We generally recommend taking between 30 and 60 days to complete due diligence. We find this is enough time to complete a thorough evaluation of the business without letting the process drag on.

Due diligence will include onsite visits with your internal team and your external team of lawyers, accountants, and your third party M&A advisor. Your internal team should include more than just your CFO; we recommend involving your functional leaders from sales, marketing, and operations in this process because they will be in charge of running those functional areas once you complete the acquisition. Involve these functional leaders as early as possible so they can start learning about the business that’s being acquired and not only look for issues but also identify opportunities where you can realize the value of the acquisition.

In addition to onsite visits, you also have data requests that are sent out the acquisition prospect, asking for information about the company. We try to make this process a bit more interactive than a simple checklist by having a conversation around what is important to the business. Information is typically shared in a virtual data room which keeps the files secure and ensures only approved viewers access the documents.

One important thing to remember is that you can never completely eliminate risk, no matter how thorough you are during due diligence. We have a saying “Due diligence will go on forever…if you let it!” At some point you have to call the question and decide if you’ll pursue the deal or not. You’ll never uncover 100% of the issues during due diligence, but that’s why you have attorneys draft reps and warranties that can protect you if there are things found out after the deal. On the other hand, you’ll never uncover 100% (or any) of the opportunities by just evaluating the company. You will have to execute the acquisition in order to realize the benefits.

Photo credit: Craig Sunter via Flickr cc

Q: How often are you able to bring together both buyer and seller functional personnel during due diligence? Some sellers might be sensitive to confidentiality and not open to bringing their personnel into the fold.

A: When conducting due diligence, we advocate a functional approach, where leaders from the buyer’s organization meet with the seller’s. There are a number of advantages to this approach including paving the way for a much smoother integration once the deal is complete. However, sometimes you have cases where the seller, most often the sole owner of the company, wants to keep the deal quiet for as long as possible. Of course, it’s natural for a seller to feel this way because he or she does not want to alarm among the employees or generate unrest in the business for a deal that may or may not happen.

In cases like these, we have been most successful if the owner has at least a few trusted confidants that can act as proxies for some of the functional area leaders. In this case, you will not have an army of twenty functional leaders from your organization meet with the respective leaders on the seller’s side, but you may compile lists of questions that will be directed through a Vice President of Human Resources or a Vice President of Operations that the owner trusts. As much the owner wants to maintain confidentiality, we strongly advise he or she has at least one or two others from the organization involved in the transaction and due diligence.

If the owner wants to keep the acquisition completely under wraps, it is up to you to make a business decision of whether or not you want to continue pursuing M&A with the company. If you do continue down the path, you should have strong reps and warranties because you are not able to conduct accurate due diligence prior to the transaction closing. This way, there will be some recourse for you should you discover anything after the deal is announced and you have already taken over the company.

* This question was asked on our webinar “M&A: From LOI to Close.” Learn more about Capstone’s webinar series.

Q: “What if the buyer and seller functional leaders do not match? How do you coordinate the two sides?”

We take a functional approach to due diligence where we encourage your leaders from sales, marketing, finance, operations and other functional areas to meet with their respective leaders on the seller’s side. A functional approach ensures all important aspects are covered and explored during due diligence.

Due Diligence Buyer and Seller Interaction

Functional due diligence: Functional leaders from the buyer meet one-on-one with functional leaders from the seller during due diligence.

However, we often run into a situation where there are more functional leaders on the buyer’s side than on the seller’s because traditionally buyers tend to be larger than sellers. While you still want functional leaders from each side to meet, keep in mind you don’t want to overwhelm or intimidate the seller. I don’t mean take a soft or easy approach, but don’t have two or three of your functional leaders meeting with one leader from the seller’s side. It will feel like an ambush.

Identify which leader from your organization most closely aligns with their functional leader and pair them off one-on-one.  For example, while you may have accounting, HR and tax professionals, select only one of these leaders to meet with the individual performing all of these functions at the seller’s business. This approach will allow for effective communication between buyer and seller.

This question comes from our webinar “A New Thinking on Due Diligence.” Learn more about Capstone’s webinar series.

People are critical to the success of your company, and it’s no different in the business you are acquiring. But how can you go beyond the surface and find out what employees really think? It is doubtful employees will be completely open and honest when asked point blank, “Do you like your job?”

One of the best sources of information when conducting human resources due diligence are employee satisfaction surveys, especially those conducted by a third party. These surveys are not only telling about employees but also about management and the organization as a whole.

Review historical employee satisfaction survey results and look for key metrics and trends. It’s also wise to look at remediation – how has management responded to complaints in the past? This may provide insight into the management team, working styles and organizational culture.

When we’re consulting on integration, one metric my firm looks at is turnover. Is there high turnover within a department when benchmarked against this industry or the rest of the company? If so, why is this happening? In certain situations of unusually high turnover, we found that the department manager had been there forever but was an ogre to work with. Anyone with any intelligence who came into that department pretty much got run out because the manager felt threatened!

You can also discover “green buckets,” or opportunities, within the survey results. If employees are dissatisfied with their old computers, now may be the time for an upgrade. In one case we noticed employees had really old monitors. We found that the owner had upgraded the computers, but viewed upgrading the monitors or keyboards as unimportant. For our client, it was relatively inexpensive to purchase new monitors and employees were very happy with the upgrade. Look for these opportunities to form a positive relationship with your new employees.

An acquisition can cause anxiety for employees. Anything you do as the buyer that says “We care about you” will help reassure employees and make for a smoother integration process.

I’m often asked for a due diligence checklist by clients or acquirers who are anxious to make sure they’ve covered all their bases.

While there are plenty of due diligence checklists, I caution against using a list developed by someone else because it may not cover aspects that are important to your organization. Your questions will vary depending on your business and your strategy for acquisition.

I recommend using functional leaders from key areas of your organization such as sales and marketing, operations, IT and finance to develop a comprehensive list of questions that are specific to your company and your acquisition strategy. No one knows your company as well as the people who work there.

If you aren’t sure where to begin, I’ve listed a couple of key areas and example data points to help you get started.

  • Financial Information– This most often comes to mind when people think about due diligence. We typically ask for:
    • Audited financials
    • Pro-forma income statement, balance sheet and cash flow statement
    • Past five-year tax reports
    • Five-year projections
  • Customers and Suppliers – Request information on key customers and suppliers and any contracts that are in place.
  • Management – Don’t forget to gather information about the seller’s management, including personal references and a verification of personal history. What you may uncover by digging a little deeper may surprise you.  It’s much better to find any skeletons before closing the deal. On the other hand, you may also find some pleasant surprises and opportunities.
  • Product Literature – Ask for marketing literature such as sales brochures and promotional materials.
  • Other Information – We may ask sellers for company bylaws, articles of incorporation, board minutes and 401K plans.

Please note what I provided here is not complete. You should use these examples to develop a complete list with your acquisition team.


You can increase your chances for successful acquisition by using functional due diligence to evaluate a prospect. This means actively involving leaders of the key functions of your organization: functional leaders from sales and marketing, finance, operations, IT, etc.

There are several benefits to involving functional leaders in the due diligence process.  Each leader has a different perspective and can provide unique insights to help evaluate an acquisition target. That’s because each functional leader focused on a specific area has a deeper understanding of the day-to-day procedures and may point out unseen risks and opportunities.

In addition, involving functional leaders early on in the due diligence process leads to a much smoother integration once the deal is complete.

To learn more about functional due diligence, please join my webinar on “A New Look at Due Diligence” on July 24, 2014.

Due diligence is often seen in purely negative terms, as a way to avoid pitfalls or find “hidden skeletons”. In this webinar you will learn how to use due diligence positively, to maximize the opportunity for a successful acquisition.

After this webinar you will be able to:

  • Organize due diligence to maximize efficiency and get the information you need to move the deal forward.
  • Know what items to look for by key functional areas (sales, marketing, HR, IT, etc.), including financial due diligence.
  • Use due diligence to reveal unforeseen opportunities as well as important red flags
  • Understand how items uncovered during due diligence can affect deal structure and terms.
  • Utilize tools to organize due diligence findings

CPE Credit available.

Click to register: https://www3.gotomeeting.com/register/601246870

Earlier this month, the Association for Corporate Growth hosted a webinar on “Identifying and Achieving Transaction Synergies and Impacts on the Acquisition Price.” One of the takeaways was the gulf between financial and strategic leaders:  “We often see a disconnect between the financial modelers of synergies and the strategic & operational planners, particularly in large corporate settings,” says Matthew Morris, Managing Director of RGL Advisors.

This disconnect underlines the need to include functional leaders in your acquisition process. That’s to say, leaders from each main area of the business: operations, marketing, finance, etc. With each function represented on your team, everyone is on the same page for overall M&A strategy.

Regardless of your strategic reason for an acquisition, it will affect every functional area of your organization, and each functional leader has unique insights into the potential synergies of a given target company. Open communication with each functional area prevents “silo thinking” and increases the effectiveness of your M&A process.