What is the purpose of due diligence in mergers and acquisitions?

The purpose of due diligence in mergers and acquisitions is to thoroughly investigate and assess the financial, operational, legal, and commercial aspects of a target company. This process is essential for establishing a complete understanding of the business's assets, liabilities, and overall commercial potential.

Due diligence allows the acquiring company to verify the information provided by the target company and to uncover any risks or issues that could affect the transaction's value or success. By examining financial statements, contracts, market position, and compliance with regulations, the acquiring firm can make an informed decision and mitigate potential surprises post-acquisition. This detailed examination helps in assessing whether the investment aligns with the acquiring company's strategic objectives.

In contrast, negotiating the sale price, preparing marketing materials, or finalizing the terms of the acquisition are more focused on specific aspects of the transaction rather than on the comprehensive evaluation that due diligence provides. Therefore, establishing a business's assets, liabilities, and commercial potential captures the heart of why due diligence is a critical step in the M&A process.