10-12 minute read
Every acquisition and every sale ultimately comes down to one question. Will the business perform as expected once ownership changes? Due diligence is the process used to answer that question before capital is committed or value is locked in. It sits at the centre of every successful transaction, yet it is often misunderstood, underutilised, or left too late. Understanding its role from both an acquisition and sale perspective is critical to achieving strong outcomes in M&A
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Zain Isai
Financial Analyst
HMW Capital
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- Due diligence underpins value and risk management in M&A: Its purpose is not to approve or reject a deal, but to identify, quantify, and allocate risk through pricing, structure, warranties, and indemnities, helping ensure performance expectations hold post-transaction.
- Buy-side and sell-side diligence protect different interests: Buyers use diligence to protect capital and validate earnings sustainability, while sellers use vendor diligence to defend value, reduce uncertainty, and control the narrative with evidence.
- Early, independent diligence delivers outsized returns: Typically costing a small fraction of deal value, due diligence materially reduces completion risk, mitigates emotional bias, and improves decision-making, both in transactions and broader strategic planning.
Importantly, due diligence is not designed to deliver a simple yes or no outcome. Its real value lies in identifying risk, understanding its impact, and determining how that risk should be reflected in pricing, deal structure, warranties, and indemnities.
The Role of Due Diligence in Preserving Value and Managing Risk
Understanding what your business is worth is one thing. Ensuring that value holds up under scrutiny is another. This is where due diligence becomes critical. Due diligence is often viewed as a transaction hurdle, something that sits between agreement and completion. It is one of the most important disciplines in M&A, shaping outcomes on both the acquisition and sale side, and frequently determining whether a deal proceeds at all.
At its core, due diligence tests whether the risks embedded in a business are understood, quantified, and appropriately reflected in the transaction terms. Where risks are identified early, value can often still be preserved through pricing adjustments, deal structure, or contractual protection.
Buy Side and Sell Side Due Diligence: Objectives and Outcomes
From an acquisition perspective, due diligence is fundamentally about capital protection. Buy side due diligence validates assumptions around earnings sustainability, risk exposure, and future performance. Findings frequently inform pricing adjustments, deal structure changes, or risk allocation mechanisms rather than simply determining whether a transaction proceeds.
From a sale perspective, vendor due diligence is about protecting value. It allows owners to assess their business through a buyer’s lens, identify issues early, and clearly articulate what is sustainable and defensible. This reduces uncertainty and helps vendors control the narrative with evidence rather than explanation.
Is It Worth Investing in Due Diligence?
One of the most common questions business owners ask is whether due diligence is worth the investment. In practice, the cost of due diligence is typically immaterial relative to the value it protects. A targeted analysis can prevent valuation adjustments, stalled negotiations, or transactions failing late in the process. More importantly, it provides decision-making confidence by clearly identifying and mitigating risk.
A commonly cited rule of thumb is that total third-party due diligence costs, including financial, legal, tax, and operational reviews, typically range from approximately 0.5% to 2.0% of deal value, depending on size and complexity. When viewed in the context of the capital at risk, due diligence is one of the highest return investments made during a transaction.
Transaction Completion Risk and the Value of Early Analysis
A reality that is often overlooked is how many transactions fail to reach completion.
Market data consistently shows that only a small proportion of potential acquisitions progress from early discussions to a completed deal. Issues uncovered during due diligence are one of the most common reasons transactions fall over.
This is not necessarily a bad outcome. Due diligence is doing its job when it prevents the wrong deal from being done. But it does reinforce a key point. When diligence is left too late, the time, cost, and emotional energy invested can be significant, with nothing to show for it. Preparation materially improves the odds.
Managing Emotional Bias Through Independent Review
Another underestimated factor in M&A is emotion. Business owners are often deeply connected to their business. Buyers can be equally influenced by strategic ambition or deal momentum. Emotional bias can cloud judgement on both sides, particularly around value, risk, and future performance.
This is where a third party perspective becomes essential.
An independent due diligence process introduces objectivity. It challenges assumptions, separates facts from narratives, and provides a clear, balanced view of the business. This is critical not only for decision making, but for maintaining discipline throughout a transaction. The strongest outcomes occur when emotion is acknowledged, but analysis, data and facts lead.
Due Diligence Beyond a Transaction Context
Due diligence is not limited to active transactions. Many businesses undertake non-transactional due diligence to better understand earnings sustainability, operational dependencies, and risk exposure. This insight supports governance, succession planning, capital raising, and future transaction readiness.
A Disciplined Approach to M&A
Whether buying, selling, or simply seeking a deeper understanding of your own business, the role of due diligence is the same. It exists to replace assumption with evidence and uncertainty with clarity. Due diligence is not limited to approving or rejecting a transaction. It is a structured way of identifying risk, understanding its implications, and making informed decisions with confidence.
