M&A Due Diligence Checklist

Confirm the NDA scope covers the target's customer lists, financials, and source code. Engagement letter from the buy-side advisor should specify scope (Quality of Earnings vs. full DD), fee structure, and exclusions — tax structuring and legal opinions are typically separate engagements.

Run a conflict check against the target and its parent. AICPA independence rules apply if the firm performs attest work for either party. Document the cleared check in the engagement file.

Issue the prepared-by-client request list through the data room (Suralink, Datasite, or Intralinks). Cover three years of financials, tax returns, customer contracts, cap table, org chart, and benefit plans. Track receipts weekly with a dated log.

Pull the last three fiscal years of audited statements plus the trailing-twelve-month trial balance. Reconcile audit-report figures to the WTB; unexplained variances are an immediate red flag for a do-over of the QofE base.

Walk reported EBITDA to adjusted EBITDA: owner comp normalization, one-time legal, PPP forgiveness, COVID anomalies, related-party rent at FMV, run-rate cost savings. Each adjustment needs a supporting workpaper and a defensibility rating (high / medium / low).

Concentration risk: any customer over 10% of revenue is a flag; over 20% is a deal term. Run cohort retention by year of first revenue. Confirm ASC 606 recognition policy matches deliverables — common gotcha for SaaS targets booking annual contracts as upfront revenue.

Calculate trailing 12-month average NWC excluding cash and debt. This sets the peg used in the purchase agreement; a low peg gives the seller a working-capital windfall at close. Document the peg with a 36-month chart.

Beyond bank debt: deferred revenue, customer deposits, accrued bonuses, capital lease obligations, unfunded pension, earn-out balances, tax liabilities, settlement payables. Each reduces equity value at close dollar-for-dollar.

Pull 1120, 1120-S, or 1065 for the last three open years. Reconcile book-to-tax differences (Schedule M-1/M-3), confirm NOL carryforwards survive a 382 ownership change, and verify R&D credits and ERC claims are documented.

Pull 50-state revenue and headcount data. Check sales-tax economic nexus thresholds (post-Wayfair, typically $100K or 200 transactions) and income-tax nexus. Unregistered states with crossed thresholds become VDA candidates and a purchase-price adjustment.

Pull 941 and state filings for the last eight quarters. Match deposits to lookback-period schedule. Late-deposit penalties (2% / 5% / 10%) accumulate quietly and become an indemnity item.

Pull top 20 customer contracts, top 10 supplier agreements, real-estate leases, and licensing agreements. Flag change-of-control clauses, anti-assignment language, exclusivity, and most-favored-nation pricing. CoC triggers in an asset purchase often require third-party consent.

Request docket searches in every jurisdiction the target operates. Review prior settlements, pending arbitration, EEOC complaints, and any agency investigations (EPA, OSHA, DOL, state AG). Reserve adequacy for known matters becomes an indemnity escrow line.

Loop M&A counsel into any matter rated material. They drive the reps and warranties language, indemnity caps, and escrow structure for these specific exposures. Counsel often recommends a rep & warranty insurance policy to bridge the gap.

On-site visit: production lines, warehouse, server room, remote-work setup. Document deferred maintenance, capacity headroom, and IT debt (legacy ERP, end-of-life servers, single-points-of-failure on key vendors).

Reconcile the cap table to the option ledger and 409A valuation. Check accelerated vesting on change-of-control — single-trigger acceleration on the founders' grants moves real money at close.

Pull Form 5500 filings, plan documents, and discrimination test results. Late deferral remittances are a fiduciary breach the buyer inherits. Confirm any defined-benefit plan is fully funded or carve out the liability.

Off-site interviews with top 5-10 employees. Look for non-competes, intent to stay through transition, and stay-bonus expectations. Founder dependency is a frequent reason carve-out deals stall in the first year post-close.

Cross-check the CIM's market sizing against IBISWorld, Gartner, or industry trade data. Identify the three closest competitors and pull their public financials or comparable transaction multiples.

Build a synergy model with named owners and timelines. Cost: duplicate G&A, shared services, vendor consolidation, real-estate. Revenue: cross-sell, geographic expansion, pricing harmonization. Apply a 50% haircut to revenue synergies in the base case — execution rarely beats that.

Five to ten reference calls with current and former customers. Conducted under NDA, late-stage. Probe contract renewal intent, satisfaction with product, and reaction to a change of ownership.

Findings memo covers: QofE adjustments, tax exposure, legal contingencies, NWC peg, debt-like items, and synergy estimate. Red-flag log itemizes each issue with proposed deal-document treatment (price adjustment, indemnity, escrow, walk-away).

Deal lead, finance lead, M&A counsel, and operating sponsor walk through the findings memo together. Decisions: price adjustments to push for, deal-killer items, items to handle through reps & warranties insurance.

Final sign-off from the engagement partner or investment-committee chair. Decision drives whether the LOI converts to a purchase agreement, gets repriced, or terminates.

If diligence supports a renegotiation, draft a memo tying each proposed adjustment to a specific finding (QofE delta, tax exposure, NWC peg shift). Concrete dollars per finding land better than a global haircut.