M&A finance due diligence: 55 essential questions you should ask

January 26, 2018
M&A finance due diligence: 55 essential questions you should ask

Due diligence is what determines whether a merger or acquisition deal goes through or falls through, so it’s up to the buyer to be as rigorous as possible. While it’s the seller’s responsible to comply with requests, the buyer should look into every nook and cranny of the business, especially in relation to its financial health.

Full disclosure is advised during due diligence because one way or another, the buyer will discover what’s hidden. Being open and transparent will move things along quicker. It helps to know what a buyer will look for before they ask. Expect the following to be examined in relation to the company’s finances.

Accounting, tax and financial information

  1. Review trailing twelve months (TTM) and two year historical trends.
  2. Look for unusual patterns to find income and expenses that may be non-recurring.
  3. Analyse earnings before interest, taxes, depreciation and amortization (EBITDA).
  4. Examine revenue, gross margins and working capital.
  5. Look into the company’s performance projections for the next three years.
  6. Assess letters provided by the company’s accountants over the last five years.
  7. Inspect the updated business plan and budget.
  8. Compare the last two years forecast budgets to how the company has performed.
  9. Investigate non-recurring charges and optional expenses.
  10. Identify sales discounts.
  11. Request a report detailing revenue, gross margin and income trends by customer and product line.
  12. Take note of seasonal revenue and the ensuing working capital requirements.
  13. Review the un-audited statement of the company for the most recent quarter.

Cost of Sales

  1. Find out how inventory accounting affects the cost of goods that are sold.
  2. Discover the patterns in groups of cost of services over the past two financial years and TTM period.
  3. Ascertain the parts of cost per service if all expenses are categorised correctly.
  4. Establish the pattern of controllable expenses (for example, advertising, maintenance and utilities etc.) over the TTM and from the last two years.
  5. Look at the tendencies in non-controllable expenses (for example, rent, insurance and property taxes) over the last two year period.
  6. Discover information about third party suppliers.
  7. Learn about drivers for important part of costs.
  8. Familiarise yourself with the cost build-up approach.


  1. Inspect all local, national and international tax returns over the last five years.
  2. Examine outstanding tax issues including audits, together with the auditor’s footnotes and opinion.
  3. Check all communications with all tax offices over the last five years.
  4. Confirm tax issues that will be affected by the M&A.
  5. Look at the last five years worth of audit reports and results.
  6. Go over all correspondence between the company and their auditors over the last three years.
  7. Consider settlement documents for the past five years.
  8. Review arrangements to extend tax return filing deadlines.
  9. Verify that sales, payroll, franchise, business and personal property tax have been paid on time.
  10. Substantiate that all tax regarding the sale of private or business property has been paid.
  11. Go through tax allocation, sharing inter-company-company agreements.
  12. Explore tax abatement or incentive arrangements.

Corporate infrastructure

  1. Gain a complete understanding of corporate expenses.
  2. Watch out for any abnormal patterns.
  3. Obtain copies of any financial packages provided to the board and management over the past three years.
  4. Review costs assigned or not assigned to different locations for services that are carried out by corporate.

Outside Services

  1. Get hold of a list of every outsourced service.
  2. Confer with management about the relationship with the outsourced service.
  3. Find copies of every investment policy of the company.


  1. Examine the classes and series of securities.
  2. Check the amount of share or membership interest of every class or series outstanding and issued.
  3. Inspect all issuance of securities of warrants, convertible securities, stock options, phantom stock rights or any other pledge to issue securities.
  4. Look over schedules of repurchase of capital stock or other securities.
  5. Find out about every agreement between security holders, the company in relation to dividend declaration, voting, first offer or first refusal rights, information rights and grants of proxies.
  6. Inspect agreements between security holders or involving the company that relate to ownership, control or management of the company.
  7. Identify and review all security holders.
  8. Scrutinise all stockholder, put or call, voting, stock transfer or other shareholder agreements.
  9. Check arrangements where the company is involved and contain change of control stipulations.
  10. Examine plans in relation to pre-emptive, registration, co-sale rights and rights of first refusal.
  11. Familiarise yourself with trust arrangements or other similar documents.
  12. Find out about agreements offering private placement memoranda, circulars and disclosure letters in relation to sales over the last five years.
  13. Go over arrangements with all brokers or anyone else involved in past, current or future security offerings.
  14. Discover restrictions on the company’s capability to pay its shareholders’ dividends.
  15. Look into claims by anyone insisting on rights to an equity interest in the company.

There you have it. 55 questions you should ask in relation to finance in M&A deals. These questions should prevent you getting nasty surprises down the line. However, there’s normally more that will come to light, so it’s recommended that you add to this list as appropriate.

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