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The Importance of Due Diligence in M&A Transactions

By Charlie Wood, on June 13th, 2024

Due diligence is an integral part of any M&A transaction. During this phase of the transaction, the parties outline internal and external risk factors, mitigate various issues, and lay out their acquisition strategy.

Risk mitigation in M&A through due diligence is only feasible by following a detailed and structured checklist. This checklist must address multiple facets of a target company, including:

  • Overall organizational structure
  • Finance and accounting
  • Operations
  • Tax liabilities
  • Market and sales
  • Human resources
  • Information technology and cybersecurity

In a world of ever-changing cybersecurity threats and risks, organizations of all sizes and levels of complexity are targets of cybercriminals. Failure to appropriately perform due diligence procedures in the IT and cybersecurity space can lead to a data breach, which can lead to:

  • Significant fines
  • Loss of consumer confidence and trust
  • Delays in the completion of the transaction
  • Purchase price reduction
  • Future liabilities and lawsuits

In order to limit short-term and long-term costs associated with a breach, organizations need to ensure that they have a strong sense of what controls are currently in place to identify, isolate, and mitigate risk. During most M&A activities, organizations are looking to purchase intellectual property and data. This data is protected using the various IT and cyber-centric security controls.

If the data is important to the acquiring organization, then it is more than likely that it will be important to and sought after by cybercriminals.

Leveraging a savvy cybersecurity consulting firm can significantly reduce these risks. These firms can perform the appropriate level of IT due diligence, which would include the following:

  • A review of physical and logical security access controls
  • Third party / vendor management
  • Review of policies and procedures
  • Compliance requirement reviews
  • Penetration testing procedures
  • Incident response planning and training
  • Security awareness procedures
  • Disaster recovery

Furthermore, leveraging a virtual Chief Information Security Officer (vCISO) can also be a significant difference maker. A second set of eyes watching the organization and not only ensuring that the security controls operate as designed, but also leveraging their years of experience to potentially identify new and evolving risks, can further strengthen the security posture of the organization.

Due diligence in the M&A world has never been more complicated. Cybercriminals can breach networks and exfiltrate or encrypt sensitive data from anywhere in the world. That is why it has never been more important that M&A activities include cybersecurity due diligence procedures, performed by reputable and experienced IT and cybersecurity professionals.

If you need further guidance or have any questions, we are here to help. Please do not hesitate to reach out to discuss your specific situation.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.

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Written By

Charlie Wood April 2020
Charlie Wood
Practice Lead, FoxPointe Solutions