Seven Common M&A Due Diligence Pitfalls

In 2025, global merger and acquisition (M&A) volume is expected to surge to the highest level in four years, according to Reuters. M&As require thorough due diligence to minimize risks and maximize long-term value. Some business combinations fail to achieve expected results due to financial missteps, overlooked liabilities, and integration challenges. Here’s an overview of seven common mistakes that inexperienced buyers might make when vetting deals — and how to avoid them:

1. Overlooking financial red flags. Buyers may fail to critically assess financial statements, which can lead to unexpected financial burdens. Pay special attention to potential tax liabilities, including unpaid payroll or sales tax, pending audits and evasive tax practices. Also, consider obtaining a quality of earnings report to help identify nonrecurring revenue, accounting inconsistencies and working capital needs. Site visits may help shed light on details you might not notice from reviewing the seller’s financials, such as old, obsolete or damaged equipment and inventory.
2. Missing hidden liabilities. Unreported liabilities may result in costly post-acquisition surprises. Forensic accounting techniques can help buyers identify and quantify off-balance-sheet items, such as undisclosed property liens, environmental violations, pending litigation and golden parachute clauses.
3. Overestimating projected financial results. Overly optimistic seller representations and financial projections can cause an unwary buyer to overpay. Carefully assess revenue and cash flow projections, including their underlying assumptions, to ensure they’re realistic and supported by historical trends. Stress-testing projections and evaluating customer concentration risks can help ensure revenue sustainability.
4. Failing to assess internal controls. Weak controls expose businesses to fraud and financial mismanagement. Issues such as lack of segregation of duties or poor inventory tracking can result in operational inefficiencies. Due diligence should include an internal control assessment to identify deficiencies and develop a proactive plan to correct them.
5. Misjudging tax implications. The structure of an M&A deal — whether an asset or stock purchase — can significantly affect tax outcomes. If properly structured, creative deal terms, such as earnouts and installment sales, may provide tax advantages. It’s critical to structure a deal that optimizes tax benefits while complying with state and federal tax regulations.
6. Rushing due diligence. Hasty due diligence can result in costly oversights. Buyers should conduct comprehensive, methodical reviews of financial statements, legal agreements and operational structures before finalizing deals. Reading the fine print of key contracts may help buyers anticipate restrictions related to franchise agreements, insurance policies, and equipment and property leases. Some agreements require renegotiation before closing.
7. Flying solo. Do-it-yourself due diligence can be risky. M&As are complex undertakings, and the financial nuances may be unfamiliar to business owners and managers.

If you’re contemplating buying or merging with another company, contact DLA early in the M&A process. Our experienced accounting professionals can help you avoid financial surprises, negotiate favorable terms, address post-deal accounting and tax issues, and build long-term value.