The Ecosystem of Due Diligence in Mergers & Acquisitions

Mergers and Acquisitions (M&A) are like a game of Jenga. Pull the right piece, and you’ve got a stronger, taller structure. Pull the wrong one and everything collapses.

We believe no one wakes up thinking, "Hey, let’s smash everything to hell." That’s exactly why due diligence exists—it’s the buffer between a smart move and a costly mistake. It’s about knowing what you’re walking into—because discovering you bought a financial black hole after the papers are signed is not exactly a banner day at the office.

Defining the ‘Ecosystem’ in Due Diligence

When we toss around the word “ecosystem,” we mean that all the pieces of due diligence need to work together. Financial reviews, legal checks, tech assessments, cultural evaluations—the whole nine yards. Skip one, and you might as well bake a cake without flour. Sure, it might look okay—until you take a bite.

Mark Bridges, Senior Director of Strategy at Flevy, says:

"Due diligence is no longer just a financial exercise. It now encompasses broader aspects, from market positioning to cultural fit. With the growing importancmultifaceted, comprehensive approach, leveraging data and insights to provide a 360-degree view of the target company.e of ESG factors, organizations must also assess a target’s sustainability initiatives and governance practices. This modern due diligence requires a multi-faceted, comprehensive approach, leveraging data and insights to provide a 360-degree view of a target company."

So, let’s talk about what actually matters. These are the pillars that hold everything up—mess up here, and you’re looking at a shaky deal (or worse, a full-blown disaster). Each of these areas tells a different part of the story, and if you skip one, you’re basically leaving yourself open to a very expensive "oops" moment. Let’s break it down.

Financial Due Diligence: Revenue, Debt, and Cash Flow

Money talks, but sometimes, it lies.. That’s why financial due diligence is all about cutting through the fluff and making sure the numbers actually mean something.

Revenue Validation: Are the sales numbers sustainable, or are they inflated by temporary deals? Flimsy revenue streams can sink post-acquisition returns.
Debt Analysis: What’s lurking under the surface? Some liabilities are manageable, but if there’s a mountain of debt waiting to topple over, that’s your problem now.
Working Capital: Is there enough cash in the system to keep things running post-acquisition, or will you be patching holes from day one?

If the financials are sketchy, the rest doesn’t matter much. You’re not buying a dream—you’re buying a business.

Financial Aspect

What to Check	Red Flags	Healthy Indicators	Impact on Valuation
Revenue Validation	High customer churn, temporary revenue spikes, dependency on few clients	Consistent revenue streams, diversified customer base, predictable income	Inflated revenue can lead to overvaluation; stable revenue increases confidence.
Debt Analysis	Unreported liabilities, upcoming loan maturities, high-interest debt	Manageable debt levels, transparent financial reporting, low-risk obligations	High debt can lower valuation or require price adjustments.
Working Capital	Negative cash flow, over-reliance on credit lines, slow receivables turnover	Positive cash flow, sufficient reserves, efficient accounts receivable management	Lack of liquidity may force price reductions or require additional working capital.
Profitability Trends	Declining profit margins, inconsistent earnings, reliance on cost-cutting	Steady profit growth, strong EBITDA margins, well-controlled costs	Declining profitability can lower valuation multiples.
Cost Structure	High fixed costs with low revenue elasticity, inefficiencies in spending	Balanced cost structure allowing flexibility during downturns	High fixed costs limit operational flexibility and may affect valuation.
Cash Flow Projections	Negative cash flow projections, excessive short-term borrowing	Stable and growing cash reserves, self-sufficient funding	Unstable cash flow increases risk, leading to lower deal pricing.
Outstanding Legal or Tax Liabilities	Pending lawsuits, tax penalties, underreported financial obligations	Clean legal/tax history, all obligations settled transparently	Legal/tax issues can result in contingent liabilities, reducing deal attractiveness.
Earnings Quality	Heavy reliance on non-recurring revenue sources, accounting inconsistencies	Revenue driven by recurring business, clear profit attribution	Recurring earnings justify higher valuation; one-time gains do not.
Customer Payment Behavior	High number of overdue invoices, frequent late payments from customers	High percentage of customers paying on time, strong receivables management	Delayed payments indicate potential bad debts, affecting valuation.
Capital Expenditure (CapEx)	High CapEx needs with unclear ROI, dependency on outdated infrastructure	Well-planned investment strategy with measurable ROI projections	High future investment needs may require price adjustments or additional capital commitments.

Legal Due Diligence: The Fine Print That Can Bite You

Contracts. IP rights. Regulations. Not the most thrilling stuff, but this is where small details turn into massive problems if you don’t catch them early.

Contract Reviews: Any nasty clauses hiding in vendor or customer agreements? Handshake deals don’t cut it when legal headaches pop up.
IP Protection: Who actually owns the intellectual property? Few things are worse than buying a product only to find out someone else controls the rights.
Regulatory Compliance: Are they following all the rules, or is there a government fine (or lawsuit) waiting in the wings? Better to find out now.

Louis Lehot, Venture Capital and Corporate Lawyer in Silicon Valley and San Francisco, highlights the importance of contract reviews during this stage:

"Suppose existing customer contracts are an integral part of the transaction. In that case, acquirers will want to diligence the material customer contracts constituting a significant percentage of its revenue to determine the terms of the contracts and whether the counterparties have a right to terminate by convenience, whether these agreements contain any restrictive covenants, whether consents from these counterparties are required, as well as other commercial arrangements with the customers."

Commercial Due Diligence: Are They Actually Winning?

Okay, so they say they’re a market leader. Cool. But what’s the real story?

Market Analysis: Is this industry on fire or fizzling out? The last thing you want is to invest in a company that’s coasting in a dying market.
Competitive Landscape: Who are the major players? Are they holding their own, or are competitors eating their lunch?
Customer Contracts: Are customers locked in, or can they bail the second the ink dries? High churn = major red flag.

Operational Due Diligence: What’s Under the Hood?

Operations are what keep a business moving. If they’re a mess, you’ll feel it real fast.

Supply Chain: Is it stable, or is one hiccup going to throw everything into chaos? Disruptions get expensive.
Process Efficiencies: Are they running a tight ship, or is there waste everywhere? Inefficiencies can quietly kill profitability.
Scalability: Can they grow smoothly, or is the infrastructure held together with duct tape and crossed fingers?

Bottom line: If operations are clunky now, they won’t magically get better after the deal.

Technical Due Diligence: Is their tech past its prime?

If tech is part of the deal (and let’s be real, it usually is), you better know what you’re walking into.

IT Infrastructure: Is it modern and secure, or are you about to inherit a fragile, outdated mess?
Product Roadmap: Are they innovating, or is the roadmap just a wish list with no execution?
Cybersecurity Risks: Weak security can cost you millions. Are there risks hiding in the shadows?

What red flags should make a buyer think twice about a future deal? Anything that could be viewed as an impediment for post-deal strategy execution (for example, integration complexity) could negatively impact valuation," says Alex Natskovich, Founder & CEO of MEV.

"Gaps in understanding the existing systems, single-person risk when one team member has disproportionate knowledge/ownership of the system(s), vendor lock-in or other 3rd party risks (for example heavily relying on a 3rd party API, data vendor, etc.)—these are all critical red flags. And, of course, the usual ones—overstated capabilities/tech maturity, tech debt, unsustainable infrastructure or engineering costs, compliance risks, unproductive engineering culture, high churn, etc."

Make sure the deal's technical foundation is strong

Talk to an Expert

So, what should buyers be asking but often don’t? Natskovich points out a commonly overlooked area:

"How did the underlying technology evolve, and are the original architect/core engineer(s) still involved with the company? This could help understand not just why some decisions were made but how they were made, how the team makes critical/core decisions, and if that decision-making process is institutionalized or still rests with one or a small number of core individuals. Neither of these are good or bad, but the optimality depends on the reason for the transaction and what the buyer is looking to do with it."

This isn’t just about code reviews or user-friendly interfaces. Technology decisions shape whether the product can scale or turn into a liability.

"Not paying attention to the key underlying technical decisions on how they will allow or prevent the product/tech to scale can be a costly oversight," adds Natskovich.

Human Resources Due Diligence: People Matter

Employees aren’t just a line item—they’re the actual company.

Org Structure: Is leadership solid, or will you be dealing with power struggles the second you take over?
Talent Retention: Are key employees sticking around, or will they jump ship? Losing top talent post-acquisition is a nightmare.
Comp & Benefits: Any surprise costs hiding in contracts? Golden parachutes, retention bonuses—know what you’re signing up for.

Klint C. Kendrick, M&A Consultant with over 20 years of experience in human resources, highlights how HR due diligence impacts valuation:

People-Related Liabilities & Integration Risks
HR due diligence often uncovers hidden liabilities that impact valuation. These include misaligned compensation structures, cultural incompatibilities, and potential retention issues among key employees. If post-merger integration efforts are expected to be difficult due to cultural clashes or leadership gaps, the valuation should be adjusted accordingly.
Unaccounted Workforce Costs & Commitments
Buyers often underestimate costs related to severance obligations, long-term incentive plans, or pension liabilities. A full HR diligence review can reveal underfunded retirement plans, compliance issues with employment laws, or hidden costs related to layoffs, which should be factored into the valuation.
Talent Pipeline & Leadership Gaps
Beyond current employee data, the strength of the acquired company’s leadership bench and internal succession planning can significantly impact future business stability. If key talent is at risk of leaving or if there is no clear leadership transition plan, the deal value should reflect the cost of talent acquisition and potential disruptions.

He sums up:

“Rather than focusing solely on risks, HR due diligence should also identify hidden strengths—such as high-potential employees, underutilized skills, and leadership talent that could drive innovation and growth. By proactively engaging employees, fostering collaboration, and aligning incentives, buyers can turn the integration process into a competitive advantage, ensuring that the full value of the deal is realized”.

HR Risk Area

What to Check	Red Flags	How It Kills Valuation
People Risks Compensation, leadership gaps, cultural fit.	High turnover, toxic culture, siloed teams.	Weak integration = slow execution, lost talent.
Hidden Workforce Costs Severance, benefits, unpaid bonuses, misclassified employees.	Surprise layoffs, underfunded pensions, lawsuits.	Workforce liabilities = post-deal cash drain.
Leadership Gaps Succession planning, retention of top talent.	No transition plan, flight risk of critical employees.	Lost leaders = lost product vision, delayed ROI.
Single-Person Risk Is business knowledge concentrated in a few employees?	One person holds the system together—if they leave, it crumbles.	Total disruption if key talent walks post-deal.
Compliance Landmines Employment contracts, labor law violations, DEI policies.	Unpaid overtime, misclassification, workplace disputes.	Legal battles, fines, and reputational damage.

Best Practices for a Comprehensive Due Diligence Process

M&A deals are complex. Without a rock-solid due diligence process, things can spiral fast. From missed red flags to disjointed teams pulling in different directions, there’s plenty that can go wrong. But with the right approach? You set yourself up for a deal that not only closes but delivers real value afterward. Here’s how to keep things sharp, focused, and (mostly) headache-free.

Best Practices for Due Diligence Process

Pre-Due Diligence Planning: Set Goals or Get Lost

Jumping into due diligence without a plan is like heading on a road trip without a map,GPS,or snacks. You might get where you’re going, but chances are you’ll waste time, energy, and patience.

Start by asking:

What are we really trying to learn from this process?
Which deal-breakers do we need to spot early?
What’s our ideal outcome—and what are we willing to compromise on?

Setting clear objectives upfront keeps everyone aligned and avoids endless rabbit holes. Plus, it makes you look like you actually know what you’re doing (which is always a bonus).

Engaging the Right Internal and External Stakeholders: More Voices, Less Chaos

Due diligence is a team sport. And no, you can’t just dump it on the finance department and hope for the best. You need a mix of people—internal leaders who know your company inside out, and external experts who bring fresh perspectives (and let’s be real, specialized knowledge you might not have).

Jac Crocker, Strategic Growth and M&A Leader, emphasizes the importance of this phase:

"Companies can significantly enhance their chances of materializing the acquisition strategy by employing a structured approach to due diligence, engaging both internal leaders and specialized third-party consultants, and focusing on deal structuring. Furthermore, the transition from due diligence to integration is a critical inflection point where the potential value of the transaction is either realized or lost. A well-defined integration strategy, detailed integration plan, and robust communication and monitoring systems are key to unlocking this value."

Internally, pull in folks from finance, legal, operations, HR, and IT. Externally, think lawyers, tax advisors, cybersecurity consultants—you name it. Each stakeholder adds a piece to the puzzle. The trick? Keeping everyone talking. Silos kill deals. Regular check-ins, shared dashboards, and clear communication channels go a long way.

Oh, and make sure there’s a single point of contact. Otherwise, it turns into a game of telephone, and nobody has time for that.

Conducting Parallel Work Streams Without Losing Cohesion: Herding Cats—But Make It Efficient

You’ll have multiple teams digging into different areas—financials, legal docs, tech systems, operations. That’s a lot of moving parts. The challenge? Moving fast without everyone stepping on each other’s toes.

Here’s how to keep it together:

Set clear deadlines (and stick to them). Use collaboration tools that actually work—no endless email threads, please.
Hold quick status meetings to keep things on track (think 15-minute stand-ups, not three-hour marathons).
Share findings as you go. If the tech team finds massive technical debt, finance needs to know ASAP.

The goal is speed and accuracy. Yes, you can have both—if you’re organized.

Ensuring Post-Transaction Value Realization: Closing Is Just the Beginning

Congrats—you closed the deal! Now what? (Spoiler: The work’s far from over.)

Too many companies celebrate the closing and forget that real value comes from integration and execution. Without a solid post-transaction plan, synergies stay on paper and never hit your bottom line.

Focus on:

Integration: Align teams, systems, and cultures fast. The longer it drags, the messier it gets.
Communication: Keep employees, customers, and stakeholders in the loop. Surprises are fun for birthdays, not for business.
Performance Metrics: Set clear goals and track them. How else will you know if you’re getting your money’s worth?

The best deals aren’t just about what’s on the contract—they’re about how you realize value afterward.

Mistakes Happen—Just Don’t Make the Obvious Ones

There are plenty of mistakes buyers make when evaluating a company’s long-term potential. Overestimating market stability, underestimating cultural clashes, glossing over leadership gaps, ignoring customer churn—pick your poison. Sometimes it’s assuming financial growth will magically continue. Other times it’s betting on a “rockstar” product while overlooking the operational mess brewing underneath. And far too often, buyers get caught up in surface-level numbers and technology and miss the bigger picture.

“The biggest mistake? Focusing too much on the tech and not enough on the team and the process,” says Alex Natskovich, Founder & CEO of MEV. “It’s not just about what decisions were made, but how—and whether those decisions set the company up to scale or stall. Overlook that, and you risk turning what looks like a great deal into an expensive headache.”

Mistakes are part of the game—but letting obvious ones slide? That’s on you. Whether you’re digging through financial statements, scrutinizing systems, or making sure the leadership team isn’t held together with duct tape and wishful thinking, thoroughness is non-negotiable. No cutting corners. No “we’ll figure it out later.” Later is when things get expensive.

Conclusion: Pull the Right Block, Win the Game

We talked about how one wrong move can send everything tumbling—and that’s no exaggeration. M&A isn’t just about strategy; it’s about execution. Skip the details, rush the process, or focus on the wrong things, and you’ll be dealing with problems that should’ve never made it past due diligence. That’s what it’s there for—to steer you clear of expensive surprises.

Bottom line: Know what you’re buying. Understand how it works. Don’t underestimate the people behind the product or the decisions that got it there. Deals don’t unravel because of bad luck—they fall apart when you miss what’s right in front of you. So slow down, dig deep, and ask the tough questions.