Due Diligence Process in Mergers and Acquisitions: Find Hidden Liabilities, Call Now

In 2011, Hewlett-Packard’s $11 billion acquisition of Autonomy stunned the business world when unexpected accounting issues and hidden debts surfaced, wiping out nearly all of the deal’s value. This serves as a clear reminder that, without a thorough due diligence process in mergers and acquisitions, organizations can face devastating financial setbacks. Many surprises in mergers and acquisitions come from hidden liabilities like unresolved lawsuits, undisclosed debts, or regulatory fines, which are often buried deep within company records.

Identifying these liabilities takes more than a quick financial review. The due diligence process in mergers and acquisitions includes targeted steps to spot risks that could hurt a deal’s value. Forensic accountants help reveal financial truths and strengthen the decision-making process, giving buyers confidence and protection before closing a deal.

This post explains how hidden liabilities appear in mergers and acquisitions, shows the core steps of strong due diligence, and explores how forensic accounting helps organizations avoid costly mistakes. Ready to reduce risk and get a clear financial picture? Call us or fill out our form for a forensic consultation.

Hidden liabilities are financial or legal obligations that are not obvious at first glance. These risks can change the value of a merger or acquisition and put future profits at risk. As companies move through the due diligence process in mergers and acquisitions, they need to find and address these threats to prevent costly mistakes. Let’s take a closer look at what often gets overlooked.

Every merger or acquisition can hide unpleasant surprises. Here are some of the most common hidden liabilities that can affect buyers:

• Contract Disputes:
  A target company might be in the middle of a contract dispute with a supplier or customer. For example, a catering business may face a breach-of-contract lawsuit over undelivered services. If unresolved, this claim might cost the new owner thousands or limit critical business relationships.
• Employee Claims:
  Think of issues like discrimination or wage disputes. A factory could face unpaid overtime claims from workers, and these can lead to unexpected settlement costs or penalties. Legal action from past or current employees can impact morale, reputation, and finances.
• Intellectual Property Issues:
  A tech startup’s code could infringe on another company’s patent or fail to secure rights for a product name. If a deal is done without clear ownership, buyers risk expensive lawsuits or having to halt product lines.
• Regulatory Fines:
  Regulatory bodies may investigate pollution from a manufacturing plant or non-compliance with health laws in a medical practice. These discoveries might only come after the deal closes, leaving the buyer exposed to fines or forced operational changes.

Each scenario adds costs, disrupts operations, or leads to legal trouble after the deal. That’s why a thorough check during the due diligence process in mergers and acquisitions is critical.

Hidden liabilities often develop due to pressure and gaps in how deals are executed. Here’s how this can happen:

• Sellers may skip sharing all facts, especially under tight deadlines.
  Incomplete disclosure can be a deliberate choice—maybe to keep buyers interested or to avoid drawn-out negotiations.
• Company structures can be complex, making it easy to miss loose ends.
  For instance, a construction firm might have dozens of subcontractors and open permits that are hard to track. In financial services, layered subsidiaries or off-book transactions can bury loan defaults or compliance gaps.
• Rushed due diligence, especially in competitive markets, compounds these risks.
  The clock ticks, and buyers may not check every record, contract, or lawsuit, which lets liabilities slip through.

Missing these issues can weaken bargaining power, lead to lawsuits, and damage long-term plans. A quality due diligence process in mergers and acquisitions helps buyers stay one step ahead of these risks. For more insight on the importance of detailed review, see this article from Marsh about how skipped steps during due diligence often expose unexpected risks and liabilities: Six risky missteps that highlight the need for quality M&A due diligence.

The due diligence process in mergers and acquisitions is the safety net that can save buyers from costly mistakes. Without it, even the most promising deals can hide pitfalls just below the surface. This phase is where trust gets built—or lost—based on what the investigation reveals about the target company’s financial health, compliance, and operations. For organizations pursuing a merger or acquisition, a structured and thorough due diligence review serves as the key line of defense against hidden liabilities and post-deal surprises.

A step-by-step approach is essential for effective due diligence. Think of it as piecing together a puzzle where every detail matters. Here are critical actions that should always be included:

• Audit Financial Books: Analyze financial statements, tax returns, and supporting ledgers for consistency and possible misstatements. Scrutinize year-over-year trends and out-of-the-ordinary transactions.
• Review Contracts: Examine all active contracts—including leases, vendor agreements, and client obligations—for loopholes, dispute histories, or undisclosed side agreements. Look for any terms that commit future cash or create new liabilities.
• Assess Assets and Liabilities: Confirm ownership, value, and existence of physical and intangible assets. Investigate off-balance-sheet items, contingent obligations, and pending litigations.
• Verify Compliance: Check for any outstanding fines, regulatory investigations, or gaps in compliance with laws affecting operations.
• Use Secure Data Rooms: Digital data rooms allow controlled access for internal and external reviewers, centralizing critical documents while maintaining confidentiality.

Nothing replaces human insight. After combing through documents, conduct targeted interviews with leadership and key employees. Pay attention to inconsistencies between what is disclosed in writing and what you learn through direct conversations.

Here are a few practical tips for avoiding overwhelm:

• Prioritize core risk areas based on industry norms.
• Break down reviews into “must-review” and “deep-dive-when-red-flagged” tiers.
• Use checklists, like those recommended in this due diligence process step-by-step overview , to help stay organized and thorough without missing essentials.

By following these steps and keeping a disciplined process, you can lower the chances of costly surprises and negotiate from a position of strength.

While traditional due diligence looks at known risks, forensic accounting digs deeper. Forensic accountants act like financial detectives, uncovering warning signs that audits might miss. They analyze unusual patterns, trace transactions, and test the integrity of internal controls.

What sets forensic experts apart is their ability to:

• Spot Anomalies: Identify transactions that don’t fit standard behavior, such as material adjustments near the period’s end or unapproved vendor payments.
• Trace Irregular Transactions: Follow the money through layered accounts and entities, revealing schemes or intentional concealment.
• Expose Concealed Liabilities: Uncover related-party dealings, improper asset transfers, or liabilities buried in footnotes.

These skills are especially useful in sectors prone to complex transactions, like healthcare, nonprofits, or government contracting. If your organization is considering a deal where trust is paramount, a forensic review adds a critical level of protection.

If you need expert guidance or a second set of professional eyes, consider reaching out— schedule a consultation to discuss how forensic accounting can reduce risk and add clarity to your due diligence process in mergers and acquisitions.

To read more about how criminals attempt to hide financial red flags during deals, see the article on fraud concealment techniques and what to watch for as you conduct your review.

A smart mix of methodical review and forensic expertise helps your team turn over every stone before making big decisions.

The due diligence process in mergers and acquisitions doesn’t just end at finding hidden liabilities. Acting with confidence depends on knowing which practices protect your interests and recognizing when expert support is the right call. The following steps are grounded in real-world experience, focusing especially on decision makers in healthcare and government.

Every transaction comes with risk, but the best-prepared teams rely on a disciplined process to uncover what others miss. Begin with detailed audits of financial records. Go deeper than face-value numbers—look for strange entries, odd timing, or anything that doesn’t match up across documents. In healthcare or government deals, missing a regulatory fine or unpaid claim can mean headaches later.

Bring in experts early, not just at the signing table. Seasoned forensic accountants and sector specialists know how to spot liabilities and understand the rules specific to your industry. Even small oversights in contracts or licensing can snowball once the ink dries.

Negotiating clear, airtight terms is another safeguard. Use reps and warranties, disclosure schedules, and holdbacks to keep leverage if issues pop up after closing. Strong terms don’t just protect your wallet—they help avoid lawsuits and long-term disputes.

Data control matters too. Store confidential documents in a secure data room, limiting access and tracking every read or download. This builds a reliable audit trail, which is especially important if questions arise later.

Target your time on the issues with the most potential impact. Focus first on clinical or regulatory contracts for healthcare, existing government funding sources for agencies, or any off-balance-sheet exposures. Put less critical files on a second tier for review.

Lastly, capture every step in writing. Document what was checked, who did the work, and the conclusions reached. This file not only protects the team but sets expectations clear for everyone at the table.

To expand your checklist or see detailed procedures for healthcare deals, you can find a thorough breakdown here: Healthcare Mergers & Acquisitions | Due Diligence.

The signs that you need forensic support often show up as inconsistencies or things that just don’t add up. If the target’s financial statements are vague, delayed, or riddled with unexplained adjustments, that’s a red flag. In high-stakes industries like healthcare, even a small error can signal larger issues behind closed doors.

High turnover on the financial or accounting teams can also be a warning. Each change increases the chance that problems go unnoticed or unreported. Watch for confusing related-party transactions—if payments or asset transfers link back to managers and aren’t fully explained, deeper investigation is probably needed.

Off-balance-sheet items that don’t make sense or contracts with hidden addendums pose real threat. And if the business has had legal trouble or ongoing regulatory probes, demand to see all correspondence and resolutions in detail. Weak or outdated internal controls, like missing approval logs or unreviewed financial policies, should prompt you to call in the experts.

These patterns point to systemic risk, not just simple mistakes. If you notice any of these indicators, reach out right away for an evidence-backed review. Firms like Turning Numbers provide specialized, impartial analysis so you can move forward with facts and not just gut feeling.

The cost of missing hidden liabilities far outweighs the investment in forensic review. Schedule a consultation and protect your interests before you sign. For step-by-step legal review strategy in healthcare, see this playbook: A Legal Due Diligence Playbook on Mergers and Acquisitions in Healthcare.

A clear call to action: Call us or fill out the form for a forensic consultation before finalizing any deal. Expert eyes now can save you months of trouble later.

Hidden liabilities can turn even the most promising merger or acquisition into a costly setback. The due diligence process in mergers and acquisitions works as a safeguard, helping your team expose potential threats before signing any agreement. By taking a methodical approach and seeking experienced forensic accounting, buyers reduce risk and boost their chance for success. If you want clear answers and confident decision-making, call us or fill out our form for a forensic consultation. Acting now protects your investment and sets your next deal up for a smooth close.