Deal Mechanics 101: How M&A Deals Really Work

But when you peel back the layers, there’s a core set of mechanics that drive how deals come together, get evaluated, and ultimately get closed. Whether you’re a founder who’s ready to make an exit, an investor analyzing an opportunity, or an advisor navigating the process, understanding the mechanics of a deal can help you add value and avoid sudden surprises.

These are the fundamentals of deal execution—from the roles involved to the financial diligence needed for every investment decision.

Who’s Usually Involved in an M&A Deal?

Every deal really only needs two parties: a willing buyer and seller. But the reality is far more complex. Most transactions involve a team of experts who provide specific capabilities.

This team might include:

• M&A attorneys who draft and negotiate the legal terms and agreements
  
  
• Investment bankers who run the process or help identify potential targets
  
  
• Financial due diligence (FDD) advisors who scrutinize the financials and normalize earnings, removing atypical expenses to provide a clear picture of the company’s profits
  
  
• Tax and commercial diligence providers  who uncover hidden risks or blind spots
  
  
• Financing sources who help structure and fund the deal, especially in leveraged buyouts
  
  

The best deals happen when these team members work in collaboration rather than in independent silos—ensuring nothing goes unnoticed.

At Which Key Phases of the M&A Process Does a Diligence Provider Play a Pivotal Role?

The M&A lifecycle is composed of several critical phases, each with distinct objectives and deliverables that require the expertise of a diligence provider. The key stages include:

1. Pre-LOI (Letter of Intent):
   This is where the groundwork of the deal is articulated. Clean and structured data helps both buyers and sellers identify key metrics and trends, so they can make smarter, more informed decisions.
2. Financial Due Diligence (FDD):
   This phase is at the heart of deal analysis and involves adjusting financial statements to reflect the economic reality of the business. Diligence providers normalize earnings by removing non-recurring items, assess quality of earnings, and calculate adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization), providing buyers with a clear view of financial performance.
3. Post-Close Integration:
   Following deal close, diligence providers often support operational handoffs by preparing system upload files (e.g., for ERP systems like NetSuite), extending P&Ls through the transaction date, and assisting with the preparation of the opening balance sheet and purchase price allocation. These efforts ensure a seamless transition to the buyer’s finance and operations teams.

What’s the Difference between an Equity Investor and a Debt Investor?

Understanding the capital stack—the structure of debt and equity financing—helps clarify not just who gets paid first, but who’s taking on what level of risk and reward. The way capital flows into a deal matters. 

Equity investors, usually owners or shareholders, take an ownership stake and may have either majority (control) or minority (non-control) positions. Their returns depend on the future value of the company—so they typically participate in governance and strategy decisions.

Debt investors—or lenders—provide capital in exchange for fixed interest payments and principal repayment. Senior lenders have the first claim on assets, while subordinate lenders are paid after the senior debt.

Why Does Financial Due Diligence Matter?

Financial due diligence gives buyers and sellers a clear-eyed view of a business’s financial health. It goes far beyond simple P&Ls.

From the buyer’s perspective, FDD ensures the business value is based on real, sustainable earnings—not inflated numbers full of one-time windfalls or poorly recorded expenses. It validates the investment rationale and flags risks.

From the seller’s perspective, a third-party FDD provider can identify potential issues early, giving the seller a chance to address them before they become deal-breakers.

What Is a Quality of Earnings (QofE) Analysis?

The Quality of Earnings analysis adjusts reported earnings (typically EBITDA) to reflect a normalized, recurring level of profitability. These reports are crucial because reported numbers often include noise like one-time events, accounting errors, or non-operational expenses that can distort a company’s true cash flow.

A strong QofE analysis will:

• Remove non-recurring or non-business-related items
  
  
• Normalize expenses (e.g., replacing contractors with salaried employees)
  
  
• Correct accounting errors or misclassifications
  
  
• Adjust the recognition of both revenue and expenses based on the accounting standards
  
  
• Highlight both positive synergies or damaging inefficiencies that impact future performance

Ultimately, a QofE analysis helps buyers refine their valuation models, structure better deals, and negotiate with data-driven confidence.

How Do Advisors Work Together Across M&A Deals?

Each advisor brings deep domain expertise, but deals are most successful when those insights are connected. For example, financial findings should influence legal documentation, and accounting adjustments should be understood in the context of tax structuring.

That’s why great deal teams don’t just know their lane—they understand the broader circumstances. They ask better questions, anticipate downstream impacts, and drive better outcomes for their clients.

Final Thoughts

Deal mechanics aren’t just for investment bankers or CFOs. Understanding them is a strategic advantage for anyone involved in the transaction.

By learning how deals are actually built—from the numbers to the negotiations—you’ll be able to add value at every stage of the process, and that gives you a serious edge.

If you are interested in learning more about the ins and outs of deals, or are considering buying or selling, please reach out.