Addressing 8 Key Due Diligence Challenges in Mid-Market Transactions
Due diligence for mid-market M&A transactions presents a distinct set of challenges compared to large transactions. Differences in scope, speed, and data availability have a far larger impact on the success of transactions when compared to larger deals. In our experience working with both private equity (PE) firms and corporate acquirers, we've seen how these differences shape the due diligence process and, ultimately, the success of the deal.
For large transactions, due diligence inevitably runs at a higher gear, which can be most obviously characterised by larger teams tackling various facets simultaneously —commercial, financial, legal, operational, and market assessments. The process is comprehensive and complex, supported by substantial resources and access to large quanitites of data. Given the scale and stakes, larger teams work in parallel to ensure a deep dive into every critical aspect, leveraging well-established data sources and frameworks to mitigate risks.
In contrast, mid-market transactions move much faster, with due diligence typically taking 3-4 weeks, often less. Teams are leaner, budgets are tighter and the process is constrained by aggressive timelines. With fewer layers of oversight and less extensive data availability, mid-market due diligence requires a more focused and innovative approach. Teams must prioritise the most material risks and be nimble in their methods—often relying on creative data acquisition techniques, such as primary research, external data sources, and advanced analytics, to fill gaps and validate assumptions. The need for speed and efficiency is more pronounced in the mid-market, where deal cycles are shorter, and the ability to make timely decisions is condensed.
This faster pace, coupled with a more constrained environment, brings unique challenges to mid-market due diligence.
The best companies focus on addressing these eight key challenges early and quickly.
1. The Resource Gap
Mid-market due diligence often grapples with significant resource constraints, whether in terms of time, budget, or human capital. Unlike larger transactions that can deploy multiple specialised teams, mid-market deals demand a more focused approach.
Successful acquirers in this space—whether PE's or corporates, adopt a more targeted diligence strategy, prioritising critical risk areas such as financial health, key contracts, and customer concentration. They leverage cross-functional teams to ensure comprehensive coverage whilst maintaining efficiency. This approach allows for thorough examination of crucial elements without overtaxing limited resources or ballooning the budget.
2. Data Quality
A major challenge in mid-market transactions is acquiring the right data and then applying it effectively to derive actionable insights without getting creating more noise. Mid-sized companies often have limited internal data, requiring acquirers to source meaningful external data—such as industry reports, competitive intelligence from specialised platforms, and proprietary databases. However, relying solely on ingesting more data can often create more static, rather than clarity. Managing the costs of data acquisition and ensuring the data is both relevant and actionable is a key cost driver in conducting effective due diligence.
A recent due diligence within the technology sector had us leverage our proprietary data sets—built from numerous transactions in the mid-market —and combine them with selected external market reports and competitive analysis. Instead of aggregating more data, the key to unlocking the true picture of the market focused on triangulating the most relevant information points to understand market trends, competitive positioning, and growth opportunities.
3. Unlocking Management Capabilities
The effectiveness of a mid-market company's management team is often a critical factor in post-acquisition success. However, these management teams may be less experienced with institutional investors or less prepared for integration into a larger entity.
A global medical devices company addressed this by introducing thorough management assessments, including structured interviews, performance evaluations, and in some cases, psychometric assessments. The goal is to identify whether key leaders possess the adaptability and capability to drive growth under new ownership, and to assess potential turnover risk post-acquisition.
4. Market Dynamics and Competitive Positioning
Understanding market dynamics presents a unique challenge in mid-market due diligence. Unlike larger corporates, mid-market companies may lack the level of sophisticated market intelligence or may be overly reliant on niche markets.
Top-performing acquirers conduct comprehensive market analyses that go beyond surface-level assessments. These includes detailed breakdowns of competitive dynamics, customer trends, and regulatory changes that could impact the target. Particular attention is paid to sectors where markets shift quickly and where value can be eroded in the months post transaction.
The importance of this cannot be overstated. We've observed numerous cases where a target company's seemingly strong market position was undermined by unforeseen competitive threats or regulatory changes. In one instance, a mid-market software company's valuation was significantly impacted when a larger competitor unexpectedly entered their niche market just weeks before the planned acquisition.
5. Uncovering Meaningful Synergies
Synergy assumptions often drive mid-market deals, yet these projections are frequently overly optimistic or insufficiently vetted. This can lead to post-acquisition disappointments when anticipated savings or growth fail to materialise.
Successful firms implement rigorous synergy validation processes. This involves regularly reassessing synergy projections and maintaining a dynamic integration plan that evolves as more information about the target becomes available. The focus is on operational realities rather than headline numbers to understand what is genuinely achievable.
6. Hidden Liabilities
Mid-market companies may harbour hidden liabilities such as ongoing legal disputes, unaddressed compliance issues, or outdated supplier contracts that can materially impact deal value. These risks are often not immediately apparent, particularly when sellers themselves may lack full awareness.
Extending due diligence beyond standard legal reviews is crucial. This may incorporate forensic accounting, in-depth compliance assessments, and where relevant, environmental audits. Such comprehensive approaches help uncover hidden risks and better prepare acquirers for potential deal-breakers.
7. Programatic Due Diligence
A common phenomenon in mid-market transactions is the pressure to close deals, particularly within corporate business development teams. This can lead to confirmation bias and the overlooking of critical risks.
Fostering a culture of constructive scepticism throughout the due diligence process is essential. Establishing internal mechanisms to continuously challenge assumptions and viewing the decision to walk away from a suboptimal deal as a strategic success rather than a failure are hallmarks of disciplined acquirers.
This discipline is particularly crucial in the mid-market space, where the stakes are high and the margins for error are slim. We've seen cases where the willingness to walk away from a deal that didn't meet stringent criteria ultimately protected the acquirer from significant value destruction.
8. Stakeholder Alignment
Managing expectations among diverse stakeholders can be particularly challenging in mid-market deals. Investors, board members, and internal teams may have varying perspectives on the deal's strategic fit and potential value, leading to misalignment and friction.
Implementing clear, consistent communication from the outset of the due diligence process is crucial. Establishing a single source of truth and a coherent narrative around the deal's strategic rationale, potential risks, and value drivers ensures all stakeholders maintain alignment throughout the due diligence process.
The mid-market due diligence landscape is rife with complexities that demand nuanced, strategic approaches. The challenges outlined in this paper underscore the need for a tailored methodology that goes beyond standard due diligence practices. By recognising these unique aspects of mid-market transactions, acquirers can better position themselves to identify opportunities, mitigate risks, and achieve successful outcomes in this dynamic market segment.
As the mid-market continues to evolve, so too must the strategies employed to navigate it. The insights provided here serve as a starting point for corporates and private equity firms looking to refine their approach to mid-market due diligence. In an increasingly competitive landscape, the ability to effectively address these challenges can be the difference between a value-creating acquisition and a missed opportunity.
