30+ Due Diligence Questions to Ask When Acquiring a Business
Due diligence is essential to all M&A transactions, particularly acquisitions. Buying a business is an intricate process that requires full concentration and attention to detail. Unfortunately, due to the sheer amount of data, it’s easy to overlook certain aspects of the deal and make wrong decisions.
To stay focused throughout the due diligence process, and not miss any important information, the buyer should ask strategic questions about each area that impacts the deal. Asking the right due diligence questions when buying a business is an essential step to a successful and efficient acquisition.
In this article, we explore common due diligence questions to ask when preparing for an acquisition.
How to ask the right questions during due diligence
Although due diligence processes often fall into similar patterns, each transaction is unique. Therefore, the best practice for the buyer is to come up with due diligence questions that reflect the deal’s nature and the deal-making practices of both parties.
This is why the first stage of due diligence is outlining the buying company’s goals, values, and strategies. When the buyer understands their own preferences and expectations, it becomes easier for their due diligence team to know what questions to ask during the due diligence process.
- Main takeaway: Before figuring out what questions to ask, the buyer must understand their own objectives and action plans.
The next step is to adopt a structured approach to asking M&A due diligence questions. Once again, while there’s no one-size-fits-all structure to follow, there are several must-inspect areas.
Top due diligence questions to ask for an acquisition
Regardless of industry and company size, there are a few universally crucial categories when it comes to due diligence questions for acquisition. Below are the six most important question groups for your due diligence team to consider.
1. Questions for financial due diligence
Profit is the ultimate purpose of any M&A. That’s why financial due diligence is always the first item on the acquisition due diligence checklist. As a rule of thumb, the buying side will be requesting financial statements for the last five years.
Asking due diligence questions when buying a business means looking into management accounts, operating costs, investment and accounting policies, profit margins, debt, inventories, and more. Also, tax documents — tax diligence is a crucial part of this stage.
Below are a few of the questions that you must include in your financial due diligence checklist.
Common due diligence questions:
- How much revenue has the company made in the past years?
- What was your expense ratio in the past years?
- How do you plan your budget, and what tools do you use in the process?
- Can you provide details of your capital expenditures for the upcoming year?
- What are the company’s accounts payable?
2. Questions for legal issues due diligence
The buyer needs to meet with the seller’s lawyers to examine legal documents and discuss legal M&A due diligence questions. Past and current litigations are an important factor to weigh in acquisition decision-making, and it’s a good idea to learn about them early on.
Other topics to discuss with the legal team are licenses, insurance, and permits. In some cases, the buyer will also want to see environmental reports and health and safety notices. When you are preparing your due diligence checklists, make sure to include these questions about legal issues.
Common due diligence questions:
- Do you have any contractual limitations on conducting business?
- Are there specific laws and regulations your company must observe?
- What regulatory bodies oversee your operations?
- Did your company face any lawsuits?
- Are you currently involved in any litigations?
3. Due diligence questions about the target company
Before diving into the specifics of the front-end of the seller’s operation, it’s important to examine the company’s structure and operations first. This should have high priority on the buyer’s due diligence checklist. The buyer will study the sell-side’s by-laws, ownership specifics, competition profiles, recent annual reports, ongoing business deals, and more.
When preparing your due diligence questionnaires, you can ask questions like these.
Common due diligence questions:
- How long have the key decision-makers in the company served in their positions?
- Who are the board members, and what was their input like for the past five years?
- What are the channels of communication with stakeholders?
- What are the hierarchical and decision-making structures of your company?
- Who are your main competitors?
4. Questions for due diligence on employees
A closer look at the target company will also include assessing the employees outside of the executive circle. The quality of the staff is an extremely valuable asset to the potential buyer as they drive the operation forward.
When putting together the due diligence questions to ask human resources, working alongside the integration team might be beneficial. Keeping the upcoming post-transaction procedures in mind helps focus on the most crucial aspects and express consideration to the employees who will be affected by the acquisition.
So, here are a few questions you should definitely include in your HR due diligence checklist.
Common due diligence questions:
- What are the specifics of the company’s culture?
- Who are the key employees in each sector?
- Can I see a complete employee review with lengths of service and job descriptions?
- How often do you assess the employees’ performance, and what approach and key performance indicators do you use?
- What are the stages of the recruitment and hiring processes?
5. Product-related due diligence questions
Product or service-related questions to ask during due diligence usually concern the products themselves, competitors, and marketing strategies of the target company. But in order to go deeper, the buyer should always look past the catalog specifications and dig into the production costs and particularities, the major challenges, and evolution plans.
To that end, the following questions should be included in your due diligence checklists.
Common due diligence questions:
- What are your supply channels?
- Did you ever have product recalls, and why?
- Do you have any patented products?
- What marketing strategies do you use?
- Are you currently developing any new products?
6. Due diligence questions about customers
Customer profiles are just as important as employees’ and deserve the same level of recognition and appreciation. The buy-side will look at the general sales information, with a special focus on the most loyal clients.
In the B2B sector, the top customers might be represented by their attorneys, and the data they provide will be subject to an NDA agreement.
So, make sure your due diligence team includes the following questions in their customer due diligence checklist.
Common due diligence questions:
- Who are your main clients?
- In what areas does the company do most of its business?
- What are your customer acquisition and retention strategies?
- How are the customer contracts structured?
- What kind of feedback have you been getting from the target clientele?
7. Questions for cybersecurity due diligence
When acquiring a company, it’s important to be aware of all the threats it’s exposed to. But while market fluctuations, new competitors, high turnover, and legal risks are sure to be included in a risk analysis, it’s easy to overlook cyber threats and leave them out of a due diligence checklist.
To avoid that, make sure your due diligence team talks to the target company’s IT team and looks into cybersecurity by including questions such as the following in their due diligence questionnaires.
Common due diligence questions:
- Does the company follow a formal security plan?
- Do you perform cyber security testing, and how often?
- What are the key risks to cybersecurity?
- What causes those risks?
- How much will it cost to eliminate the causes?
8. Asset-related due diligence questions
While some people include asset due diligence in financial due diligence, it’s entirely possible to make it a separate area, so as to break up the financial due diligence process into smaller steps. With these questions, your team will assess the target company’s assets and liabilities.
Common due diligence questions:
- What are the company’s physical and financial assets?
- Do you have any lease agreements for equipment?
- What intellectual property does the company own?
- Are there any liabilities in the balance sheet?
- Are there any off-balance sheet liabilities?
Using a ready-made question for due diligence checklist
Lately, most M&A due diligence is taking place online via virtual deal rooms. Some deal room software providers have more experience and knowledge in the merger and acquisitions sector and offer guidance to buyers and sellers.
The buyer can request a due diligence question list from the deal room company to arrange and streamline the due diligence process. Although, as mentioned before, every transaction comes with its own specifics and technicalities, following due diligence checklists saves a good deal of time and effort.
At the same time, the seller can use the due diligence question list to get all the necessary information ready beforehand and further reduce the deal-making time.
- Main takeaway: going along with a pre-made due diligence question list can significantly improve agility during an M&A transaction.
Summing up: acquisition due diligence questions
When you are preparing for an acquisition and thinking of what due diligence questions to ask, this is what you should keep in mind:
- Asking the right due diligence questions is an important step to a successful acquisition.
- Before drawing your list of questions, understand your own objectives and general acquisition strategy.
- Make sure to ask questions about these eight key areas: finances, legal issues, target company structure, employees, main products, and customers.
- If you are using a virtual deal room, the provider may be able to give you a pre-made list of due diligence questions, which will save you time.
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