Mergers and Acquisitions Due Diligence: Financial and Operations Review

By Drew Stevens - August 30, 2018 - Mergers & Acquisitions

Perhaps you’ve just started the due diligence process, and you’re wondering what you should be looking for in sizing up your target. Here, we’ll examine a few key areas – financials, operations, products, customers, and sales and marketing.

Financial Review

Your M&A process and gauging whether to buy your target business will likely center around the seller’s financials. To start, it is usually customary to ask for, at minimum, the last three years’ balance sheets, cash flow statements, and income statements. No small amount of time should be spent reviewing the revenue, cost of goods sold, operating expenses, and other traditional benchmarks. Potential buyers often ask to see bank statements and tax filings as well.

Good M&A due diligence is not limited to asking for financial statements and passing them off to your accountant. There are many financial points that can and should be reviewed. These include breaking down R&D and IT costs, looking at historic and projected working capital, and reviewing significant capital expenditures. If your M&A deal involves buying a products company, there is no shortage of information to be analyzed. You can review historical and future revenue and gross margin, looking at trends in customer purchases, sales by territory, and distribution.

Another important area of your M&A financial analysis is properly documenting and reviewing the target’s assets. This includes tangible assets such as machinery, equipment, computer hardware, POS systems and cash registers, inventory, and raw materials. Asset review also includes accounts receivable, fixed assets, and intangible assets such as patents, trademarks, and copyrights.

Expenses and liabilities are not to be neglected. Supplier costs, product recalls, environmental issues, ongoing and threatened lawsuits, UCC filings, and all things real estate require a thorough review. For complete reviews, it is best to reach out to a business acquisition lawyer in Columbus, Ohio.



This is one of the areas where the more time you spend, the more comfortable you’ll ultimately be with the business and hopefully eliminate potential surprises or obstacles. To start, think in terms of the high level points. Be sure to request an operational organization chart. A top mergers and acquisitions law firm can assist with requesting this. Make sure you understand what is necessary for the business to function and operate – suppliers, materials, permits, and certifications, for example. Become familiar with the critical departments and employees. If internal research and development or industry and competition analyses are important, spend the proper amount of time fully understanding these areas. If the business involves multiple locations, make sure you analyze what each location does and why. If you’re working with a physical-asset heavy mergers and acquisitions deal, such as manufacturing, be able to understand, at least at a high level, key machinery and equipment.



If your mergers and acquisitions transaction involves a products company, there are multiple areas of the product(s) you need to understand. For starters, you’ll want to see detailed product summaries, including production and pricing information. Ask for historical pricing information and inquire if any future pricing changes or increases are planned. If the products involve third party production or technology platforms, make sure you have comprehensive lists detailing such parties and their involvement. With suppliers, review the contracts involving the delivery of the services or raw materials, checking key terms like pricing, quantities, and time periods of the relationships. A legal component of your products analysis includes checking the scope and ownership of any trademarks, copyrights, or patents. Finally, if you’re buying a business that has significant future development, be certain that you review the development roadmap and the high level details, including pricing, proposed release dates, and remaining development.



One of the critical issues in buying a revenue-producing business is fully and confidently understanding the source of that revenue—the customers. You’ll want to review a full customer list for at least the last three years. Ascertain revenue by client, which services or products the customer uses, and any noteworthy issues or problems that arose. For all customers, you’ll want to review the applicable contract or service agreement and note how much time is remaining on the contract and any anti-assignment clauses. If the seller lost any big customers in the last three years, conduct an analysis as to why the customer left for a competitor.


Sales and Marketing

If you’re buying a young or growing company, such as a software or SaaS company, perhaps the company is working toward profitability or has only been in the black for a short time. This is where reviewing sales and marketing can be especially important. Factors to be assessed, to name a few, include the customer pipeline, customer acquisition cost, detailed reports on sales structure, advertising summaries and results, and website traffic statistics. It is very important to fully comprehend how the target company has been generating leads, converting leads into customers, and its future plans for continued sales growth.

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