What happens in financial and commercial due diligence?
What financial and commercial due diligence checks in an acquisition, the red flags buyers look for, and how sellers can prepare.
Read the guideShort answer
There is no fixed timeline. A buyout moves through preparation, buyer outreach, an offer and exclusivity, due diligence, negotiation of the agreement, approvals and closing. Mid-market deals commonly take several months, and the biggest factors are how ready the seller is, how complex the structure is, and which approvals are needed.
The stages
| Stage | What happens | What the seller needs |
|---|---|---|
| 1. Preparation | Target assessment, valuation view, documents and a buyer list | Clean financials, normalised earnings, a clear story and objectives |
| 2. Outreach | Confidential approach to selected buyers under an NDA | A teaser and an information memorandum |
| 3. Offers | Indicative offers, then a letter of intent and often exclusivity | A view on price, structure and non-price terms |
| 4. Due diligence | Buyer checks financial, commercial and legal matters | An organised data room and fast, consistent answers |
| 5. Agreement | Negotiation of the share purchase agreement and schedules | Counsel, and decisions on warranties and indemnities |
| 6. Approvals and closing | Conditions satisfied, payment and transfer | Timely filings and board and shareholder approvals |
What drives the timeline
- Readiness. Messy records add weeks to diligence.
- Structure. Earn-outs, rollover stakes and cross-border elements add negotiation.
- Approvals. Some deals need regulatory clearance, for example from the Competition Commission of India where thresholds are met, under SEBI's rules where the target is listed, or under FEMA for foreign buyers or sellers. Confirm the current requirements with counsel.
- Number of buyers. More competition helps price but needs more management time.
Seller checklist
- Three years of financials, reconciled to the audited statements.
- A normalised EBITDA bridge with evidence for every adjustment.
- Customer and supplier contracts, with change-of-control terms flagged.
- Shareholding, cap table and statutory records up to date.
- Key employees and what keeps them after the sale.
- A list of open disputes, claims and tax matters.
- A named lead for each question area in diligence.
Common mistakes
- Starting outreach before documents are ready, so the buyer finds problems you could have explained.
- Telling different buyers different numbers.
- Leaving the management team out of the plan, then losing them mid-process.
Sources and further reading
- Competition Commission of India: combinations
- SEBI: legal framework and regulations
- Reserve Bank of India: FEMA notifications
- Ministry of Corporate Affairs (Companies Act, 2013 and rules)
General information based on market practice and the official sources above. Rules change, so check the current position with your adviser before acting. See our disclaimer and the M&A glossary.
Our work
Strategic M&A & Buyout Advisory
End-to-end execution: target identification, joint ventures, deal structuring and post-merger integration.
Related case: Structured buyout: Paybingo.
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