Imagine you are about to buy a new home. Before signing anything, you would naturally inspect the structure, check the wiring, review the renovation history, and make sure everything is in good condition. You are not trying to catch the seller off guard, but you simply want to be certain about what you are investing in.
This is basically what due diligence is in the world of mergers and acquisitions (M&As).
Due diligence is the process where a potential buyer carefully examines a business to understand its true condition – financially, legally, operationally, and commercially – before completing a transaction. It is essentially a thorough “health check” that verifies the information provided, uncovers any potential risks, and ensures that both sides have a transparent and accurate understanding of the business for a smooth integration after the M&A transaction.
Although the process may feel detailed or overwhelming, especially for small and medium-sized entrepreneurs (SME) experiencing it for the first time, its purpose is simple: to give both buyer and seller the clarity and confidence they need to make a well-informed decision. And while many may assume due diligence is only for large corporations, it is actually a standard step in almost every business sale – regardless of size – because it protects both parties and lays out the foundation for a smooth, successful transaction.
In this article, we explain why due diligence matters and break down the key areas involved, so you can approach M&A with confidence.
Why Due Diligence Matters
In an M&A process, due diligence usually begins after both parties agree on the initial terms, but before the final Sale and Purchase Agreement (SPA) is signed. For buyers, this stage provides an assurance that the business is performing as claimed, that there are no hidden risks, and that the valuation is reasonable.
On another note, for sellers, due diligence could serve as an opportunity to show transparency and professionalism. When documents are well-organized and information is accurate, it gives buyers confidence that the business has been managed properly, which can help maintain trust and support smoother final negotiations before the signing.
More importantly, effective due diligence also sets the stage for post-merger integration (PMI). When buyers understand the company’s operations, culture, and key employees during due diligence, they can make better decisions about how the business will be integrated after the deal is completed. This helps reduce disruption, supports smoother employee adaptation, and increases the chances of achieving the synergies and sustainable growth expected from the M&A.
A business that is well-prepared often moves through this stage more efficiently, experiences fewer surprises, and is more likely to preserve a strong valuation. In short, due diligence is not just an administrative step — it is the foundation of trust that allows both sides to make confident decisions and supports a smoother transition once the transaction is completed.
The Key Areas Covered During Due Diligence
Although due diligence can feel broad and complicated, it generally focuses on six core areas, with each giving the buyer a different perspective on how the company operates today, and how it may perform in the future.
1. Financial and Tax Due Diligence
Money always ranks the top priority in all businesses, which is why financial due diligence is often the most detailed. Here, buyers will review the company’s financial health, such as the revenue trend, profit margins, cash flow stability, operating costs, debt levels, liabilities, tax filings, and historical financial statements. The goal here is to confirm whether the financial information presented truly reflects the company’s performance. That is why, for sellers, having organized and clean financial records helps build buyers’ confidence and speeds up the review process.
2. Legal Due Diligence
Legal due diligence focuses on understanding the company’s legal standing and obligations. This will include contracts with customers and suppliers, corporate documents, licenses, regulatory compliance, intellectual property (IP) rights, and any potential legal disputes. The aim is to ensure that the business is legally sound and that all rights and obligations are clearly documented, assuring buyers that the business can operate regularly post-transaction without any unexpected complications.
3. Business Due Diligence
Buyers often acquire businesses with a strategic purpose. This is when the business due diligence comes into play. Buyers will look at the broader market and assess whether the company is well positioned for long-term success. For example, they will evaluate market dynamics, customer concentration, competitive landscape, and growth opportunities. This helps determine whether the company has a sustainable competitive advantage and attractive future potential.
At the same time, it also involves understanding the people behind the company. Buyers will review the organizational structure, key employees, employment terms, compensation, and overall company culture – to evaluate whether the workforce can continue supporting the company’s growth and ensure a smooth transition after the M&A.
4. Operational Due Diligence
This area focuses on how the company actually functions behind the scenes. During this stage, the buyer will usually review the internal processes, supply chain relationships, IT systems, facilities, and equipment to understand how efficient and scalable the operations are. This is especially important because a clear understanding of day-to-day operations helps ensure a smoother PMI once the businesses come together.
5. Environmental Due Diligence
Environmental due diligence examines whether the business complies with environmental laws, regulations, and industry standards. Buyers will check things like waste management practices, emissions, potential contamination, and any environmental risks that may lead to future liabilities or penalties. This review is especially important for businesses in manufacturing, industrial operations, logistics, F&B production, or any sector involving physical facilities and equipment, especially when ESG is a key focus area now in today’s business landscape. The goal is to make sure there are no hidden issues that could lead to fines, extra costs, or problems after the deal is completed.
6. Property Due Diligence
Lastly, the property due diligence. This process focuses on the physical assets the company owns or uses, such as land, buildings, warehouses, or rental spaces. Buyers will review property ownership, lease agreements, land use rights, building conditions, and any ongoing maintenance or structural issues. This helps them understand whether the premises are in good condition, whether the business can continue operating there without disruption, and if there are any property-related risks or costs that may arise after the transaction.
Together, these areas give buyers a holistic picture of the company – not just what it is today, but what it could become in the future.
How the Due Diligence Process Works (and How Long It Takes)
The due diligence process typically begins after the buyer issues a Memorandum of Understanding (MOU) or Letter of Intent (LOI) to the seller, expressing their interest in acquiring the company. After that, the buyer will send the seller a detailed request list outlining all the information they need to perform the due diligence. This will normally include financial statements, legal documents, contracts, HR records, operational data, and more.
Once the documents are shared, the buyer’s advisors – usually including accountants, lawyers, and tax consultants – begin analyzing the information and documents provided. This stage often involves multiple rounds of clarifications, follow-up questions, and requests for additional documentation. Once the review is complete, the due diligence provider will then compile the findings into a due diligence report. Depending on what is discovered, this may lead to adjustments in valuation, deal structure, or specific contractual protection.
For most SMEs, the process takes between one to three months, or it could sometimes be more. The timeline depends heavily on how organized the seller’s documents are, the complexity of the business, and how quickly both sides respond to requests. A well-managed due diligence process could significantly speed up the process, reduce stress, and avoid any delays.
A Smooth M&A Journey Begins with Preparation and the Right Support
Due diligence is a critical step in ensuring that an M&A transaction is fair, transparent, and successful. While it may seem demanding, having a clear understanding of what to expect from the process and preparing early can make a huge difference. Organizing financial statements, formalizing contracts, documenting operational processes, and ensuring compliance can greatly improve the efficiency and quality of the process, ultimately, strengthen the outcome of the deal.
And for SME owners, having the right and experienced advisor by your side is just as important as the preparation itself. A partner like Nihon M&A Center Malaysia can support you throughout the entire process – from getting the necessary documents in place, preparing key information, and anticipating questions, to avoiding common pitfalls and ensuring the review moves efficiently. With the right support and guidance, the due diligence becomes much easier to navigate, and the journey toward a successful M&A closing becomes much smoother.
Whether you are exploring exit options or considering a future sale, Nihon M&A Center Malaysia is here to help you understand your readiness and guide you throughout the journey. Reach out to us today to learn how we can assist you.
