ma-due-diligence

name

ma-due-diligence

description

M&A due diligence framework for buy-side or sell-side transactions covering all major workstreams. USE THIS SKILL when the user asks about due diligence, DD checklists, acquisition assessment, target evaluation, red flag analysis, data room review, quality of earnings, buy-side DD, sell-side DD, vendor due diligence, management presentations, DD findings, integration complexity, or "what should we check before acquiring." Also trigger when asked to scope a DD exercise, build a data room request list, prepare management presentation questions, or assess deal risks for any M&A transaction. Cross-references: use `valuation` skill for valuation work and `financial-modeling` skill for projection model construction.

M&A Due Diligence

Required Inputs

• Target Company: Name, industry, size (revenue, EBITDA, headcount), and brief description.
• Transaction Type: Buy-side (acquirer's perspective) or sell-side / vendor DD (seller preparing for market).
• Deal Thesis: Strategic rationale — why this acquisition makes sense (synergies, market access, capability, scale, vertical integration).
• Deal Structure: Asset deal vs. share deal; expected consideration type (cash, stock, earnout).
• Timeline: Expected DD window (typically 4-8 weeks); exclusivity expiration date if applicable.
• Budget / Scope Constraints: Which workstreams are in scope; any areas requiring specialist advisors.

Execution Steps

1. DD Scoping

Scope varies significantly between buy-side and sell-side engagements.

Buy-Side DD Focus:

Workstream	Primary Objective	Key Questions
Financial	Validate earnings quality; identify hidden liabilities	Is EBITDA real and sustainable? What is true net debt?
Commercial	Confirm market position and revenue durability	Will customers stay? Is the market growing? Is the moat real?
Legal	Identify legal exposure and deal impediments	Are there change-of-control issues? Litigation? IP risks?
Operational	Assess scalability and integration complexity	Can we integrate this? What will break? Key person risks?
Technology	Evaluate tech assets and technical debt	Is the tech an asset or liability? What is the rebuild cost?
HR / Cultural	Assess people risks and cultural compatibility	Will key talent stay? Are there hidden liabilities? Culture clash?

Sell-Side (Vendor) DD Focus:

Workstream	Primary Objective	Key Questions
Financial	Present clean, adjusted financials proactively	How do we present EBITDA in the best defensible light?
Commercial	Build the equity story with supporting data	What is the compelling growth narrative? Market proof points?
Legal	Identify and remediate issues before buyer finds them	What can we fix before going to market?
Operational	Demonstrate operational readiness for new ownership	Can the business run independently? Transition service needs?
Technology	Showcase tech differentiation; remediate known issues	What is our tech competitive advantage?
HR / Cultural	Demonstrate stable, capable team	How do we retain key people through the process?

2. DD Workstream Details

Workstream 1: Financial Due Diligence

Quality of Earnings (QoE) Analysis:

Start with reported EBITDA and systematically adjust:

Adjustment Category	Description	Direction	Examples
Non-recurring revenue	Revenue that will not repeat under new ownership	Subtract	One-time project fees, litigation settlement income, government grants
Non-recurring expenses	Costs that will not recur post-close	Add back	Restructuring charges, litigation costs, one-time bonuses, IPO costs
Owner adjustments	Above-market compensation or personal expenses	Add back	Owner salary above market, personal travel, related-party rent above market
Accounting policy differences	Adjustments to normalize to standard policies	+/-	Revenue recognition timing, capitalization vs. expensing, reserve levels
Pro forma adjustments	Full-year effect of mid-year changes	+/-	Annualize acquisitions, new contracts, or cost savings started mid-year
Run-rate adjustments	Known future changes not yet in financials	+/-	Signed contracts not yet billing, committed cost reductions, price increases

Adjusted EBITDA Bridge:
Reported EBITDA                         $___M
+ Non-recurring expense add-backs       $___M
- Non-recurring revenue subtractions   ($___M)
+ Owner / related-party adjustments     $___M
+/- Accounting policy normalizations    $___M
+/- Pro forma adjustments               $___M
+/- Run-rate adjustments                $___M
= Adjusted EBITDA                       $___M

Working Capital Normalization:

Component	Calculation	Months to Analyze	Key Tests
Accounts Receivable	DSO trend; aging analysis; bad debt history	24-36 months	Unusual spike near period-end? Customer concentration?
Inventory	DIO trend; obsolescence; write-off history	24-36 months	Aging increasing? Slow-moving categories?
Accounts Payable	DPO trend; supplier concentration	24-36 months	Stretching payables to manage cash flow? Supplier dependency?
Other WC items	Accruals, prepayments, deposits, deferred revenue	24-36 months	Large swings? Deferred revenue recognition changes?
Normalized NWC	Average of normalized months (exclude outliers)		Peg mechanism for closing adjustment

Net Debt Bridge:

Item	Value	Notes
Funded debt (bank loans, bonds)	$___M	Face value
Capital leases / finance leases	$___M	Post-IFRS 16 / ASC 842
Unfunded pension liability	$___M	Actuarial deficit
Deferred consideration (prior acquisitions)	$___M	Outstanding earnouts owed
Tax liabilities (overdue or disputed)	$___M	Net of expected refunds
Litigation provisions	$___M	If probable and estimable
Less: Cash and cash equivalents	($___M)	Unrestricted only
Less: Excess cash above operating needs	($___M)	If segregated
Net Debt	$___M

Workstream 2: Commercial Due Diligence

Market Sizing Cross-Reference:

Validate the target's stated TAM/SAM/SOM using at least two independent methods:

• Top-down: Industry reports, analyst estimates, government statistics.
• Bottom-up: Customer count x average spend x penetration rate.
• Triangulate: Check that the target's revenue as % of SAM is plausible.

Customer Concentration Analysis:

Customer	Revenue ($M)	% of Total	Contract Expiry	Switching Cost	Risk
Customer 1				Low/Med/High
Customer 2				Low/Med/High
Top 5 total		X%
Top 10 total		X%
Top 20 total		X%

Red flag thresholds:

• Top 1 customer > 20% of revenue: High concentration risk.
• Top 5 customers > 50% of revenue: Moderate-high concentration risk.
• Top 10 customers > 70% of revenue: Moderate concentration risk.

Competitive Moat Assessment:

Moat Type	Evidence Present	Strength (1-5)	Sustainability
Network effects	[Y/N — describe]		[Durable / Eroding / Emerging]
Switching costs	[Y/N — describe]		[Durable / Eroding / Emerging]
Scale economies	[Y/N — describe]		[Durable / Eroding / Emerging]
Brand / Reputation	[Y/N — describe]		[Durable / Eroding / Emerging]
IP / Patents	[Y/N — describe]		[Durable / Eroding / Emerging]
Regulatory barriers	[Y/N — describe]		[Durable / Eroding / Emerging]
Data advantage	[Y/N — describe]		[Durable / Eroding / Emerging]

Workstream 3: Legal Due Diligence

Area	Key Items to Review	Red Flag Indicators
Material contracts	Top 20 contracts by value; change-of-control provisions; exclusivity; MFN clauses	Contracts terminable on change of control without consent; onerous exclusivity
Litigation	Pending and threatened claims; regulatory investigations; historical settlements	Unresolved material claims; pattern of similar litigation; regulatory investigation
IP ownership	Patent portfolio; trademark registrations; trade secrets; open-source compliance	IP created by contractors without assignment; open-source license contamination
Employment	Employment agreements; non-competes; severance obligations; wage-and-hour compliance	Mass non-compete expirations post-close; unpaid overtime exposure; misclassification
Regulatory	Licenses and permits; compliance history; pending regulatory changes	Expired or at-risk licenses; history of violations; upcoming regulation threatening model
Tax	Tax returns (3-5 years); transfer pricing; tax disputes; structural exposures	Aggressive positions; open audits with material exposure; NOL limitations on change of control
Environmental	Phase I/II assessments; remediation obligations; compliance history	Known contamination; pending remediation; Superfund site exposure
Data privacy	GDPR/CCPA compliance; data processing agreements; breach history	Prior breaches; non-compliant data practices; cross-border transfer issues

Workstream 4: Operational Due Diligence

Area	Assessment Focus	Key Questions
Supply chain	Supplier concentration; single-source risks; lead times; logistics	Any single-source suppliers for critical inputs? Geographic concentration?
Key person dependency	Identify roles where departure = material business impact	What happens if the founder/CEO/CTO leaves? Are there successors?
Scalability	Can operations scale 2-3x without fundamental redesign?	What breaks at 2x revenue? Capacity constraints?
Quality and compliance	Quality management system; defect rates; certifications	ISO certifications current? Customer quality complaints trending?
Facilities	Lease terms; capacity utilization; capex needs	Lease expiry alignment with hold period? Deferred maintenance?
IT infrastructure	Systems maturity; disaster recovery; cybersecurity posture	Last penetration test? DR tested? Systems integrated or siloed?

Workstream 5: Technology Due Diligence

Area	Assessment Focus	Scoring (1-5)
Architecture	Monolith vs. microservices; scalability; technical debt level	1=Legacy monolith, 5=Modern cloud-native
Code quality	Test coverage; deployment frequency; incident rate; documentation	1=No tests, no docs, 5=>80% coverage, CI/CD, well-documented
Security	Vulnerability management; pen test results; SOC 2 / ISO 27001	1=No security program, 5=Certified, tested, monitored
Data assets	Data quality; uniqueness; competitive advantage from data	1=Poor quality, commodity, 5=Unique, clean, defensible
Team	Engineering talent quality; retention; key person risk	1=High attrition, thin, 5=Strong team, deep bench
IP / Product	Proprietary algorithms; patents; product-market fit	1=Commodity/easily replicated, 5=Strong IP moat
Scalability	Can the platform handle 10x current load?	1=Will break at 2x, 5=Proven at scale with headroom
Tech debt	Estimated cost to remediate critical tech debt	1=>$5M to remediate, 5=Minimal debt

Workstream 6: HR & Cultural Due Diligence

Area	Assessment Focus	Red Flag Indicators
Org structure	Layers, spans, key roles, succession planning	Over-reliance on founder; no succession plan for key roles
Compensation	Salary benchmarking; equity/options outstanding; retention packages	Below-market comp with no equity = flight risk; large option pool dilution
Benefits & liabilities	Pension obligations; post-employment benefits; accrued leave	Underfunded pension; large accrued leave balances; OPEB liabilities
Employment compliance	Contractor classification; overtime compliance; handbook completeness	Misclassified contractors (IC vs. employee); missing handbook policies
Talent retention	Voluntary attrition rate (last 3 years); engagement survey scores	Attrition >20%; declining engagement; key departures pre-announcement
Cultural assessment	Values alignment; management style; decision-making norms	Significant values mismatch with acquirer; command-and-control vs. empowerment

3. Red Flag Identification and Classification

Every finding must be classified by severity. Use strict definitions:

Severity	Definition	Typical Examples	Deal Action
Deal Breaker	Fundamentally undermines deal thesis; cannot be remediated at acceptable cost	Fraud; undisclosed material litigation; regulatory prohibition; target does not own its core IP	Walk away or fundamentally restructure deal
Material	Significant impact on valuation (>5% of EV) or deal structure	Quality of earnings adjustments >15% of EBITDA; key customer at risk; material compliance gap; unfunded pension >10% of EV	Price adjustment, indemnity, escrow, or structural protection
Manageable	Addressable post-close with known cost and timeline	Tech debt requiring $1-3M remediation; 2-3 key hires needed; process gaps fixable in 6 months	Factor into integration plan and budget
Noted	Minor issue; no material impact; documented for completeness	Expired non-material contract; minor policy gap; cosmetic financial restatement	Document only; no action required

4. Integration Complexity Scoring

Score integration complexity across 8 dimensions (1-5 scale):

Dimension	1 (Simple)	3 (Moderate)	5 (Complex)	Target Score
Systems overlap	No shared systems; standalone	Some system overlap; phased migration	Deep system entanglement; big-bang required
Geographic overlap	Same country; same timezone	Same region; 2-3 countries	Global; 5+ countries; regulatory variation
Customer overlap	<5% customer overlap	10-20% overlap; manageable conflict	>30% overlap; significant cannibalization risk
Product integration	Complementary; no overlap	Some overlap; portfolio rationalization needed	Significant overlap; product retirement required
Cultural distance	Similar culture and values	Some differences; manageable with effort	Fundamentally different cultures; merger of equals dynamic
Regulatory complexity	Same regulatory regime	Some additional regulatory approvals	Multiple jurisdictions; antitrust risk; foreign investment review
People integration	Minimal overlap; mostly additive	Some role duplication; selection needed	Significant redundancy; large-scale role elimination
Operational integration	Independent operations; tuck-in	Shared services consolidation	Full operational merger; new operating model needed

Overall integration complexity: Average of dimension scores.

Score	Complexity Level	Typical Integration Timeline	Integration Cost (% of deal value)
1.0 - 2.0	Low	3-6 months	1-3%
2.1 - 3.0	Moderate	6-12 months	3-5%
3.1 - 4.0	High	12-18 months	5-8%
4.1 - 5.0	Very High	18-36 months	8-15%

5. Data Room Request List

Organized by workstream. Send this to the target as the initial information request.

Financial (40-50 items):

• Audited financial statements (last 3-5 years)
• Monthly management accounts (last 24 months)
• Revenue by customer, product, geography (last 3 years)
• Detailed cost breakdown by category (last 3 years)
• Working capital detail (monthly, last 24 months)
• Debt agreements and amendments
• Capital expenditure schedule (actual and planned)
• Tax returns and correspondence with tax authorities (last 3-5 years)
• Budget and forecast (current year and forward plan)
• Related-party transactions detail

Commercial (20-30 items):

• Top 20 customer contracts
• Customer list with revenue, tenure, and contract terms
• Sales pipeline and bookings report
• Pricing history and scheduled price changes
• Churn analysis and customer loss reasons (last 3 years)
• Market studies or analyst reports referenced in management materials
• Competitor analysis and win/loss data
• Channel partner agreements

Legal (30-40 items):

• All material contracts (>$[X] annual value)
• Litigation summary (pending, threatened, settled in last 5 years)
• IP schedule (patents, trademarks, copyrights, domain names)
• Employment agreements for key executives
• Lease agreements for all facilities
• Insurance policies and claims history
• Regulatory licenses and permits
• Data processing agreements and privacy policies

Operational (15-20 items):

• Organization chart with headcount by function
• Key supplier contracts and terms
• Quality certifications and audit results
• Facilities list with lease terms and capacity utilization
• Business continuity and disaster recovery plans
• Key operational metrics and KPIs (last 3 years)

Technology (15-20 items):

• Technology architecture diagram
• Third-party software licenses and contracts
• Security audit reports and penetration test results
• Development roadmap and backlog
• System uptime and incident history (last 12 months)
• Data architecture and data flow diagrams

HR (15-20 items):

• Employee census (name, role, tenure, compensation, location)
• Organization chart by function and level
• Benefits summary and costs
• Employment agreements, non-competes, and change-of-control provisions
• Attrition data (voluntary and involuntary, last 3 years)
• Engagement survey results (last 2 surveys)
• Outstanding equity grants and option pool

6. Management Presentation Question Bank

Critical questions to ask the target management team (minimum 25):

Strategy & Market:

1. What is your sustainable competitive advantage and what threatens it?
2. Which competitors worry you most and why?
3. What is the single biggest risk to your business in the next 3 years?
4. How would you grow the business with $[X]M additional investment?
5. Which customers are you most at risk of losing and why?

Financial: 6. Walk us through EBITDA adjustments — what do you consider truly non-recurring? 7. What is your typical cash conversion cycle and how has it changed? 8. Where are the largest areas of management judgment in your financials? 9. Are there any off-balance-sheet commitments or contingent liabilities? 10. What is driving the trend in gross margin over the last 3 years?

Customers & Revenue: 11. What would it take for your largest customer to leave? 12. How do you acquire new customers and what is the cost of acquisition? 13. What is your net revenue retention rate and how is it trending? 14. Are any material contracts up for renewal in the next 12 months? 15. How much of your pipeline is committed vs. speculative?

Operations: 16. What breaks if the business doubles in size? 17. Where are the key person dependencies and what is the succession plan? 18. What are the top 3 operational improvements you would make with more resources? 19. Have you experienced any significant supply chain disruptions? How did you respond? 20. What is your biggest quality or delivery challenge?

Technology: 21. What is the most significant technical debt and what would it cost to fix? 22. How would you rate your cybersecurity posture on a 1-10 scale? 23. What is on your technology roadmap for the next 18 months and why? 24. Are there any open-source license compliance concerns? 25. What systems or technology would need to change in an acquisition?

People & Culture: 26. Who are the 5 people you cannot afford to lose and why? 27. How would you describe the company culture in 3 words? 28. What has voluntary attrition looked like and what are people leaving for? 29. Are there any outstanding employment disputes or union matters? 30. What would change about the culture under new ownership?

7. DD Timeline Template

Standard 6-week DD timeline with gated milestones:

Week	Phase	Key Activities	Gate / Milestone
1	Kickoff & Data Room	DD kickoff meeting; data room access granted; initial document review; information request gaps identified	Data room substantially populated
2	Deep Dive Begins	Financial model build; QoE analysis started; legal contract review; customer interview scheduling	Preliminary QoE adjustments identified
3	Workstream Execution	Management presentation; site visits; customer reference calls; technology deep dive; HR census analysis	Management presentation completed; site visit done
4	Analysis & Findings	Draft findings across all workstreams; red flag identification; integration complexity scoring	Draft findings memo circulated internally
5	Synthesis & Valuation Impact	Cross-workstream synthesis; valuation impact quantification; SPA markup review; closing conditions list	DD findings report draft complete
6	Report & Negotiation Support	Final DD report delivered; findings presentation to investment committee/board; support price negotiation and SPA indemnities	Final report delivered; IC/Board decision

Timeline adjustments:

• Compressed (4 weeks): Competitive process or exclusivity pressure. Cut depth, not breadth. Focus on deal breakers.
• Extended (8 weeks): Complex carve-out, multi-jurisdiction, or regulatory approval required. Add weeks 5-6 for specialist workstreams.

8. Finding Summary with Deal Impact Quantification

For each material finding, quantify the deal impact:

Finding ID	Workstream	Finding Description	Severity	EBITDA Impact	EV Impact	Recommended Action
F-01	Financial	[Description]	Deal Breaker / Material / Manageable / Noted	$___M	$___M	[Action]
F-02	Commercial	[Description]		$___M	$___M	[Action]
F-03	Legal	[Description]		$___M	$___M	[Action]

Impact quantification methodology:

• EBITDA impact: Annual recurring impact on adjusted EBITDA (positive or negative).
• EV impact: EBITDA impact x deal multiple (e.g., $1M EBITDA hit x 8x multiple = $8M EV impact).
• One-time costs: Integration or remediation costs not reflected in EBITDA (deducted from EV separately).

Output Template

## Due Diligence Report: [Target Company Name]

**Date**: [Date] | **Transaction Type**: [Buy-side / Sell-side]
**Target**: [Company] | **Industry**: [Industry] | **Revenue**: $[X]M | **EBITDA**: $[X]M
**Deal Thesis**: [One-sentence strategic rationale]

### Executive Summary
Due diligence on [Target] identified [N] findings: [X] deal breakers, [Y] material issues,
[Z] manageable items, and [W] noted items. Adjusted EBITDA is $[X]M vs. reported $[Y]M,
a [Z]% reduction driven by [key adjustments]. Net debt is $[X]M. Integration complexity
is scored [X/5] ([Low/Moderate/High/Very High]). The deal [remains viable with adjustments /
should proceed with caution / should not proceed] based on the findings below.

### Quality of Earnings Summary
| Item | Amount ($M) | Notes |
|---|---|---|
| Reported EBITDA | $___M | As per management accounts |
| Non-recurring expense add-backs | +$___M | [Detail] |
| Non-recurring revenue subtractions | -$___M | [Detail] |
| Owner / related-party adjustments | +$___M | [Detail] |
| Accounting normalizations | +/-$___M | [Detail] |
| Pro forma / run-rate adjustments | +/-$___M | [Detail] |
| **Adjusted EBITDA** | **$___M** | **[X]% vs. reported** |

### Net Debt Bridge
| Item | Amount ($M) |
|---|---|
| Funded debt | $___M |
| Lease liabilities | $___M |
| Other debt-like items | $___M |
| Less: Cash | ($___M) |
| **Net Debt** | **$___M** |

### Working Capital Analysis
| Component | Normalized Level ($M) | Peg Mechanism | Variance to Peg |
|---|---|---|---|
| [Component] | $___M | [Trailing X-month avg] | $___M |

### Commercial DD Summary
- **Market**: [TAM/SAM/SOM validated? Growth rate confirmed?]
- **Customer concentration**: Top 5 = [X]% of revenue. [Assessment]
- **Competitive moat**: [Assessment — strong/moderate/weak with evidence]
- **Revenue durability**: [Recurring %, contract length, retention rate]

### Findings Register
| ID | Workstream | Finding | Severity | EBITDA Impact | EV Impact | Action |
|---|---|---|---|---|---|---|
| F-01 | [WS] | [Finding] | [Severity] | $___M | $___M | [Action] |
| F-02 | [WS] | [Finding] | [Severity] | $___M | $___M | [Action] |

### Integration Complexity Assessment
| Dimension | Score (1-5) | Commentary |
|---|---|---|
| Systems overlap | X | [Note] |
| Geographic overlap | X | [Note] |
| Customer overlap | X | [Note] |
| Product integration | X | [Note] |
| Cultural distance | X | [Note] |
| Regulatory complexity | X | [Note] |
| People integration | X | [Note] |
| Operational integration | X | [Note] |
| **Overall** | **X.X** | **[Low / Moderate / High / Very High]** |

Estimated integration timeline: [X] months
Estimated integration cost: $[X]M ([X]% of deal value)

### Deal Breakers and Material Issues (Detail)
#### [F-XX]: [Finding Title]
- **Description**: [Detailed description]
- **Evidence**: [What was reviewed]
- **Impact**: [Quantified impact on EBITDA and EV]
- **Recommended action**: [Walk away / Price adjustment / Indemnity / Escrow / Integration plan]

### Recommendations
1. **Proceed / Do Not Proceed**: [Recommendation with rationale]
2. **Price adjustment**: Reduce offer by $[X]M based on QoE adjustments and identified risks
3. **Structural protections**: [Indemnities, escrows, earnouts, reps & warranties to negotiate]
4. **Integration priorities**: [Top 5 Day 1 / Week 1 / Month 1 actions]

### Cross-References
- Valuation analysis: See `valuation` skill output for DCF, comps, and precedent transactions
- Financial model: See `financial-modeling` skill output for detailed projection model

Quality Checks

• DD scope explicitly defined as buy-side or sell-side with appropriate focus per workstream.
• All 6 workstreams covered: Financial, Commercial, Legal, Operational, Technology, HR/Cultural.
• Quality of earnings analysis includes full adjusted EBITDA bridge with every adjustment categorized and quantified.
• Working capital normalized using trailing 24-36 month analysis with peg mechanism defined.
• Net debt bridge includes all debt-like items (leases, pensions, contingent liabilities, tax), not just funded debt.
• Customer concentration analyzed with specific revenue percentages and red flag thresholds applied.
• Competitive moat assessed across multiple moat types with evidence and sustainability rating.
• Every finding classified by severity using the four-level scale (Deal Breaker / Material / Manageable / Noted).
• Material findings quantified in terms of EBITDA impact and enterprise value impact using deal multiple.
• Integration complexity scored across all 8 dimensions with implied timeline and cost estimate.
• Management presentation includes at least 25 questions across strategy, financial, customer, operations, technology, and people.
• Data room request list organized by workstream with sufficient specificity to be sent to the target.
• DD timeline is realistic (4-8 weeks) with gated milestones and clear deliverables per week.
• Cross-references to valuation and financial-modeling skills included where applicable.
• Recommendations section provides clear proceed/no-proceed guidance with price adjustment and structural protections.