[Insight] M&A Due Diligence: Nine Key Review Areas

In the M&A process, due diligence is an essential step that must be undertaken.

If an acquiring company proceeds with a transaction without sufficiently reviewing the target company’s financial condition, legal risks, customer base, and market position, unexpected issues may arise after the transaction is completed.

This article summarizes the main reasons for conducting due diligence in the M&A process and highlights nine key areas that should be carefully reviewed.

1. Review of the Company’s Financial Condition

The buyer must accurately assess the target company’s financial condition by reviewing its financial statements, profitability, cash flow, and debt structure.

Through this review, the buyer can determine how stable the company’s earnings are and how effectively its liabilities are being managed.

It is also necessary to examine whether revenues are one-time or recurring, whether the accounting records accurately reflect the company’s actual operating conditions, and to assess the feasibility of recovering the investment.

By confirming the target company’s actual value as well as its revenue and cost structure, the buyer can determine an appropriate transaction price and identify potential financial risks.

2. Identification of Legal Risks

During the acquisition process, the buyer must identify potential legal risks and confirm any required legal procedures.

This includes determining whether the target company has violated licensing requirements or regulatory laws in the course of its business operations, whether there are ongoing or anticipated lawsuits or legal disputes, and the potential scale of any contingent liabilities that may arise as a result.

In addition, it is important to identify key contracts that must remain valid after the acquisition and to take the necessary steps required under those contracts to ensure their continued effectiveness.

3. Assessment of Financial and Tax Risks

Tax-related risks are assessed by reviewing the target company’s historical tax filings, records of tax audits, and any tax-related disputes.

In particular, it is important to identify in advance any issues that may arise from unpaid taxes or improper tax reporting.

As the buyer may assume certain tax obligations after the acquisition, it is essential to accurately understand the relevant regulations and potential tax liabilities that may arise following the transaction.

4. Review of Intellectual Property and Technology

The buyer must confirm whether key intellectual property assets, such as patents, trademarks, and copyrights, are adequately protected.

This is particularly important for technology-driven or IT companies, where it is essential to determine whether proprietary technologies are original and legally protected.

5. Analysis of Business Performance and Customer Base

The buyer should thoroughly review the target company’s business performance and customer base by examining its key customer segments, revenue concentration, and major contracts.

If a significant portion of revenue depends on a small number of key customers, the termination or loss of those customer relationships during or after the acquisition may have a negative impact on revenue.

6. Analysis of Organization and Human Resources

It is also important to assess the target company’s key personnel, management team, and organizational structure.

The buyer should determine whether key talent can be retained after the acquisition and whether there is a risk of internal conflict or employee turnover during the transaction process.

In addition, evaluating how well the target company’s organizational culture may align with that of the buyer and anticipating potential issues during organizational integration are essential considerations.

7. Evaluation of Business Outlook and Growth Potential

The buyer must assess the target company’s current market conditions and competitive position, as well as analyze its future growth potential.

This includes reviewing market share, competitive strengths, and technological innovation capabilities to determine whether the company can continue to grow after the acquisition.

Changes in industry trends or regulatory environments may also affect growth prospects and should therefore be considered as part of the due diligence process.

8. Assessment of Environmental and Social Risks

It is necessary to identify whether the target company is exposed to environmental or social risks.

For manufacturing companies or resource extraction businesses in particular, environmental issues—such as soil contamination—or regulatory violations may result in substantial costs.

Social responsibility issues may also affect the company’s reputation, making prior assessment important.

Through this process, potential legal issues or reputational damage can be mitigated, and it can be determined whether the company is able to meet ESG standards following the acquisition.

9. Preparation for Post-Merger Integration (PMI)

Through due diligence, potential issues that may arise during the post-acquisition integration process can be identified in advance, and plans can be developed to address them.

Based on the findings related to financial, legal, operational, and human resource matters, the buyer can formulate a concrete post-merger integration strategy.

Detailed planning that takes into account expected costs, time requirements, and potential organizational resistance is necessary in order to ensure a smooth integration process and minimize unforeseen issues after the acquisition.

As illustrated above, due diligence conducted by the buyer is a critical process for identifying and managing various risks that may arise after an acquisition.

Due diligence is not merely a procedural step in M&A transactions, but a core process that can determine the overall success of the transaction.

WMD identifies acquisition targets that meet your specific criteria and connects them efficiently.

With more than 15 partner organizations across eight countries, including Japan, Singapore, the United States, and the United Kingdom, as well as a database of over one million companies—the largest of its kind in Korea—WMD enables buyers to acquire suitable companies both domestically and internationally with a high level of certainty.

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