Buying a business is a major milestone—exciting, full of potential, and yes, a little overwhelming. Whether you are exploring your first acquisition or already deep in conversations, understanding the M&A due diligence process is essential to making a smart, confident decision.
At its core, buy-side due diligence helps you validate the opportunity, uncover hidden risks, and ensure the business you’re looking to acquire aligns with your strategic goals. While every deal is unique, most due diligence efforts are organized into key “workstreams,” each focused on a critical area of the business.
Below, we break down four key workstreams every first-time buyer should consider and understand.
Financial Due Diligence (FDD)/Quality of Earnings (QOE) Analysis
Financial due diligence/quality of earnings analysis is designed to assess the accuracy, stability, and sustainability of the target company’s financial performance.
What to expect:
- Determine whether the target company follows generally accepted accounting principles (GAAP) or other applicable standards, and note any deviations that may distort reported earnings
- Evaluate adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), focusing on one-time income or expenses as well as any owner discretionary costs that could impact reported earnings
- Review historical financial statements to observe trends in revenue, margins, and profitability
- Examine the consistency of revenue and key customers, and identify customer concentration risks
- Analyze the target’s net working capital trends to determine the ongoing needs of the business
Tax Due Diligence
The tax due diligence process helps assess the company’s tax compliance, liabilities, and potential exposures.
What to expect:
- Consider how deal structure (asset versus stock deal) affects the overall tax risk. Stock transactions require more comprehensive procedures because buyers assume all existing liabilities. While asset deals limit liability, some states or industries impose successor liability for unpaid taxes (e.g., sales tax, withholding tax). Consider obtaining tax clearance certificates where available to mitigate this risk
- Review past tax filings and audit results to ensure compliance with IRS standards and identify any red flags
- Ensure payroll, sales, and corporate taxes are accurately assessed and paid
- Review and note any pending tax matters or regulatory inquiries that may affect the transaction or ongoing operations
Legal Due Diligence
The purpose of the legal due diligence workflow is to uncover legal risks, obligations, and structural issues that could affect the transaction or future operations.
What to expect:
- Confirm that the legal entity is properly formed, in good standing, and that ownership interests are clearly documented and transferable
- Review key contracts for change-of-control clauses, consent requirements, or termination penalties
- Verify that intellectual property (IP) like trademarks, patents, and copyrights is properly registered and transferable
- Assess any ongoing or threatened litigation that could lead to indemnities, escrow holdbacks, or purchase price adjustments
- Review real estate leases for transfer restrictions or landlord consent requirements
- Ensure the business holds all necessary licenses and permits to operate legally
Human Resources and People Due Diligence
Human resources and people due diligence helps assess the company’s workforce, compensation structure, and employment practices.
What to expect:
- Review employee contracts, handbooks, and HR policies for compliance and clarity
- Assess the roles and responsibilities of owners and key personnel, and determine any replacements required post-transaction
- Analyze compensation and benefits for alignment with market standards and future requirements
- Evaluate company culture, employee satisfaction, and potential retention concerns
- Identify any union agreements or outstanding labor matters
- Consider team integration post-acquisition and assess any potential change management needs
Next Steps to Ensure a Smooth Acquisition Process
While this overview is not exhaustive, it gives first-time buyers a clear roadmap of what to expect when conducting due diligence on a potential target. Each workstream plays a vital role in helping you make an informed decision and avoid costly surprises.
Most importantly, don’t go at it alone. Engaging experienced advisors, CPAs, attorneys, and industry experts can make all the difference. A disciplined approach to due diligence ensures that the business you acquire is not only a good fit, but a smart investment.
For guidance tailored to your specific transaction, contact Kreischer Miller to learn how our Transaction Advisory Services team can support your due diligence needs.