M&A · Due Diligence
Mergers and Acquisitions · Due Diligence
What is M&A?
- Verification across four areas: finance, legal, business, and HR
- Failure comes from integration, not price
- When people are the asset, HR due diligence is key
Due diligence is less a gate that decides 'buy or pass' than work that changes 'on what terms to buy'. In practice, most findings from due diligence are not used to break the deal but are translated into contractual mechanisms such as price adjustments, representations and warranties, conditions precedent, and escrow. So the value of a due diligence report lies not in how many pages of findings it lists but in how many contract clauses each finding ends up in. However thorough a risk report is, if it is not written into the contract, it becomes a cost the buyer bears alone after closing.
In mid-market Korean deals, a preliminary review typically takes 2–3 weeks and confirmatory due diligence before the definitive agreement takes 4–6 weeks. The final output of financial due diligence is not book operating profit but normalized EBITDA, with one-off revenue and the owner’s personal expenses stripped out. Net debt and a working-capital baseline are then added to fix the purchase price. The line between due diligence and valuation also blurs often: if valuation puts a price on future assumptions, due diligence checks whether the premises behind those assumptions are true. For companies whose value sits in their people, expect key-personnel retention agreements of 24–36 months and an escrow holding roughly 10% of the purchase price for 12–18 months.
The most common misstep in practice is handing the entire due diligence to an advisory firm and treating collecting the document request list as the finish line. Teams relax because every item is filled in, and then, two months after closing, a sales executive who was responsible for half of revenue leaves for a competitor with no non-compete agreement in place. The rule an acquirer should remember is simple: an item found in due diligence but written into neither the contract nor the 100-day integration plan is not a risk you have addressed. It is just a risk you knew about.
John KimAuthor of B2B Marketing Design and CEO of Nanum Consulting
Okgum LeeExpert in corporate analysis, fundraising, and business planningThe term due diligence derives from the 'reasonable care' duty required of underwriters under U.S. securities law. It later settled as a general term for the pre-acquisition verification process in corporate takeovers.
Consider a hypothetical case. Company A, a corporate training services firm with 180 employees and KRW 32 billion (≈ US$23,941,300) in annual revenue, put Company B, a production house with 22 employees and KRW 3.8 billion (≈ US$2,843,000) in annual revenue, on its acquisition list to bring video content production in-house. The first offer was KRW 9 (≈ US$1) billion, and three members of the strategic planning team started six weeks of confirmatory due diligence with accounting and legal advisors.
- When the accounting firm dug into three years of revenue, it found that 61% of Company B’s revenue came from a single large corporate group, and KRW 2.4 billion (≈ US$1,795,600) of that was a two-year in-house university build project that had already ended.
- The legal review revealed that the service contracts Company B signed with 12 outsourced directors had no copyright ownership clause at all. Company A’s head of legal summed it up: “As it stands, what we’re buying is neither the company nor the rights.”
- In the HR due diligence interview, Company B’s head producer said, 'The CEO could sign off in a single day with no approval chain, and that is the strength here,' but by the standards at Company A, the same item went through a three-step approval process averaging 7 business days.
- The negotiating team cut the purchase price from KRW 9 billion (≈ US$6,733,500) to 7.8 billion, but locked in a KRW 450 (≈ US$1) million, 30-month retention bonus for three key people and completion of the retroactive copyright assignment for outsourced work as conditions precedent to the definitive agreement.
- At the same time, the 100-day plan included an exception that delegates production approvals of up to KRW 30 million (≈ US$22,400) to the division head. Twelve months after the acquisition, all three key people had stayed, dependence on a single client fell from 61% to 38%, and in-house video production cost dropped from KRW 14 million (≈ US$10,500) to KRW 8.9 million (≈ US$6,660) per episode.