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Cyber Due Diligence in Mergers and Aquisitions

The key purpose of Cyber Due Diligence is to identify and address a target company’s cybersecurity vulnerabilities, regulatory compliance gaps, and potential liabilities that could impact the transaction. With cyber risks increasingly influencing deal value and post-close integration, a thorough assessment of cybersecurity has become a critical component of the investment decision-making process and successful transaction execution.

Introduction:

Why Cyber Due Diligence Matters in Private Equity

Cyber due diligence isn’t just another checkbox for private equity firms – it’s a protection against hidden liabilities that can quietly erode deal value. Beyond the obvious risks of regulatory fines and data breaches, neglecting cybersecurity exposes buyers to more subtle but equally damaging challenges: ineffective or unenforceable cyber R&Ws, inflated cyber insurance premiums, and stolen intellectual property circulating on the dark web that devalues core assets before the ink on the deal is dry.

Addressing these risks proactively ensures a smoother transaction and protects the long-term integrity of the investment. These risks don’t just threaten the financials – they can derail timelines, strain relationships with investors, and damage trust in leadership’s ability to manage risk. Cyber due diligence, done right, should be an important component of your broader due diligence process.

Yet, many private equity professionals see traditional cyber due diligence as overly technical and detached from deal realities. They’re not wrong. This disconnect has undermined the credibility of cybersecurity providers in the eyes of private equity firms, as many fail to align their findings with the strategic and financial priorities of the deal.

This page explores why high-quality cyber due diligence is essential to safeguarding deal value and maintaining investor trust, offering practical guidance to bridge the gap between technical assessments and the realities of M&A transactions.

Objectives of Cyber Due Diligence

Establish Cyber-Specific Representations and Warranties (R&Ws):

Cyber due diligence delivers the insights required to work collaboratively with counsel and carriers in crafting precise, enforceable R&Ws. These provisions shield the buyer from unforeseen issues such as undisclosed data breaches, misaligned regulatory compliance practices, or gaps in third-party vendor agreements, ensuring that legal protections align with the deal’s risk profile.

Turn Risks into Negotiation Leverage:

Cyber due diligence isn’t just about identifying vulnerabilities – it’s a strategic tool for improving deal terms. By uncovering gaps in security protocols, weak vendor agreements, or compliance deficiencies, buyers can justify purchase price adjustments, structure escrow provisions, or negotiate specific conditions precedent to closing. These insights enable buyers to mitigate exposure while reinforcing the overall value proposition of the transaction.

Efficiently Assess the Cybersecurity Posture:

Time is always a factor in M&A. The goal is to rapidly evaluate the target’s cyber posture, identifying critical vulnerabilities and gaps that could jeopardize the transaction while minimizing disruption to the deal timeline.

Facilitate a Secure Transaction:

Cyber due diligence ensures the deal proceeds without unexpected cybersecurity roadblocks, such as undisclosed breaches, compliance gaps, or vendor risks that could derail closing or create liabilities post-close.

Facilitate a Secure Transaction:

Cyber due diligence ensures the deal proceeds without unexpected cybersecurity roadblocks, such as undisclosed breaches, compliance gaps, or vendor risks that could derail closing or create liabilities post-close.

Evaluate Cyber Insurance Viability

Cyber insurance is a critical layer of protection, but not every target is insurable at a reasonable cost – or at all. Assessing whether the target’s current coverage is adequate, or if their posture requires significant upgrades, ensures buyers won’t inherit a policy that’s more liability than protection.

Set the Stage for Post-Close Action Plans:

Every deal has post-close to-dos, but cyber gaps can become post-acquisition crises without a clear roadmap. A strong due diligence process prioritizes critical fixes and continued oversight to ensure smoother integration and avoiding operational disruptions that could derail value creation.

Identify Threats Prior To Closing

Ransomware Susceptibility
Existing Critical Vulnerabilities
Past and Active Dark Web Threats

Essential Cyber Risks to Address in Cyber Due Diligence

Cyber risks often lurk in critical operational areas, from access controls to incident response plans. Below, we break down the key risk areas that every private equity professional should consider during cyber due diligence to ensure a secure and smooth transaction.

Information Security Management Program

A company’s overarching approach to managing cybersecurity risks. The program should be guided by formal frameworks (e.g., NIST CSF, ISO 27001), including policies, governance, and continuous improvement processes. Weak or outdated programs can signal systemic issues and create significant compliance risks.

Key Points to Assess:

Governance structure (e.g., security committees, accountable roles)

Alignment with industry standards

Regular program reviews and updates

01

Access Control

Mechanisms that manage and regulate access to systems, data, and resources, including privileged access management (PAM).
Inadequate or improperly enforced controls may allow unauthorized access, data breaches, and heightened insider threat risks.

Key Points to Assess:

Adoption of zero-trust or least-privilege principles

Strength of privileged access management

Enforcement of MFA and conditional acces

02

Audit Logging and Monitoring

Robust processes for tracking and analyzing system and network activity, often via SIEM (Security Information and Event Management) solutions, SOC (Security Operations Center), or managed detection and response tools. Weak logging and monitoring limit a company’s ability to detect, contain, and respond to cybersecurity incidents.

Key Points to Assess:

Completeness and retention of logs

Tools and technologies for real-time monitoring

Scope of monitoring capabilities

03

Endpoint Protection

Security measures for user devices (laptops, desktops, mobile phones) and other endpoints (IoT, operational technology). Proper endpoint protection ensures malware, ransomware, and other threats are blocked. Poor endpoint protection significantly raises the risk of systemic compromise and will impact cyber insurance renewals.

Key Points to Assess:

Use of EDR/XDR solutions

Patch frequency for endpoint devices

Security configuration baselines for different device types

04

Network Protection

Safeguards for IT networks, including next-generation firewalls, intrusion detection/prevention systems, network segmentation, and regular network vulnerability assessments. Inadequate network protection exposes the organization to external attacks and potential operational disruption.

Key Points to Assess:

Network architecture

Configuration and rule management for firewalls/IDS/IPS

Vulnerability & Patch Management

05

Data Protection and Privacy

Policies, technologies, and processes to securely handle sensitive data throughout its lifecycle, ensuring compliance with regulations (GDPR, CCPA, etc.) and internal classification standards. Weak data protection leads to regulatory liability and reputational harm. For an in-depth look at why data privacy is critical during M&A, see our article Data Privacy in M&A Due Diligence.

Key Points to Assess:

Data classification framework and enforcement

Encryption at rest and in transit

Alignment with privacy requirements and breach notification laws

06

Password Management

Practices governing secure password creation, storage, and use of MFA wherever feasible. Poor password hygiene is a leading cause of unauthorized access and account compromises.

Key Points to Assess:

Enforcement of strong password policies (length, complexity, expiration)

Use of enterprise password managers or vault solutions

Multi-factor authentication rollout and coverage

07

HR Security

Measures addressing employee awareness (e.g., regular cybersecurity training, phishing simulations) and insider threat management. Neglecting HR security can result in preventable human errors or deliberate malicious actions.

Key Points to Assess:

Frequency and effectiveness of security awareness training

Onboarding and offboarding procedures (e.g., background checks, access revocation)

Policies governing employee device usage and remote work

08

Third-Party Security

Oversight of vendors, partners, and suppliers with access to systems, data, or critical services. Poor third-party security practices or insufficient contractual safeguards can introduce significant cyber risk to the entire organization.

Key Points to Assess:

Vendor due diligence and continuous monitoring

Contractual obligations for security (e.g., SLAs, liability clauses)

Regulatory requirements around supply chain security (PCI-DSS, etc.)

09

Business Resiliency

The organization’s ability to ensure operational continuity and recover from disruptions (cyber incidents, natural disasters, etc.) through business continuity and disaster recovery planning. Inadequate resiliency can result in extended downtimes and significant financial or reputational losses.

Key Points to Assess:

Existence and maturity of business continuity and disaster recovery plans

Regular testing via tabletop exercises or simulations

Incident response plans and crisis management protocols

10

Application Security

Security measures and best practices throughout software development and deployment phases, most relevant for SaaS companies and organizations building in-house web/mobile applications.

Key Points to Assess:

Secure coding practices (e.g., OWASP Top 10 Testing)

Web and mobile application penetration testing

11

AI Security

Governance, policies, and controls around the use of AI tools by employees, whether for data analysis, coding assistance, or other productivity tasks. This is to ensure responsible and secure usage of readily available AI solutions.

Key Points to Assess:

Clear guidelines on the permissible use of AI tools and data handling

Technical controls to prevent sensitive data leakage (e.g., blocking certain content uploads to AI platforms)

Regular training for employees regarding safe AI usage

12

Audit Logging and Monitoring

Validating the accuracy and security of a target company’s leadership can be an important aspect of cyber due diligence. This involves assessing whether key executives have any compromised credentials, sensitive data, or other exposure that could pose risks to the company. A careful review can help ensure there are no red flags tied to their online presence or historical activity that could undermine the transaction or attract unwanted scrutiny to the firm. For a deeper dive into the importance of executive's digital footprint, read our guide for managing personal privacy risks in private equity.

Key Points to Assess:

Verification of executive credentials and professional background for accuracy

Checks for compromised credentials or sensitive data linked to executives on the dark web

Analysis of executives’ digital footprint for any activities that may reflect poorly on the business post closing.

13

Cyber Due Diligence Process

01
Phase
Cyber Screening & Portfolio Benchmarking
02
Phase
Threat Analysis
03
Phase
Reporting and Strategic Recommendations
04
Phase
Remediation Oversight & Management

Common Challenges of Conducting
Cyber Due Diligence

While cyber due diligence is essential to protecting deal value and ensuring a smooth transaction, it’s not without its challenges. Private equity firms and M&A advisors often encounter obstacles that can delay timelines, create friction with stakeholders, or leave critical risks unaddressed. Below are some of the most common challenges and how they impact the due diligence process:

Misalignment with IT Stakeholders:

Target companies may be hesitant to disclose sensitive cybersecurity data, particularly befResistance from the target’s IT or security teams is a frequent hurdle. These stakeholders often view the process as invasive or time-consuming, which can result in delays, incomplete information, or outright pushback. Explore our comprehensive guide on actionable strategies to secure IT stakeholder buy-in and streamline the cyber due diligence process.ore deal terms are finalized. This lack of transparency can make it difficult to identify potential vulnerabilities or historical breaches.

Inconsistent Cybersecurity Standards:

Targets, particularly smaller companies or those outside technical industries, often lack the in-house expertise to navigate the complex and resource-intensive cybersecurity assessments typically offered by consulting firms. This challenge is precisely why we developed SwanScreen, our expedited Cyber Screening tool, to deliver focused, actionable insights without overburdening resources or delaying the deal timeline.

Lack of Post-Close Action:

Even when risks are identified, buyers often lack the resources and oversight needed to effectively address these issues post-close. Without a clear roadmap and dedicated accountability, this gap can result in post-acquisition disruptions, integration delays, and unexpected costs that undermine deal value.

Technical Jargon Overload:

Traditional cyber due diligence often produces highly technical reports that fail to provide actionable insights for private equity professionals. Without translating findings into business terms, deal teams can struggle to connect cybersecurity risks to deal value and structure.

Limited Access to Information:

Target companies may be hesitant to disclose sensitive cybersecurity data, particularly before deal terms are finalized. This lack of transparency can make it difficult to identify potential vulnerabilities or historical breaches.

Tight Deal Timelines:

M&A transactions operate under strict deadlines, leaving little time to conduct an in-depth cyber review. This can lead to overlooked vulnerabilities or a rushed assessment that misses critical risks.