Greater rates of interest have remodeled mergers and acquisitions from a vendor’s to a purchaser’s market, permitting extra thorough risk-based due diligence. Protiviti’s Jim DeLoach maps the essential questions dealmakers ought to ask about their targets’ main belongings, compliance histories, ESG efficiency and expertise pipelines earlier than signing on the dotted line.
The due diligence course of referring to mergers and acquisitions has modified in recent times. The method has been enhanced with the usage of digital instruments and platforms, permitting for extra environment friendly information assortment and evaluation. This development helps buying corporations shortly collect and analyze giant volumes of information, lowering human error and offering extra dependable insights in a well timed method. The scope of due diligence has been expanded to incorporate not simply financials but in addition inquiries into tradition, human sources and ESG components to make sure that targets align with the acquirer’s values and long-term targets. This line of inquiry helps corporations spot potential integration points.
To make sure, the complexity of sure matters like environmental impacts, provide chain, cybersecurity and information privateness has elevated. Throughout the Covid-19 pandemic, dealmaking was pressured to rely completely on videoconferencing, which remains to be used for effectivity functions. Videoconferencing allows stakeholders to fulfill throughout time zones, breaking down geographical limitations. Nevertheless, it doesn’t totally exchange the necessity for bodily excursions of enterprise services and in-person interactions in conditions requiring a extra private contact or involving delicate negotiations. Its use will depend on the circumstances.
However the extra necessary shift is because of low-cost cash turning into a relic of the previous. Low-cost cash, fueled by traditionally low rates of interest, enabled consumers to lift funding to execute offers, placing sellers in an advantageous vendor’s market wherein they might emphasize pace and competitors by limiting the time accessible for purchaser due diligence.
As the price of capital rises, sellers’ affect over due diligence wanes and the M&An area shifts towards a purchaser’s market, which permits consumers to exert extra management over the scope of the due diligence course of. Thus, conventional due diligence has given solution to a threat-based method that considers the upper value of capital and focuses on figuring out and understanding potential points that might frustrate the mixed entity’s achievement of the worth anticipated from the acquisition. This shift in due diligence is leading to a deeper dive into a number of areas by means of extra targeted questions.
My aim right here is to not add one more checklist of inquiries to the literature; relatively, it’s to recommend an important questions the due diligence group ought to ask.
What are we shopping for?
Elementary to the method is the “main asset” query: What are we shopping for? Solutions to this query affect a lot of the deal preparation, due diligence and integration/separation planning and execution processes that it have to be answered early and repeated typically. The M&A spotlight is pushed by the “what,” as wants can shift dramatically relying on the first asset being acquired (i.e., know-how, buyer relationships, mental property, workforce, licenses and contracts, amongst others).
Key inquiries to ask embody:
- What’s the main asset acquired on this transaction? How does it assist our strategic aims? Are we shopping for capabilities or looking for value synergies?
- What asset-specific concerns do we have to tackle? How is the due diligence course of affected by these concerns? Are we speaking about bodily or monetary belongings; the differentiating expertise, expertise and data of the goal’s human capital; current contracts and agreements with prospects, suppliers, companions and staff; properties or operations that might have environmental impacts; software program, databases and know-how infrastructure; or intangibles (mental property and types)?
- May we develop the focused main asset extra cheaply if we constructed it ourselves?
With this context, six areas of curiosity are addressed right here. There could also be different areas.
Provide chain resilience
For the reason that pandemic uncovered the fragility of world provide chains, third-party evaluations have grow to be more and more necessary. On this post-pandemic world, there’s a want to judge all important features of the goal’s provide chain which may be utilized going ahead. This implies there have to be a cautious evaluation of worst-case eventualities that think about the goal’s provider and third-party dependencies; documented, actionable response plans; and established accountabilities for his or her execution. The insights from this evaluation needs to be used to construction the due diligence questions.
Examples of related inquiries to ask embody:
- Who’re the goal’s key suppliers, and do vulnerabilities exist inside the provide chain wanting all the best way upstream to second- and third-tier suppliers, contemplating monetary stability, focus threat and probably disruptive bottlenecks to inbound logistics?
- What’s the goal’s international footprint, and the way might it have an effect on the provision chain? The place are supplies dealing with processes being administered? Are contractor or labor sourcing relationships concerned in managing or coordinating the supplies provide chain, and, if that’s the case, how dependable are these relationships and the way essential is their contribution?
- Are there any sustainability or social accountability points within the goal’s provide chain that aren’t aligned with our firm’s values and will current post-acquisition reputational points?
- Are there potential value-creating synergies between the goal’s provide chain and our provide chain that can facilitate development?
- If the transaction is an integration, can main provider contracts be voided post-acquisition to understand anticipated financial savings and efficiencies?
- What are the goal’s different important third-party relationships, and do the contractual relationships with them current any post-acquisition considerations?
Expertise pipeline and retention
Due diligence of expertise can determine threat, improve transaction worth and supply integration readability and route. Whereas attrition charges have returned to historic pre-pandemic averages, corporations are asking how they’ll greatest determine and retain expertise throughout due diligence relatively than after the deal is consummated. Expertise retention could make or break a deal.
Related inquiries to ask embody:
- Who’re the goal’s prime performers who harbor the expertise and institutional reminiscence wanted to make sure post-acquisition success? Amongst them, who presents the best flight threat, and what steps ought to we take earlier than later to retain them? Are any of those performers of such worth to the enterprise {that a} noncompete settlement is required earlier than the deal is signed? If the goal represents that noncompetes exist, have we validated that illustration?
- Is there enough bench energy to facilitate succession planning?
- How does the goal’s tradition differ from ours? What are the office expectations (i.e., distant, hybrid, in-person)? What steps ought to we take to speed up the mixing course of in assimilating the 2 cultures and enabling efficient group constructing?
- Do the goal’s worker contracts embody contractual obligations that might impression deal–pricing negotiations, e.g., change-of-control clauses, termination funds or obligatory outplacement prices? Are these prices accrued on the goal’s stability sheet?
ESG
Evaluating the ESG efficiency of M&A targets has grow to be an integral a part of the due diligence course of, notably with respect to environmental points. The main focus of the method is shifting from a qualitative perspective that considers the goal’s acknowledged values, advertising communications and different exterior studies to a evaluate of its ESG quantitative efficiency. It ought to give attention to figuring out ESG initiatives and points that current important post-acquisition alternatives and dangers to the mixed firm’s backside line, repute and exterior reporting.
Related inquiries to ask embody:
- Does the goal have an ESG technique? What ESG procedures, insurance policies, processes and disclosure controls does it have in place?
- Which ESG metrics does the goal create and monitor?
- What’s the goal’s observe document associated to ESG? Whether or not it’s unfavorable or optimistic, how does that document impression the deal?
- Are there environmental authorized or regulatory exposures the customer must assume post-acquisition? If the reply is sure, are these exposures accrued on the goal’s stability sheet? If not, how does that have an effect on deal pricing?
Cybersecurity and information privateness
Due diligence can not ignore cybersecurity points. Too typically, these points lie hidden within the weeds. For example, after buying Starwood Accommodations in 2016, Marriott found a knowledge breach inside the Starwood visitor reservation database in 2018 that had been ongoing for 2 years previous to the acquisition. Having uncovered the private info of roughly 500 million visitors, the breach led to regulatory investigations, lawsuits and lack of buyer belief. Previous to closing its acquisition of Yahoo seven years in the past, Verizon found two large cyber assaults that resulted in a $350 million discount within the acquisition worth.
The goal’s information administration technique and processes are additionally necessary concerns. The dangers and related penalties and fines might quantity to important unrecorded liabilities on the goal’s stability sheet. For instance, relating to the aforementioned Marriott breach, the UK levied a positive of £99 million for violating British residents’ privateness rights beneath the GDPR, citing the corporate’s failure to train enough due diligence on Starwood’s IT infrastructure.
Related inquiries to ask pertaining to cybersecurity and information privateness due diligence embody:
- Does the goal have a technique for figuring out and mitigating cyber breaches? Has it invested sufficiently to execute that technique efficiently?
- If cybersecurity dangers are current within the goal’s techniques and infrastructure, are our choices relating to the impression of those dangers on the deal being made on the proper ranges? Given the timeframes and useful resource constraints, how are we avoiding poor choices main as much as the closing of the deal?
- Given our evaluation of the goal’s menace panorama and cybersecurity capabilities, have we established a post-acquisition technique for addressing recognized and probably unidentified dangers? What measures do now we have in place to stop any dangers within the acquired atmosphere from contaminating our firm’s current atmosphere?
- Do now we have applicable insurance coverage underwriting for the transaction that can cowl dangers that weren’t disclosed or recognized?
- What’s the goal’s coverage for gathering, processing, storing, utilizing, sharing, archiving, monetizing and destroying private information and its compliance with relevant information privateness legal guidelines and laws in all jurisdictions wherein it operates?
Compliance with legal guidelines and laws
Whereas this subject is implicit in areas mentioned above, it deserves separate point out as a result of corporations buying a enterprise ordinarily assume its unrecorded liabilities. Accordingly, a due diligence evaluate of the compliance perform is so as.
Related inquiries to ask embody:
- What’s the goal’s historical past of compliance with relevant legal guidelines and regulatory necessities, together with its regulatory technique, inner insurance policies, outcomes of inner and exterior audits and regulatory opinions and total compliance tradition?
- What are the corporate’s protocols and processes for remediating management deficiencies and addressing new regulatory necessities?
- Are there features of the goal’s operations that expose it to company misconduct, e.g., the character of its operations, the place it operates or unrealistic efficiency incentives? Have there been situations of company misconduct up to now?
- Do now we have authorized advisers who can present enter on compliance, antitrust, securities and different points germane to the transaction?
Integration effectiveness
After a decade-low stage of exercise in 2023, M&A exercise reveals optimistic indicators of development in 2025. With anticipation of extra favorable macroeconomic situations and diminished regulatory scrutiny from the brand new US presidential administration, is the corporate’s readiness enough to have interaction within the course of? Realizing the true worth of a deal depends upon profitable integration and utilization of the goal acquired. This actuality locations a premium on Day One preparation and readiness.
Related inquiries to ask embody:
- Have we evaluated prior acquisitions and assessed the effectiveness and effectivity of our integration course of? What classes have we discovered? If that is our first time executing a deal, do now we have the correct data and advisers in place to finish the mixing efficiently?
- Are there features of the goal’s operations (e.g., the workforce, key processes and techniques and sources of provide) to be built-in into our operations that warrant planning and preparations earlier than the deal is consummated in order that the mixing course of hits the bottom working post-acquisition?
- Do now we have the suitable sources in place to execute an integration? Are these sources devoted full-time to the mixing, or will they nonetheless be answerable for their “day jobs” and thus expertise potential bandwidth challenges? If sure, do we want exterior assist to execute the mixing efficiently?
- Is our management group for executing the mixing and every practical workstream outlined? Is it accountable for outcomes?
- What synergies and dis-synergies are deliberate? Had been these appropriately thought-about within the buy worth? Do our integration plans allow synergy seize?
- What are the prices to combine the goal, and do they drive any front-end or pricing impacts?
- What main adjustments are we anticipating, and what change administration plans are in place?
In addressing the above areas, it is very important take note the sustainability of the goal’s governance plumbing. On this age of disruptive change, sudden and sudden surprises are the norm. Over the previous two to a few years, how has administration reacted to hurry bumps occurring with out warning? How did they handle a disaster occasion?
Penetrating questions addressing the resilience of the group in responding to difficult issues can supply transparency relating to the goal’s leaders and their values and habits beneath fireplace.
Greater rates of interest have remodeled mergers and acquisitions from a vendor’s to a purchaser’s market, permitting extra thorough risk-based due diligence. Protiviti’s Jim DeLoach maps the essential questions dealmakers ought to ask about their targets’ main belongings, compliance histories, ESG efficiency and expertise pipelines earlier than signing on the dotted line.
The due diligence course of referring to mergers and acquisitions has modified in recent times. The method has been enhanced with the usage of digital instruments and platforms, permitting for extra environment friendly information assortment and evaluation. This development helps buying corporations shortly collect and analyze giant volumes of information, lowering human error and offering extra dependable insights in a well timed method. The scope of due diligence has been expanded to incorporate not simply financials but in addition inquiries into tradition, human sources and ESG components to make sure that targets align with the acquirer’s values and long-term targets. This line of inquiry helps corporations spot potential integration points.
To make sure, the complexity of sure matters like environmental impacts, provide chain, cybersecurity and information privateness has elevated. Throughout the Covid-19 pandemic, dealmaking was pressured to rely completely on videoconferencing, which remains to be used for effectivity functions. Videoconferencing allows stakeholders to fulfill throughout time zones, breaking down geographical limitations. Nevertheless, it doesn’t totally exchange the necessity for bodily excursions of enterprise services and in-person interactions in conditions requiring a extra private contact or involving delicate negotiations. Its use will depend on the circumstances.
However the extra necessary shift is because of low-cost cash turning into a relic of the previous. Low-cost cash, fueled by traditionally low rates of interest, enabled consumers to lift funding to execute offers, placing sellers in an advantageous vendor’s market wherein they might emphasize pace and competitors by limiting the time accessible for purchaser due diligence.
As the price of capital rises, sellers’ affect over due diligence wanes and the M&An area shifts towards a purchaser’s market, which permits consumers to exert extra management over the scope of the due diligence course of. Thus, conventional due diligence has given solution to a threat-based method that considers the upper value of capital and focuses on figuring out and understanding potential points that might frustrate the mixed entity’s achievement of the worth anticipated from the acquisition. This shift in due diligence is leading to a deeper dive into a number of areas by means of extra targeted questions.
My aim right here is to not add one more checklist of inquiries to the literature; relatively, it’s to recommend an important questions the due diligence group ought to ask.
What are we shopping for?
Elementary to the method is the “main asset” query: What are we shopping for? Solutions to this query affect a lot of the deal preparation, due diligence and integration/separation planning and execution processes that it have to be answered early and repeated typically. The M&A spotlight is pushed by the “what,” as wants can shift dramatically relying on the first asset being acquired (i.e., know-how, buyer relationships, mental property, workforce, licenses and contracts, amongst others).
Key inquiries to ask embody:
- What’s the main asset acquired on this transaction? How does it assist our strategic aims? Are we shopping for capabilities or looking for value synergies?
- What asset-specific concerns do we have to tackle? How is the due diligence course of affected by these concerns? Are we speaking about bodily or monetary belongings; the differentiating expertise, expertise and data of the goal’s human capital; current contracts and agreements with prospects, suppliers, companions and staff; properties or operations that might have environmental impacts; software program, databases and know-how infrastructure; or intangibles (mental property and types)?
- May we develop the focused main asset extra cheaply if we constructed it ourselves?
With this context, six areas of curiosity are addressed right here. There could also be different areas.
Provide chain resilience
For the reason that pandemic uncovered the fragility of world provide chains, third-party evaluations have grow to be more and more necessary. On this post-pandemic world, there’s a want to judge all important features of the goal’s provide chain which may be utilized going ahead. This implies there have to be a cautious evaluation of worst-case eventualities that think about the goal’s provider and third-party dependencies; documented, actionable response plans; and established accountabilities for his or her execution. The insights from this evaluation needs to be used to construction the due diligence questions.
Examples of related inquiries to ask embody:
- Who’re the goal’s key suppliers, and do vulnerabilities exist inside the provide chain wanting all the best way upstream to second- and third-tier suppliers, contemplating monetary stability, focus threat and probably disruptive bottlenecks to inbound logistics?
- What’s the goal’s international footprint, and the way might it have an effect on the provision chain? The place are supplies dealing with processes being administered? Are contractor or labor sourcing relationships concerned in managing or coordinating the supplies provide chain, and, if that’s the case, how dependable are these relationships and the way essential is their contribution?
- Are there any sustainability or social accountability points within the goal’s provide chain that aren’t aligned with our firm’s values and will current post-acquisition reputational points?
- Are there potential value-creating synergies between the goal’s provide chain and our provide chain that can facilitate development?
- If the transaction is an integration, can main provider contracts be voided post-acquisition to understand anticipated financial savings and efficiencies?
- What are the goal’s different important third-party relationships, and do the contractual relationships with them current any post-acquisition considerations?
Expertise pipeline and retention
Due diligence of expertise can determine threat, improve transaction worth and supply integration readability and route. Whereas attrition charges have returned to historic pre-pandemic averages, corporations are asking how they’ll greatest determine and retain expertise throughout due diligence relatively than after the deal is consummated. Expertise retention could make or break a deal.
Related inquiries to ask embody:
- Who’re the goal’s prime performers who harbor the expertise and institutional reminiscence wanted to make sure post-acquisition success? Amongst them, who presents the best flight threat, and what steps ought to we take earlier than later to retain them? Are any of those performers of such worth to the enterprise {that a} noncompete settlement is required earlier than the deal is signed? If the goal represents that noncompetes exist, have we validated that illustration?
- Is there enough bench energy to facilitate succession planning?
- How does the goal’s tradition differ from ours? What are the office expectations (i.e., distant, hybrid, in-person)? What steps ought to we take to speed up the mixing course of in assimilating the 2 cultures and enabling efficient group constructing?
- Do the goal’s worker contracts embody contractual obligations that might impression deal–pricing negotiations, e.g., change-of-control clauses, termination funds or obligatory outplacement prices? Are these prices accrued on the goal’s stability sheet?
ESG
Evaluating the ESG efficiency of M&A targets has grow to be an integral a part of the due diligence course of, notably with respect to environmental points. The main focus of the method is shifting from a qualitative perspective that considers the goal’s acknowledged values, advertising communications and different exterior studies to a evaluate of its ESG quantitative efficiency. It ought to give attention to figuring out ESG initiatives and points that current important post-acquisition alternatives and dangers to the mixed firm’s backside line, repute and exterior reporting.
Related inquiries to ask embody:
- Does the goal have an ESG technique? What ESG procedures, insurance policies, processes and disclosure controls does it have in place?
- Which ESG metrics does the goal create and monitor?
- What’s the goal’s observe document associated to ESG? Whether or not it’s unfavorable or optimistic, how does that document impression the deal?
- Are there environmental authorized or regulatory exposures the customer must assume post-acquisition? If the reply is sure, are these exposures accrued on the goal’s stability sheet? If not, how does that have an effect on deal pricing?
Cybersecurity and information privateness
Due diligence can not ignore cybersecurity points. Too typically, these points lie hidden within the weeds. For example, after buying Starwood Accommodations in 2016, Marriott found a knowledge breach inside the Starwood visitor reservation database in 2018 that had been ongoing for 2 years previous to the acquisition. Having uncovered the private info of roughly 500 million visitors, the breach led to regulatory investigations, lawsuits and lack of buyer belief. Previous to closing its acquisition of Yahoo seven years in the past, Verizon found two large cyber assaults that resulted in a $350 million discount within the acquisition worth.
The goal’s information administration technique and processes are additionally necessary concerns. The dangers and related penalties and fines might quantity to important unrecorded liabilities on the goal’s stability sheet. For instance, relating to the aforementioned Marriott breach, the UK levied a positive of £99 million for violating British residents’ privateness rights beneath the GDPR, citing the corporate’s failure to train enough due diligence on Starwood’s IT infrastructure.
Related inquiries to ask pertaining to cybersecurity and information privateness due diligence embody:
- Does the goal have a technique for figuring out and mitigating cyber breaches? Has it invested sufficiently to execute that technique efficiently?
- If cybersecurity dangers are current within the goal’s techniques and infrastructure, are our choices relating to the impression of those dangers on the deal being made on the proper ranges? Given the timeframes and useful resource constraints, how are we avoiding poor choices main as much as the closing of the deal?
- Given our evaluation of the goal’s menace panorama and cybersecurity capabilities, have we established a post-acquisition technique for addressing recognized and probably unidentified dangers? What measures do now we have in place to stop any dangers within the acquired atmosphere from contaminating our firm’s current atmosphere?
- Do now we have applicable insurance coverage underwriting for the transaction that can cowl dangers that weren’t disclosed or recognized?
- What’s the goal’s coverage for gathering, processing, storing, utilizing, sharing, archiving, monetizing and destroying private information and its compliance with relevant information privateness legal guidelines and laws in all jurisdictions wherein it operates?
Compliance with legal guidelines and laws
Whereas this subject is implicit in areas mentioned above, it deserves separate point out as a result of corporations buying a enterprise ordinarily assume its unrecorded liabilities. Accordingly, a due diligence evaluate of the compliance perform is so as.
Related inquiries to ask embody:
- What’s the goal’s historical past of compliance with relevant legal guidelines and regulatory necessities, together with its regulatory technique, inner insurance policies, outcomes of inner and exterior audits and regulatory opinions and total compliance tradition?
- What are the corporate’s protocols and processes for remediating management deficiencies and addressing new regulatory necessities?
- Are there features of the goal’s operations that expose it to company misconduct, e.g., the character of its operations, the place it operates or unrealistic efficiency incentives? Have there been situations of company misconduct up to now?
- Do now we have authorized advisers who can present enter on compliance, antitrust, securities and different points germane to the transaction?
Integration effectiveness
After a decade-low stage of exercise in 2023, M&A exercise reveals optimistic indicators of development in 2025. With anticipation of extra favorable macroeconomic situations and diminished regulatory scrutiny from the brand new US presidential administration, is the corporate’s readiness enough to have interaction within the course of? Realizing the true worth of a deal depends upon profitable integration and utilization of the goal acquired. This actuality locations a premium on Day One preparation and readiness.
Related inquiries to ask embody:
- Have we evaluated prior acquisitions and assessed the effectiveness and effectivity of our integration course of? What classes have we discovered? If that is our first time executing a deal, do now we have the correct data and advisers in place to finish the mixing efficiently?
- Are there features of the goal’s operations (e.g., the workforce, key processes and techniques and sources of provide) to be built-in into our operations that warrant planning and preparations earlier than the deal is consummated in order that the mixing course of hits the bottom working post-acquisition?
- Do now we have the suitable sources in place to execute an integration? Are these sources devoted full-time to the mixing, or will they nonetheless be answerable for their “day jobs” and thus expertise potential bandwidth challenges? If sure, do we want exterior assist to execute the mixing efficiently?
- Is our management group for executing the mixing and every practical workstream outlined? Is it accountable for outcomes?
- What synergies and dis-synergies are deliberate? Had been these appropriately thought-about within the buy worth? Do our integration plans allow synergy seize?
- What are the prices to combine the goal, and do they drive any front-end or pricing impacts?
- What main adjustments are we anticipating, and what change administration plans are in place?
In addressing the above areas, it is very important take note the sustainability of the goal’s governance plumbing. On this age of disruptive change, sudden and sudden surprises are the norm. Over the previous two to a few years, how has administration reacted to hurry bumps occurring with out warning? How did they handle a disaster occasion?
Penetrating questions addressing the resilience of the group in responding to difficult issues can supply transparency relating to the goal’s leaders and their values and habits beneath fireplace.
