.
- A lack of cultural alignment between merging companies is a common reason for M&A failure. Assessing shared visions, values, and employee integration is critical to ensuring a successful partnership.
- Findings from the due diligence phase inform the overall M&A strategy, including risk mitigation, governance planning, and pricing mechanisms (e.g., completion accounts or locked box). These insights pave the way for effective deal execution.
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Due diligence: opportunities for value creation
The indicative offer has been made, the Letter of Intent (LoI) has been signed, so it’s time for the next step within the M&A cycle: due diligence. Historically, this step was often characterised as a search for ‘skeletons in the closet’ - hidden issues that might affect valuation, price, or contract terms, such as the sudden termination of a major client contract or a precarious tax position that impacts valuation. Today, due diligence is at least as much about opportunities as it is about risks, with a focus on scalability and unlocked potential. It is about looking at the past to discover future potential. Synergies, both expected and unexpected, are at the forefront, alongside improved processes that drive value creation and performance.
Broadening the scope
Modern due diligence encompasses far more than financial investigations, extending into various domains critical to understanding an acquisition’s potential. Financial, Tax, Commercial, Operational, HR, Technology, Legal, and ESG (Environmental, Social, and Governance) are all key areas of focus. Insights from one field often inform further exploration in others, gradually painting a comprehensive picture of the target organisation. For example, commercial due diligence may offer optimistic forecasts of revenue growth, which can then be validated and contextualised by findings from technology assessments.
Types of due diligence
Improving the decision-making process
Centralising all these forms of due diligence with a single provider enhances efficiency and ensures a cohesive review of risks and opportunities. It removes uncertainty from the buyer’s decision-making process and ensures a seamless transition to subsequent phases of the M&A cycle. This is exactly how we organise due diligence at Deloitte.
Client case: streamlining due diligence efforts
For an online services provider with disparate systems, we streamlined tax, financial, and technology due diligence. After several acquisitions, many parts of the organisation operated on different, non-integrated systems, increasing both complexity and management costs. Our analytics team first consolidated datasets into a uniform format to enable revenue and financial analysis. This foundational data supported financial and tax due diligence, as well as technology assessments. The findings revealed the need for a unified, scalable platform to support growth strategies in international markets, accommodate the expected increase in volume, streamline technology operations, and optimise costs. The collaborative approach delivered exceptional results, impressing the client with its insightfulness and integrated expertise.
The importance of cultural alignment
One common pitfall in M&A transactions is failing to consider cultural fit. Do the buyer and vendor share similar values, goals, and visions? Discrepancies here often result in fragmented organisations or employee attrition, eroding the anticipated synergies of the merger. For example, while acquiring a company to enhance cybersecurity capabilities may seem promising, past clashes between management teams could jeopardise integration. Comprehensive HR reviews, including alignment of benefit packages and management assessments, are key to mitigating such risks.
Coordinating due diligence streams
With so many workstreams in play, meticulous project management is vital to synthesise findings across disciplines effectively. At Deloitte, we can take care of this aspect of due diligence for our clients. The vendor’s level of preparedness also plays a significant role. Sales processes supported by robust documentation, such as Vendor Due Diligence (VDD) reports, Separation Memorandums, or Information Memorandums (IMs), will be more successful than processes that are less well-prepared.
Final reflections and best practices
A few additional considerations. First, your team has likely invested significant effort into preparing a multi-year financial forecast, so be sure to include the forecast in the negotiations. Using the analogy of ‘buying a home’ once again: if your constructional advisor has found one or more weak spots in the house of your dreams, you will likely include those (or let your estate agent include them) in the negotiations.
Second, avoid disconnecting the transaction team from the delivery team. Alignment across the entire lifecycle ensures smoother execution.
And finally: transparency matters. Document the processes behind your forecasts and valuation analysis, such as investment proposals preceding the offer. This strengthens corporate governance and supports transparency when the deal is finalised.
The next step: executing the deal and preparing for integration
The culmination of due diligence brings buyers to a pivotal juncture: whether to proceed with the acquisition or halt the transaction. If the decision is to move forward, the findings from this phase are instrumental in structuring the share purchase agreement and accelerating transaction completion. Pricing mechanisms, such as completion accounts or locked-box strategies, are just some considerations that play a key role in executing the deal and preparing for integration, which will be discussed next.
The M&A cycle in a nutshell
Viewing an acquisition as a series of interconnected phases rather than a one-off transaction is key. From identifying the right deal to integrating the new business into your company. Each decision you make along the way shapes the outcome. Below we have embedded a picture of the M&A lifecycle and a short description of each phase. In a series of articles we delve into each step of the M&A lifecycle, sharing stories and thoughts about each of these phases.
How Deloitte helps TMT companies
Deloitte guides TMT companies through the complexities of M&A with end-to-end advisory services across the M&A lifecycle. By leveraging a global network of experts with deep TMT industry expertise, we help define strategy, select the right partner, conduct thorough due diligence, and close deals—creating lasting value.
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