8 Critical Lessons About Financial Due Diligence During Mergers and Acquisitions
Financial due diligence is a critical process in mergers and acquisitions that can make or break a deal. This article presents expert insights on navigating the complexities of financial review during M&A transactions. From verifying note status to uncovering hidden liabilities, these lessons provide valuable guidance for both buyers and sellers in today's dynamic business landscape.
- Navigate Uncertainty with Visible Leadership
- Verify Note Status Beyond Summary Reports
- Document API Dependencies for Buyer Confidence
- Uncover Hidden Liabilities in Vendor Agreements
- Prioritize Revenue Quality Over Size
- Address Discrepancies in Recurring Contract Values
- Stress Test Assumptions During Financial Review
- Link Earnouts to Long-Term Growth Drivers
Navigate Uncertainty with Visible Leadership
When Centrica acquired The AA, I was a senior manager in Scotland leading a large operational team. From the inside, it felt less like a clean transaction and more like an earthquake. My focus shifted from performance metrics to holding people steady in uncertainty by staying visible, calm, and honest, even when I myself did not always have answers. What worked was creating connection: listening, acknowledging concerns, and helping people make sense of change rather than offering false certainty.
On the financial side, I learned a lesson I have carried into every boardroom since: spreadsheets alone cannot predict reality. The models promised tidy synergies, yet when customer service teams were merged, different systems and cultures meant retraining, delays, and a dip in productivity before any savings appeared. That gap between numbers and human behaviour showed me that financial due diligence is incomplete without cultural due diligence.
Later, as a CEO and consultant, I saw the same pattern everywhere: leaders often underestimate the people factor and overestimate the synergies. Research confirms that up to 70 percent of mergers underdeliver because the human side was not addressed. My advice to CFOs is to account for what I call the "people tax" -- the hidden costs of communication, training, and transition that always appear but rarely make it into the forecast.
If I had to sum it up, the critical lesson is this: numbers without people are fiction, and leadership in a merger is not about big speeches but about everyday conversations that keep teams grounded while the deal becomes real.
Verify Note Status Beyond Summary Reports
When we pursued a large-scale note acquisition, I learned quickly that verifying the true status of every note--especially payment history--was essential, not just relying on the summaries provided. For example, we once found several notes that looked healthy on paper, but a closer look revealed recent payment irregularities that would have been costly if we hadn't dug deeper. My key takeaway: never skip a full audit of underlying collateral and recent payor communications--it's the story behind the numbers that protects your deal.
Document API Dependencies for Buyer Confidence
When CBDNerds was being acquired, technical due diligence nearly derailed the deal because of undocumented API dependencies. The moment we standardized documentation for every integration, those concerns disappeared, and buyer confidence shot up. If you're preparing for acquisition, I'd recommend mapping every system dependency early so your financials reflect stability rather than hidden risks.
Uncover Hidden Liabilities in Vendor Agreements
The merger journey required balancing optimism with realism. I led by keeping both teams aligned and continuously communicated our shared vision to stakeholders. Maintaining clarity and transparency helped build trust and ensured everyone understood the goals we were working toward. We approached each stage methodically, focusing on collaboration and fostering a culture where both sides felt supported and valued throughout the transition.
Financial due diligence proved critical when we uncovered hidden liabilities within vendor agreements. This experience reinforced that due diligence is more than analysis; it is essential protection for the organization. By carefully examining every detail, we identified risks that could affect future stability and mitigated them before finalizing the deal. This disciplined approach not only secured the transaction but also established a standard for thoughtful and proactive decision-making in future projects.
Prioritize Revenue Quality Over Size
When we went through an acquisition process with a larger legal tech firm, the key to leading successfully was early and transparent communication — both internally and with our counterpart's leadership team. We aligned our core team early around what the deal meant strategically, then created clear internal channels for addressing questions, managing anxiety, and protecting our culture during the transition.
From the legal and financial side, one critical lesson I learned about financial due diligence is this: revenue quality matters more than revenue size. It's easy to focus on top-line numbers, but buyers (and smart sellers) dig deep into recurring vs. one-time revenue, customer churn, contract terms, and billing practices. In our case, having clean, well-organized SaaS metrics — MRR, CAC, LTV, and especially churn rate — helped us maintain leverage and avoid last-minute surprises that could have affected valuation or deal structure.
The real takeaway? You don't prepare for due diligence during a deal — you build your business in a way that's always ready for it. Clean books, solid contracts, and transparency create trust, which accelerates everything else.
Address Discrepancies in Recurring Contract Values
I recently led our company through an acquisition, which required clear communication, detailed planning, and hands-on involvement at every stage of the process. I assembled a cross-functional team early on, including finance, operations, and HR, to ensure all potential risks were identified. One of the biggest lessons I learned about financial due diligence is to not just look at the numbers but also the assumptions behind them—revenue projections, client retention rates, and contingent liabilities often hide in plain sight. I found a subtle discrepancy in recurring contract values that, if we had missed it, could have resulted in a cash flow shortfall post-acquisition. We were able to address it early, renegotiate terms, and plan for contingencies. Beyond the numbers, I also made transparency a priority with employees and stakeholders to keep everyone informed during uncertain times. Thorough financial review and clear communication were key to a smooth integration.
Stress Test Assumptions During Financial Review
By being open and clear about the finances from the start, I was able to successfully guide my organization through an acquisition. I constructed a thorough and precise set of financial statements, which included not only income and expenses but also comprehensive long-term obligations and contingent liabilities. During due diligence, I learned the importance of not blindly accepting historical performance as a basis for determining valuations and the need to stress-test assumptions. For instance, one revenue stream appeared strong on paper but was tied to a single client contract, which was due for renewal within a few months. Recognizing this risk in advance permitted us to adjust the terms during the pre-closing cash flow impact.
The powerful lesson for me was that financial due diligence goes beyond verifying the numbers. It is equally critical to ask what could change tomorrow and not only focus on past performance.
Link Earnouts to Long-Term Growth Drivers
When we incorporated Dirty Dough into a larger portfolio, the significant advantage came from linking the earnout to franchise development milestones instead of raw revenue. The moment we structured it this way, it protected our valuation even when a few early stores underperformed. For anyone going through this process, I'd suggest pushing hard to align incentives with long-term growth drivers, not just short-term numbers.
