Demystifying Due Diligence in Acquisitions

Acquiring another business can be transformative for your business, providing opportunities for growth, market expansion, and operational efficiencies. However, without thorough due diligence, what seems like a promising deal can quickly turn into a costly mistake.

Due diligence is the investigative process that assesses the financial, legal, and operational health of a business before completing an acquisition or merger. It helps buyers identify risks, liabilities, and potential deal-breakers, ensuring they make informed decisions.

In this article, we’ll outline why due diligence is so important, and provide practical steps to approach it effectively.

What is Due Diligence?

Due diligence is a comprehensive review of a target company’s:

• Financial health – Reviewing revenues, debts, assets, financial performance and tax position.
• Legal obligations – Checking asset ownership (including Intellectual Property), contracts, compliance, and employment law and litigation risks.
• Operational risks – Evaluating business operations, supplier agreements, and HR policies.

The goal is simple: to ensure there are no surprises after the deal is signed.

Why Due Diligence is Essential

Skipping or rushing due diligence can lead to unexpected liabilities and financial losses. Here’s why it’s critical:

1. Identifies Financial Red Flags
2. Assesses Legal and Compliance Risks
3. Evaluates Operational Stability

How to Approach Due Diligence Effectively

1. Start Early

It is likely that some element of financial due diligence will start when negotiations commence as the financial position of the target company will directly impact on the price being offered. Other due diligence should begin as soon as commercial terms have been agreed. Leaving it too late could result in rushed decisions and overlooked risks.

2. Build a Due Diligence Checklist

A structured approach minimises the risk of things being missed.

3. Engage Legal and Financial Experts

Acquiring another business or company is complex and having the right advisors can prevent costly mistakes. A corporate solicitor ensures:

• Contracts are legally sound and enforceable.
• The deal structure is designed to minimise risk and maximise value.
• Specific provisions are included to address identified risks.

4. Prioritise Red Flags and Deal Breakers

Not every issue uncovered during due diligence is a deal-breaker. Categorise risks as:

🔴 Critical – Major legal or financial concerns that could stop the deal.

🟡 Moderate – Issues that require renegotiation or restructuring.

🟢 Low Risk – Minor concerns that can be managed post-acquisition.

5. Negotiate Based on Findings

If due diligence reveals an issue, use this to renegotiate terms. Buyers’ may:

• Request an adjustment to the purchase price based on financial risks.
• Request a retention from the purchase price until the risk issue has been resolved.
• Require warranties and indemnities to protect against future liabilities.
• Set conditions that must be satisfied before completion of the acquisition.

How Hegarty Can Help

Navigating due diligence without expert guidance can be overwhelming.

At Hegarty, we:

• Conduct thorough legal due diligence to uncover hidden risks.
• Draft and negotiate agreements to protect your interests.
• Help businesses structure deals to minimise liabilities and maximise value.

Don’t let hidden risks derail your next business acquisition. Ensure you’re fully protected with expert due diligence.