How Can M&A Due Diligence Software Help You Spot Red Flags Before It’s Too Late? 

Introduction

In the high-pressure world of M&A, a missed red flag can often result in a costly outcome for the investor. Undetected financial discrepancies and red flags, such as understated liabilities or misleading revenue trends, can impact the overall process and deal momentum.  

Traditional processes rely on manual and time-consuming tasks for due diligence teams who are often working across multiple deals at any-one time. With the support of AI-powered M&A due diligence software, red flags can be identified early during a process and allow the team to focus on any risks from the outset. This blog explores how dealmakers can use software to avoid costly surprises. 

What Kind of Red Flags Do M&A Teams Typically Miss? 

Examples of red flags which may cause issues in a deal if not addressed early include:

– One-off revenue spikes with no recurring basis.
– Underreported liabilities or deferred tax positions.
– Overstated margin performance due to inconsistent cost categorisation.
– Understated cost base which is not indicative of the ongoing investment required to support the business.

According to Bain & Company, 37% of failed M&A integrations trace back to diligence oversights in financials or compliance.

Why Can’t Manual Review Catch Everything? 

Traditional due diligence is a manual review which, even for the most experienced analysts, is time bound and prone to errors.

– Analysts require to review large volumes of documents within constrained deal timelines and the need to identify red flags early in the process.
– Time pressures often result in teams not having the capacity to drill-down to the granular level of detail that has been provided by the Management team.  
– Human reviews are prone to error or confirmation bias.

How Does M&A Due Diligence Software Flag Issues So Quickly? 

AI-driven software, such as PinpointAI, reviews financial data to support the identification of unusual trends and one-off peaks / troughs through anomaly detection.  
 
Examples of items that are typically identified through anomaly detection include:

– Revenue or margin deviations outside historical trend range. 
– Incomplete financials (e.g. one entity missing a P&L for one of the months).  
– Shifts in supplier or customer concentration. 
– Under or overstated costs indicating either an incomplete cost base or one-off items (often transaction related). 

The PinpointAI platform surfaces these insights, providing a view of the transactions underpinning the anomalies.  This removes the need for analysts to spend significant efforts manually reviewing the source data, providing them with more time to focus on the red flags identified.

How Can You Trust the Risk Flags from AI?  

AI does not replace judgement or the expert advisor. The right AI tool (such as PinpointAI)  supports your deal team, providing efficiency and value in a due diligence process such as:    

– Anomaly detection based on a materiality threshold.  
– Generation of anomaly insights and providing the ability to drill down to transaction level detail.   

The anomaly detection functionality on PinpointAI platform provides the deal advisors to form a more informed view of the company in advance of further discussions with the Management team.

What Are the Key Takeaways?  

– Red flags can be buried in thousands of pages and spreadsheets. 
– AI-powered diligence software highlights risks in a timely manner. 
– Pinpoint AI is built to detect, document and drill into the most granular view of data.   

The anomaly detection functionality on PinpointAI platform provides the deal advisors to form a more informed view of the company in advance of further discussions with the Management team.

Book a Demo and See Risk Before It Escalates  

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