Why due diligence decides whether the deal succeeds
An acquisition often looks simple from the outside. A buyer sees an attractive company, the parties agree on a price, and the deal goes through. In practice, what happens between the handshake and completion is what decides whether the acquisition becomes a success or an expensive lesson. That is where due diligence comes in.
Due diligence, often called DD, is the systematic review a buyer carries out of a target company before a deal is closed. The aim is to understand what you are actually buying: which assets, liabilities, contracts, risks, and opportunities lie behind the seller’s presentation. A well-run due diligence is not a bureaucratic obstacle but the tool that lets the buyer price the deal correctly and protect against what would otherwise have surfaced only afterwards.
This article covers the types of due diligence, how the process works, how findings shape price and contract terms, the difference between an asset deal and a share deal, and the most common mistakes and risks.
What due diligence is and how it works
At its core, due diligence is about replacing assumptions with knowledge. The seller knows its company; the buyer does not, and that information asymmetry is one of the biggest risks in any deal. The review levels this out by systematically examining the company from several angles.
The different types of due diligence
A complete review rarely consists of a single examination but of several parallel tracks, each shedding light on part of the company.
Legal due diligence examines the company’s contracts, ownership structure, permits, disputes, and obligations. Financial due diligence examines the numbers behind earnings and the balance sheet, cash flow, and any hidden liabilities. Tax due diligence checks that the company has handled taxes and charges correctly and whether there are latent tax risks.
Beyond these, the review often includes commercial due diligence of the market, customers, and competitive position; a review of intellectual property (IP) such as trademarks, patents, and copyright; a GDPR and data review of how the company handles personal data; and technical due diligence of, for example, IT systems, source code, and technical debt. Which tracks are needed depends on the company’s business: a SaaS company calls for a completely different focus on IP, data, and technology than a manufacturing business.
The data room and the process
The review normally takes place in a data room, today usually a virtual one, where the seller gathers the company’s documentation. The buyer’s advisers request documents through a structured request list, ask follow-up questions, and document their observations.
The result is compiled into a due diligence report describing what was reviewed, what findings were made, and how serious they are. This report becomes the buyer’s basis for decision and, in the next step, shapes the negotiation of price and contract terms.
How findings shape price, warranties, and the agreement
The point of due diligence is not only to find problems but to manage them within the deal. The findings flow into the purchase agreement, often called the SPA after the share purchase agreement, in several ways.
Serious findings can lead to an adjustment of the purchase price or to the deal being made conditional. Identified risks are handled through warranties, where the seller confirms certain matters and becomes liable to compensate if they turn out to be incorrect. For specific, known risks, dedicated indemnities are used instead, where the seller takes on liability for a named risk, such as the outcome of an ongoing dispute. In this way, due diligence and the agreement become two parts of the same protection.
Share deal or asset deal
A fundamental question is whether the buyer acquires the shares in the company or only its business and assets, a so-called asset deal. In a share deal, the whole company comes along, including its history, contracts, and liabilities, which makes thorough due diligence especially important. In an asset deal, selected assets and contracts are bought, which can limit certain risks but instead raises questions about what actually transfers and which consents are required. The appropriate structure affects how the review is set up.
A practical example: the finding that saved the deal
Imagine a company that wants to acquire a smaller competitor in order to grow faster. The seller presents stable numbers, a loyal customer base, and a promising order book. The price feels reasonable, and the buyer is eager to act before someone else does.
During the legal and financial due diligence, the buyer’s advisers discover two things. First, a large share of revenue rests on a single customer contract that contains a clause allowing the contract to be terminated if the company changes ownership. Second, there is an ongoing tax matter that could lead to a back claim.
Without the review, the buyer would have paid full price for revenue that could vanish the day after completion, and inherited an unknown tax risk on top. With the findings in hand, the buyer can instead act: negotiate down the purchase price, require the customer’s consent to be obtained before completion, and insert a dedicated indemnity covering the tax matter. The deal goes ahead, but on terms that reflect the real risk. That is the difference between buying a hope and buying a company with open eyes.
Common mistakes companies make
The first and most serious mistake is skipping or rushing due diligence so as not to lose momentum in the negotiation. Time pressure is often greatest precisely when the review is needed most, and a deal driven by enthusiasm rather than facts is a deal with hidden risks.
A second mistake is starting the review before a non-disclosure agreement (NDA) is in place. The buyer gains access to sensitive information about the seller’s company, and without a clear NDA there is no protection if the deal falls through or the information spreads.
A third mistake is reviewing too narrowly. A company is often assessed only financially, while the real risks may just as easily lie in a single customer dependency, an invalid IP holding, or poor handling of personal data. Which tracks are needed must be tailored to the specific company.
A fourth mistake is letting the findings stay in the report. A due diligence that identifies risks but does not translate them into price adjustments, warranties, or indemnities has done only half the job. Protection arises only when the findings land in the agreement.
Legal risks of inadequate due diligence
The most direct risk is buying a problem without knowing it. In a share deal, the buyer takes over the company with all its history: unknown liabilities, disputes, mishandled taxes, or contracts that fall away on a change of ownership. What is not discovered before completion becomes the buyer’s problem afterwards.
Another risk is weak contractual protection. If the buyer does not know which risks exist, the agreement cannot be drafted to handle them either. Warranties and indemnities are effective only if they target the actual risks, and that presupposes the risks have been identified.
A third risk concerns data protection and intellectual property. If the target has handled personal data in breach of the GDPR, or does not own the rights the business rests on, the buyer can inherit both sanction risk and a business built on uncertain ground. For technology and SaaS companies, this is often the most value-bearing and most overlooked part of the review.
Recommended actions
Start with an NDA before any sensitive information changes hands. It protects both parties and sets the frame for how the information may be used. In many processes this is combined with a letter of intent that sets out the basic structure of the deal.
Tailor the scope of the review to the company. A manufacturing company, a real-estate company, and a SaaS company call for entirely different focus. Put the resources where the real risks are, rather than reviewing everything equally superficially.
Connect the review and the agreement. Make sure findings are systematically carried over into the purchase agreement as price adjustments, warranties, and indemnities, and that conditions for completion, such as necessary consents, are captured. This is where due diligence moves from knowledge to protection.
Involve advisers with both legal and commercial understanding. Due diligence is not just a checklist but an assessment of which findings actually affect the deal and how they are best handled. That judgement takes experience of having seen similar deals before.
Frequently asked questions about due diligence
What is the difference between a share deal and an asset deal?
In a share deal you buy the shares and therefore the whole company with its history and liabilities. In an asset deal you buy selected assets and contracts from the business. The structure affects both the risk profile and how the review is set up.
Does every deal need full due diligence?
The scope should be tailored to the size of the deal and the nature of the company, but some form of review is almost always warranted. Even a smaller deal can hide significant risks, and the cost of the review is normally small compared with an unpleasant surprise after completion.
What is a data room?
It is the, nowadays usually virtual, collection of documentation that the seller assembles and gives the buyer’s advisers access to. In the data room, contracts, financial information, permits, and other material are reviewed in a structured and traceable way.
How do findings affect the price?
Serious findings can lead to a lower purchase price or to the deal being made conditional. Other findings are handled through warranties or dedicated indemnities in the purchase agreement, so that the risk lands with the party who should reasonably bear it.
Why is an NDA important before the review?
During due diligence the buyer gains access to sensitive information about the seller’s company. An NDA signed before the information is disclosed protects the seller if the deal falls through and governs how the information may be used.
How long does due diligence take?
It depends entirely on the size of the deal and the complexity of the company. A smaller, well-prepared deal can be reviewed in a few weeks, while a larger or more complex deal takes longer. A well-organised data room from the seller shortens the process considerably.
Conclusion
Due diligence is not an expression of distrust towards the seller but a precondition for making a considered deal. It gives the buyer the knowledge to price correctly, negotiate from an informed position, and draft an agreement that actually protects against the risks that exist. The most expensive acquisitions are almost always the ones where the review was done too late, too narrowly, or not at all.
Lawgent helps buyers and sellers carry out secure acquisitions: we plan and lead the due diligence process, identify the findings that genuinely affect the deal, and carry them over into warranties, indemnities, and price terms in the purchase agreement. We combine experienced transaction law with AI-driven efficiency, so the review becomes both deeper and faster, and more cost-effective than at a traditional firm. Are you facing an acquisition or a sale? Contact Lawgent before you sign.
