M&A Due Diligence: 30 Common Red Flags

First 10 of the 30 Common Due Diligence Red Flags

1. Does the company appear to manipulate reserve accounts in order to smooth or enhance its reported earnings?
2. Is the internal audit team subjected to significant scope restrictions?
3. Are a large proportion of monthly sales completed during the last few days of each month?
4. Are any employees of such importance that their departure for any reason would jeopardize the existence of the business?
5. Is there evidence of continual changes in accounting methods?
6. Are the cultures of the buyer and seller’s organizations relatively similar, or are there substantial differences in management styles and treatment of customers and employees?
7. Are the financial statements complex and not readily understood? Are there any mysterious or unexplained line items on the balance sheet, income, or cash flow statements? Are the notes to the statements clear and understood?
8. Are there any emerging threats or negative factors not previously disclosed? Consider technological, competitive, and market changes that could affect the income of the business.
9. Are there any off-balance sheet entities, and is their purpose both known and fully understood?
10. Are there any significant environmental issues that are known or suspected?

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