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June 06, 2023 15 minute read

Due Diligence Questionnaire when Sourcing Deals

Pursuing an M&A deal is a major decision for any business, one that comes with a unique set of both risks and rewards. The potential rewards can be great, but the risks that are involved must also be weighed carefully. It’s crucial that you conduct a thorough due diligence process before entering an M&A deal. 

This due diligence questionnaire will explain how you can adequately vet potential M&A deals. It contains essential questions that permit an in-depth analysis. The objective is to maximize the efficiency of the due diligence process to raise awareness of the total value of your potential M&A deal.

Company History

Considering a company’s history is pivotal when conducting due diligence. This can help you better evaluate the likelihood of success or failure. Examine the founding story:

  • Who founded the company?
  • When was it founded?
  • Why was it founded?

Look at the major milestones that have been achieved since its founding. Note the significant changes in ownership, if any. 

Industry Analysis

It’s essential to understand the industry your target company operates in when assessing an M&A deal. The competitive landscape can impact how profitable your deal is going to be.

What are the current trends and growth prospects for the industry?

You’ll want to consider macro-level trends that can impact overall growth. From there, you can look at specific operations that have the potential to become more prominent trends.

For example, if you’re evaluating a healthcare business, certain trends may impact its ability to succeed in the future. Trends such as the aging population, newer technologies, and increased demand for affordable healthcare can signal whether the acquisition is currently worth considering. Changes in the political climate can also affect a vast number of industries. Regulations and new competitors can pop up and significantly affect an industry’s profitability at a certain time.

Who are the major competitors in the industry?

It’s imperative to have a deep understanding of the industry and its major players. Identify who your biggest competition will be and figure out its strengths and weaknesses. 

The best way to do so is to research their market share. You can use public records, industry reports, and financial data to make a thorough assessment. You’ll also want to have a keen awareness of the quality and quantity of product offerings, pricing options, and customer service methods.

What are the regulatory and legal requirements specific to this industry?

Regulations will vary widely based on which country, state, or jurisdiction your prospective company is located in. Part of doing your due diligence is researching whether your merger must adhere to any relevant regulations in the area.

For example, some industries have specific laws involving:

  • Intellectual property
  • Product safety
  • Data protection
  • Labor practices

There might also be antitrust laws that limit your ability to conduct M&A in certain industries.

Are there any potential risks or challenges that the industry may face in the near future?

Investigate how specific mergers may be affected by a larger market. Customer growth, market share, and pricing strategies can all be relevant factors to weigh. Doing so will give you a comprehensive view of the company’s prospective performance in its market.

Take into consideration how healthy the entire industry is in the company’s target market. You can then identify any opportunities that fit the company’s strengths. 

Financial Analysis

Understanding the financial ramifications of an M&A deal is the biggest factor when conducting your due diligence questionnaire. Here are five key questions that should be part of your financial analysis:

What is the historical financial performance of the company?

The historical financial performance of a target company will help you assess the level of risk involved in your M&A deal. Financial records can give you a clear picture of how the company has been performing and any upward or downward trends to be aware of. This will give you a greater awareness of potential profitability moving forward.

What is the projected financial performance for the next 3–5 years?

Answering this question requires evaluating:

  • Profit margins
  • Forecasted revenue
  • Cash flow
  • Expected industry growth
  • Changes in customer demand
  • Competitor activity

You’ll be able to identify potential pitfalls that could affect the deal. Things such as long-term liabilities or a decline in market share can cause you to inherit long-term problems. You’ll also have a better understanding of how the financial trajectory is likely to continue over the next 3–5 years.

Are there any significant liabilities or outstanding debts?

Liabilities may include:

  • Bonds
  • Mortgages
  • Loans
  • Accounts
  • Accrued expenses

It’s also critical to review outstanding legal issues. These financial obligations can hinder the success of the acquisition.

What are the revenue and profit margins for the company?

  • Revenue is the total amount of money a company receives for its products and services. 
  • Profit margin is the difference between its total revenue and total expenses. You can calculate this by dividing its total profit (net income) by total revenue. 

Understanding these figures will give you more insight into how well the company performs. It will also tell you how much revenue is actually coming back as profit. 

A higher profit margin is an excellent indicator of a successful business. This is a great signal to move forward with your M&A because it shows the company is already doing a great job of controlling its expenses and driving profitability.

What are the cash flow and working capital positions for the company?

These are vital factors when it comes to your financial analysis. 

  • Cash flow is the amount of money a business pulls from its investments, operations, and other sources. 
  • Working capital is the value of a company’s assets minus its current liabilities.

Some of the key metrics to analyze the financial positions of a company in this regard should include:

  • Cash flow from operating activities
  • Cash on hand
  • Changes in working capital
  • Cash conversion cycle


Valuation plays a crucial role during M&A due diligence as it helps parties involved in the transaction understand the financial worth of the target company. Here are some key reasons highlighting the importance of valuation during M&A due diligence:

  1. Determining Fair Price: Valuation provides an objective assessment of the target company’s value, enabling the buyer to determine a fair price for the acquisition. It helps in evaluating whether the asking price aligns with the company’s financial performance, assets, liabilities, growth prospects, and market conditions.
  2. Negotiation Tool: Valuation serves as a negotiation tool during the M&A process. By having a clear understanding of the target company’s value, the buyer can negotiate from an informed position, ensuring a fair and favorable deal. Valuation analysis supports discussions on purchase price adjustments, earn-outs, or potential contingencies.
  3. Assessing Financial Performance: Through valuation, the buyer can analyze the target company’s historical financial performance, including revenue, profitability, cash flow, and key financial ratios. This analysis helps in assessing the financial health of the company, identifying any potential red flags or areas of concern.
  4. Identifying Synergies: Valuation provides insights into the potential synergies and value creation opportunities arising from the M&A deal. It helps in assessing how the combined entity’s financials may look post-acquisition, identifying cost savings, revenue enhancements, or strategic advantages that can be achieved through the transaction.
  5. Due Diligence Validation: Valuation serves as a validation of the information gathered during the due diligence process. By performing an independent assessment of the target company’s financials, assets, and liabilities, valuation experts can verify the accuracy of the information provided and identify any discrepancies or hidden risks.
  6. Investment Decision Making: Valuation analysis forms a critical component of the buyer’s investment decision-making process. It helps in evaluating the potential return on investment (ROI), assessing the financial viability of the acquisition, and making informed choices regarding capital allocation.
  7. Regulatory and Legal Compliance: Valuation may be required for regulatory or legal compliance purposes. In certain jurisdictions, valuation reports are necessary to meet regulatory requirements or to obtain approvals for the M&A transaction.

Overall, valuation during M&A due diligence provides a comprehensive understanding of the target company’s financial worth, aiding in decision-making, negotiations, and ensuring a successful and value-driven acquisition. It will help you mitigate risks, identify opportunities, and set the foundation for a mutually beneficial deal between the buyer and the target company.

Market Analysis

A comprehensive market analysis will ensure you understand both the current and future potential of the business. Knowing these four key questions will help you assess the overall market dynamics to help you make an informed decision.

Who are the target customers of the company?

You have to know who your target customers are. Their unique customer profiles can help you understand if a company’s products or services will be successful in its proposed markets. The current customer base will also give you valuable insight into potential growth opportunities.

You’ll have a better shot of determining buyer habits by looking at factors such as:

  • Age
  • Income
  • Location
  • Occupation
  • Marital Status

What are the market share and growth prospects for the company?

The current market share provides insights into your target company’s customer base. It will give you an overhead view of its standing among competitors. With this understanding, you’ll be able to more accurately assess its ability to prosper in the future. 

A company with a larger market share can likely have better growth potential than one with a smaller market share. This data can also reveal if a company is currently losing ground to competitors.

What is the competitive landscape for the company’s products/services?

Determine if your target company’s offerings have significant advantages over its competitors. Know which ones are growing faster than others.

Looking at sales numbers and comparing them will tell you how other organizations compare to your target company and how you can take advantage of profitability gaps. 

Keep an especially close eye on companies that have recently launched innovative products and services. They can quickly steal market share from their competitors.

Are there any upcoming changes in the market that may affect the company’s performance?

These changes can have a significant impact on the success of the acquisition. It will also let you know if this is the right time to continue pursuing the deal or to pull back until the market is more lucrative. Understanding the evolution of regulations and technology can be a critical component to consider when entering a new market.

HR and Employment Contracts

These contracts must be properly managed when merging two companies. Here are four critical questions you should ask when undergoing this process:

What is the organizational structure of the company?

This information can help ensure all existing contracts are adequately integrated within the new organization. 

The organizational structure will vary widely between companies. Generally, it includes:

  • A board of directors
  • Executive team
  • Management

Understanding this structure allows you to identify which departments should be merged and which will remain separate. It also shows you how existing agreements should be handled in the process.

What is the total number of employees and their roles?

Knowing the total number of employees and their roles will help you make sure that all contracts are accounted for. Everyone involved should know their roles and responsibilities well before the M&A deal is closed.

This is also important for budgeting purposes. You will inevitably need to consider restructuring some departments. Taking the time to plan out the changes in roles is vital.

What are the compensation and benefits packages for employees?

You will want to know how compensation and benefits will be affected by the merger. Employees will need to know if their salary and benefits will remain the same or if they will be increased or reduced. 

Make sure both companies have a clear understanding of this before the deal is final. At the very least, both you and your new partner should consider:

  • Job titles
  • Salaries
  • Bonuses
  • Paid time off
  • Additional perks
  • The overall compensation plan
  • Collective bargaining agreements with unions or other associations

Are there any employment contracts or agreements that need to be reviewed?

Chances are good that there will be existing employment contracts in place. Determine whether these will still be valid under the new company structure. Employees that are being acquired may have pre-existing contracts with their current employer. There also may be collective bargaining agreements that you must take into account.

Legal Due Diligence

This is a critical step in any M&A deal. It helps you understand the legal risks involved for both parties. Let’s discuss four essential questions to guide your legal due diligence process when considering your M&A deal.

What are the legal requirements for the company’s operations?

These requirements can vary greatly based on the company’s size, industry, and location. It’s essential to identify any relevant local, state, or federal laws that may affect the company’s day-to-day operations.

This can include laws related to:

  • Labor and employment
  • Environmental protection
  • Licensing
  • Taxation
  • Safety

It’s also essential to ensure the company has the necessary permits required to conduct business in the area where it operates. All filings have to be completed to ensure legal operation.

Are there any ongoing legal disputes or pending litigations?

Consider any pending litigations when assessing the viability of the deal. Any past or present legal issues can significantly impact the deal. Review both litigations initiated by the target company as well as any litigation directed against it.

Pending litigations can include:

  • Claims from customers, suppliers, and third-party entities
  • Government investigations
  • Regulatory actions

Consider the financial impact these proceedings can have on the deal and future operations.

Are there any contracts or agreements that need to be reviewed? 

Review all existing contracts that are currently in place between the target company and its stakeholders. Key types of contracts include:

  • Sales
  • Supply
  • Distribution
  • Leasing
  • Patents
  • Trademarks

Also, assess any restrictions that may affect your ability to operate the business after the acquisition. Some contracts may need to be amended or even terminated. Your legal review will identify any potential issues that can arise from provisions in current agreements.

What is the ownership structure of the company?

Some key things to understand are:

  • Who owns the company
  • How much they own
  • Their level of investment in the company

This will vary significantly depending on the company you’re evaluating, but some common structures include:

  • Sole proprietorships
  • Limited Liability Companies
  • Partnerships
  • Corporations

You’ll also want to look at the voting rights of each owner and investor. Be very aware of who the decision-makers are at the company and any past conflicts. 

Intellectual Property Rights

Due diligence in this area ensures that all intellectual property (IP) is adequately protected, identified, and accounted for in your M&A process. Here are four essential questions to ask:

What are the company’s intellectual property assets?

It’s vital that you understand the extent of your target company’s IP holdings. This can include:

  • Types of patents
  • Quantity of patents
  • Trademarks
  • Copyrights
  • Other IP assets

A comprehensive review of IP should be done as part of the due diligence process. You’ll want to review everything we listed above, as well as the liabilities arising from the use of each IP.

Are there any pending or granted patents, trademarks, or copyrights?

Determine if there are any pending or granted IPs. Identify any pending applications that can be legally transferred upon acquisition.

Conduct a trademark search to identify there are no potential conflicts with existing markets. Ensure that existing trademark registrations are transferred.

Identify any copyrights that are owned by third parties. These will need to be licensed or transferred. It’s vital to verify your target company has actual ownership of any works created by its employees.

Are there any licensing agreements that need to be reviewed?

Review any existing licensing agreements related to your target company’s IP. They may contain obligations that must be changed as part of the transaction.

Are there any potential risks to the company’s intellectual property?

A target company may have pending IP that is unenforceable or invalidated. There may also be licensing agreements that contain restrictions or undisclosed obligations.

Other companies may dispute even the ownership of the IP, and there may be an infringement of third-party IP rights that you must make sure to handle.

Technology Analysis

Another important factor is considering the technology involved and how two companies’ IT systems will integrate. Asking these questions will ensure the two entities can merge successfully:

What are the company’s core technologies and IT infrastructure?

Gain an understanding of the core technologies and IT infrastructure involved. This can be a challenging task that involves evaluating many components, including:

  • Hardware
  • Software
  • Networks
  • Applications
  • Protocols
  • Processes

What is the level of investment in technology and R&D?

A company investing in research and development (R&D) is expected to stay ahead of its competitors. Consider these factors:

  • The total budget allocated to technology investments
  • The number of people employed in R&D
  • Types of technology being developed
  • External partnerships

Are there any cybersecurity risks or concerns?

Take a look at how mature the company is, including its security posture. You’ll want to evaluate practices, policies, and processes, factoring in:

  • The regularity of security checks
  • Adequate security controls to detect malicious attacks
  • Well-defined incident response plans
  • Compliance with industry regulations and standards
  • The dedicated security team

Are there any upcoming changes or advancements in technology that may impact the company?

Since technology is exponentially evolving even as you read this, a potential M&A target is likely affected by advancements in this area. Consider the impact things such as AI and mobile technology will have on your potential merger.

Environmental and Regulatory Compliance

Environmental compliance can quickly become complicated. As we all become more conscious of the health of our planet, more regulations are regularly imposed. Let’s look at some key questions to ask when evaluating the environmental and regulatory compliance of a target company:

What are the environmental regulations that the company needs to comply with?

Companies must be aware of the regulations in place in the area it operates in if it wants to avoid expensive fines and penalties.

Are there any potential environmental risks or liabilities?

There can be a plethora of environmental risks, including:

  • Non-compliance with environmental regulations
  • Contamination of the surrounding land
  • Air pollution
  • Hazardous waste
  • Improper storage of chemicals

Are there any pending or upcoming regulatory changes that may affect the company?

Ask if there are any pending changes to regulations that may affect the company. Ensure your target company is proactive, staying up to date with any regulations. 

What are the safety and health regulations that the company needs to comply with?

Ensure all health standards are being met. Any new ones should be introduced as part of the acquisition process. These will vary based on location. Some areas have more strict regulations.

Tax Review

This can be the trickiest part of your M&A deal. Here are some questions to ask to make sure you understand the tax implications of the transaction.

What is the company’s tax history, and what is its current status?

Review all the company’s past tax returns. The financial statements should be scanned for any red flags, such as unpaid taxes.

Are there any tax liabilities or outstanding payments?

You must identify any liabilities related to:

  • Corporate income tax
  • Payroll tax
  • Sales tax
  • Use tax

Are there any potential tax risks or challenges?

If the company’s jurisdiction has high corporate tax rates, it’s possible that you may be subject to new tax regulations as they are enacted. Double taxation can also be an issue, depending on how the merger is structured. 

Are there any pending tax audits or investigations?

Be aware of any ongoing investigations the IRS is conducting on your target company. Look for any irregularities that may be caused in an audit.

Integration Planning

As you’re aware, an M&A can be a great way to grow your business. However, they don’t always go as planned. Make sure you plan ahead and answer these key integration planning questions:

What are the key areas that need to be integrated post-acquisition?

There are several areas that you’ll want to pay special attention to when planning an integration:

  • The culture of both companies
  • Integrating IT systems
  • Organization structure

What are the potential challenges or risks involved with integration?

In the process of merging two companies, many challenges can occur, including:

  • Poor communication
  • Cultural differences
  • Expectations
  • Unexpected integration costs
  • Regulatory issues

What are the timelines and milestones for integration?

Timelines and milestones allow for a smooth transition process. These will help to provide a roadmap of what needs to be done and when.

Who will be responsible for the integration process?

It’s absolutely crucial that you have a solid team overseeing the integration process. There must be a clear understanding of goals and objectives. The key players will include senior leadership in general, but some M&A deals will create a designated integration team made up of specific executives from both companies.

Apply the Due Diligence Questionnaire

Answering all of these questions as part of your due diligence checklist for an M&A could be a crucial part of your next deal. Go through the process of conducting the most thorough analysis possible to identify any and all risks before committing to the deal.

Make sure no stone is left unturned, though. Of course, there are more questions that will arise throughout the course of conducting your due diligence. This questionnaire is meant to be a starting point for your M&A deal. Protect your investments by making informed decisions that can maximize your profits.

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