how to make a legal due diligence report

How to create a due diligence report: A guide for compliance professionals

Due diligence is a mission-critical process for any organization. A due diligence report consolidates all the information you uncovered during that process so you can make strategic decisions about potential vendors, third parties and even mergers and acquisitions. Understanding how to create an in-house due diligence report is an important step that helps your board make better decisions.

Here we aim to help you better understand the following topics:

• What a due diligence report is
• Who provides due diligence reporting
• What a due diligence report should include and how to write one
• The difference between reports completed by in-house compliance teams and those provided using due diligence technology

What is a due diligence report?

A due diligence report is a summary of the due diligence process. In it, risk and compliance teams will detail the research they completed, the information they uncovered and recommendations for how to proceed with the business relationship.

Based on this due diligence report definition, a thorough report will give executive teams the insights they need to make a strategic decision about the new entity. This can help your organization avoid breaches, leaks and exposure to  bribery and corruption .

Essentially, every time you complete due diligence, you should also complete a report. The report's contents may vary based on whether it’s for a  merger or acquisition , a  third party  or, increasingly, for  data privacy .

Who can provide a due diligence report?

There isn’t one group or team responsible for due diligence reports when you’re creating them inside your organization. The risk and compliance team is typically involved, but different teams within the enterprise should lend their expertise to ensure the report is as thorough as possible. For example, if you’re completing  cyber due diligence , you should include your cybersecurity teams, as they’ll know what to look for.

Many organizations also outsource their reports to external advisors or services.

What should your report include?

A due diligence report aims to recap the process and help your organization use that process to make a strategic decision. With that in mind, most data from due diligence should be in the report. This includes:

• Financial information:  Compile the company’s financial statements, tax returns and relevant documents from its accounting team, as well as any loans or debts.
• Employee information:  Focus on in-depth information about the third-party, relevant details on vendor contacts or profiles on key leaders involved in a merger or acquisition. This is more important than it may seem since  90% of successful deals  effectively identified and targeted essential employees.
• Asset information:  Describe anything the organization owns, from property and machinery to intellectual property.
• Partner information:  Include information on any vendors  or third-party partners that the organization works with. Their  supply chain  can introduce risks to your organization, so you must cover as much detail here as possible.
• Legal information:  Explain any potential legal issues. This includes lawsuits and any existing contracts, permits or licenses.

What should a due diligence report look Like?

There is no single standard for what a due diligence report should look like. The appearance of your report may vary based on the type of due diligence you’re performing, as well as the nature of the business relationship.

Understanding the structure and content of a due diligence report by reviewing a template or examples can help investors better understand the structure and content of these reports. Thus, aiding the preparation for their own due diligence investigations or reviewing reports prepared by others.

Viewing sample due diligence reports can also contribute to identifying critical areas of risk and opportunity associated with an investment opportunity, which can help investors focus their due diligence efforts on areas that are most likely to impact the success of their investment.

How to prepare your report in 5 steps

A due diligence report organizes and presents the information from due diligence in a format accessible and useful to the C-suite. Many organizations follow a  checklist .

To prepare a due diligence report, start by collecting all information and documentation from due diligence, then complete the following steps:

• Write an executive summary:  This should explain the company you investigated and the process you followed, as well as key learnings from the process.
• Include documentation:  Provide documentation that supports your investigation. This can vary based on the type of due diligence but may be legal documents, corporate reports, financial statements, etc.
• Complete a SWOT analysis:  Analyze the business agreement alongside information collected during due diligence to provide strengths, weaknesses, opportunities and threats associated with the partnership.
• Explain any legal information:  Focus on any legal issues that could impact the partnership. This includes any existing debt, liability or financial responsibilities.
• Provide statistics:  Data can provide a brief snapshot of the due diligence process. Include any surveys, analyses, market research or key data points you uncovered during your investigation that might help your CEO make an informed decision.

Can due diligence tools enhance your reporting?

In short, the answer is yes.

While certain aspects of due diligence reports can only be completed in-house, for many compliance teams, the task of completing due diligence and creating and maintaining accurate, up-to-date reports can be time consuming and risky.

Oftentimes organizations find themselves in at least one of the following scenarios:

• Inadequate resources for vetting large numbers of third parties
• Inaccurate or incomplete information due to an over-reliance on self-disclosures and manual searches
• Reports lack depth in areas where the largest risks are posed

The good news is technology can help overcome these challenges to provide more comprehensive information with greater reliability for improved risk analysis, which translates to better business decisions.

Build a more effective due diligence program

Due diligence should be reliable, scalable and effective. Yet, the sheer amount of information and the number of teams involved in both due diligence and its reports can make it difficult to coordinate this effort — even with a thorough due diligence report process in place.

Due diligence services can streamline this process for you by offering a global team of analysts and investigators, risk-based assessments and critical business insights that can be difficult to uncover on your own.

Due Diligence Services from Diligent deliver the intel you need in a format customized to your business, all of which includes real-time insights using Global Database Check (GDC) and comprehensive online research. 

Solutions Solutions

• Board Management
• Enterprise Risk Management
• Audit Management
• Market Intelligence

Resources Resources

• Research & Reports

Company Company

Your data matters.

Legal Due Diligence: Everything You Need to Know

A legal due diligence investigation is done to ensure that the investment or purchase of a business is beneficial by revealing potential liabilities. 11 min read updated on February 01, 2023

Updated Ocotber 16,2020: 

What is legal due diligence.

Legal due diligence is an investigation into a business by re viewing documents and interviewing employees. A legal due diligence investigation is completed when a business or investor is interested in buying a business or investing in that business.

A legal due diligence investigation is seeking information about the business to make sure that the investment or purchase is beneficial. The investigation seeks to reveal all important facts and potential liabilities. Once the facts are collected and analyzed, an informed decision can be made.

There are subcategories of legal due diligence. These subcategories seek more specific pieces of information.

Intellectual property due diligence

Business due diligence

Accounting due diligence

Due diligence is most often performed in preparation for a merger, acquisition, licensing , or other transaction.

Due diligence seeks to understand all of a company's obligations. This includes:

Pending and potential lawsuits

Long-term agreements

Distribution agreements

Compensation

Why is Legal Due Diligence Important?

Legal due diligence is important for many reasons, but most importantly to make informed business decisions.

Understand Your Own Business

Legal due diligence is commonly thought of an investigation performed by one company on another company. Legal due diligence can also be an investigation into your own company.

A legal due diligence investigation into your own company is most helpful if you're considering a merger or major sale. Before negotiations begin, it's important to understand the worth of your business.

A legal due diligence investigation can also help the buyer better understand the company. This includes all of the agreements that make it up.

Value a Target Company

In the same way that a legal due diligence investigation can help your company value itself, a legal due diligence can help you understand the value of another company.

Legal due diligence seeks to understand a value through information on the company's agreements, assets, and potential problems.

Drafting and Negotiations

A large part of a merger or acquisition is negotiating and drafting the agreement.  The good and bad information gathered during the legal due diligence will lend support to the negotiations. This is true whether a merger or acquisition.

The information discovered in a legal due diligence is especially helpful in assessing risk.

Drafting of the agreement is in-depth and complicated. This should be created by an experienced lawyer.

Identify Potential Closing Problems

A legal due diligence may also find potential problems that could delay closing the deal. There are many steps that must be taken before closing. A legal due diligence gathers the information to make that list.

Legal Opinion

A legal due diligence is typically completed by an attorney who specializes in due diligence investigations. The lawyer or lawyers will prepare a legal opinion based upon all of the gathered factual information. Often, a legal due diligence investigation is completed by the selling company and the buying company. This insures an unbiased opinion.

Goals of Legal due diligence

The goal of legal due diligence investigation is to assess the potential benefits and risks of selling or buying another business or business assets. There are two main areas of focus in a due diligence investigation.

Current status

Consequences of potential agreement

At the beginning of a legal due diligence investigation, lawyers are seeking to understand the current status of the business. This includes investigating relevant laws, governing documents, and contracts.

Determining status can also help to value a company and find ways to potentially improve that value.

Consequences

Along with the good, lawyers must establish a company's negative qualities during a legal due diligence investigation. This includes seeking potential problems with the transfer of assets or potential litigation.

When is Legal Due Diligence Necessary?

Legal due diligence is most common in two situations:

Sale of the proprietary rights to goods or services

Sale or purchase of a business in a merger, acquisition, or partnership

The sale of proprietary rights to goods has become more common in the digital age. With the sale of intangible goods and trademarked intellectual property, an investigation into right to use and ownership is very important.

Legal due diligence investigations are must more comprehensive for a merger or acquisition. There's simply more information to sift through and investigate. Mergers often include intellectual property and digital information now as well.

Legal Due Diligence Process

A legal due diligence investigation takes place in three stages.

Preparation

Investigation

The most time-consuming part of the process is the investigation or the gathering of facts.

This stage of the legal due diligence is to set goals and priorities. Often there is one central goal or multiple smaller important goals that stand out from the rest. Legal due diligence investigation are often limited by time and budget pressures. It's important to prioritize what information is most important.

During the investigation a lawyer or team of lawyers collect facts and documents. The findings will allow them  to formulate a legal opinion as to whether the sale or purchase is worthwhile. There are many parts to the investigation.

Establish the Big Picture. This comes back to the goal of the investigation. It's important to formulate the investigation around the central question or goal. This is also a good time to help the investigating lawyer understand the broad overview of your company.

Provide Documents and Interviews. The list of documents and interviews necessary for a legal due diligence investigation will likely surprise you with its length. The list of documents requested will likely be more documents than are actually necessary. The lawyer's job is to create a full picture, which means being thorough in gathering information. Consider making one of your c-level officers available to answer questions. Interviews are an efficient way to gather information.

The results of a legal due diligence investigation are revieled at the end of the investigation. In the results, the lawyer will present the data in as concise way as possible. The lawyer will also present a results summary which will point out the most important discoveries.

The results may also provide analysis or opinion. The lawyer may offer an opinion as to the validity of the sale or purchase.

The results may be provided in written format or verbal conversation. This depends upon the size of the investigation and the preference of the lawyer and the client.

Presentation of Legal Due Diligence Investigation Findings

The findings of a legal due diligence investigation are really only important to a buyer and the buyer's counsel.

The buyer will typically want the due diligence finding to be presented in a compact and user-friendly way. The presentation can take many forms:

Verbal conversation: This is a great method for small deals or a buyer who is concerned about cost.

Memorandum: This memorandum can greatly range in length and depth. For larger deals, the written document will be longer.

Whichever form it takes, the presentation of the legal due diligence investigation findings should describe all of the reviewed documents, analysis of key issues discovered, and make recommendations as to a solution to presented issues.

If you are having a due diligence investigation performed, be clear with your expectations. Be specific on how you would like information and issues presented to you at the end of the legal due diligence investigation.

Documents Examined During a Legal Due Diligence Investigation

There are many types of documents that are examined during a legal due diligence investigation. The documents provide information about the company and it's current performance.

Organizational Documents

This section includes documents such as:

Certificate of incorporation

Company by-laws

Limited liability agreement

Stockholder agreement

Common problems to look for here include:

Ownership: By looking through these documents, the lawyer is looking to establish who owns the company's equity. This establishes the majority equity owners and any subsidiary owners. This will also attempt to show if there will be any issues when acquiring the company.

Consent: What actions of the sale will require consent? From whom?

Transfer: Are there any restrictions on transferring company equity? Do equity holders have rights?

Dividends: What is the dividend policy? How can it be changed?Unusual points: Are there any points of agreements that seem unusual? Is there anything strange that could effect the transfer of the company?

This part of the investigation looks at all of the contractual agreements that the company is a part of. This includes:

Customer contracts

Supply contracts

Operating contracts

Parties: What parties have entered into the contractual agreement?

Change of control: Do the contracts provide regulations for a change of control?

Assignment: Can the contract be assigned? What are the provisions for an assignment?

Termination: What is the contract's termination policy?

Economics: What are the contractual agreements on economics? Can they be changed?

Merger and Acquisition Agreements

This section looks for any provisions for a potential merger or acquisition.

Parties: Who is part of the agreement?

Purchase price: Are there any purchase price adjustments that affect the business?

Escrow: Are there any escrow accounts? What funds are in the accounts? How will the funds be used?

Survival of warranties, representations, and indemnification : Does the business anticipate further indemnification claims?

Unusual provisions: Look for non-compete obligations and agreements.

Finance Documents

This part of the investigation looks at all financial documents. This includes:

Loan agreements

Hedging agreements

Promissory notes

Common problems to look for here:

Parties: What parties are named on the contract?

Basic terms: Is there outstanding debt? Are there loans?

Contingent obligations: This includes guarantees.

Restrictive covenants: Look for restrictions that could affect future transactions and operations.

Change of control: Are there any provisions for change of control?

Liens: Are there any liens on the business?

Any current or potential legal issues should be examined here. This includes:

Pending claims: How many pending claims? What is the damage estimate?

Litigation history: What claims have been paid in the past? Any class action lawsuits?

Litigation trends: What types of litigation has the company been involved in? What are the average damage costs?

Legal Due Diligence Checklist

When completing a legal due diligence investigation, it's common for lawyers to use a due diligence checklist to create organization. The checklist should include a suggested list of documents to gather.

The legal due diligence checklist is also used to keep the investigation focused on the primary goals. The due diligence checklist can also improve the efficiency of the investigation.

Example of Legal Due Diligence Checklist

The following information is an example of what should be included on a due diligence checklist.

Legal Documents

A list of all company subsidiaries, direct or indirect

Company capital

Number of authorized share for each class or series of stock

The number of issued and outstanding shares of each class or series of stock

The record owners of each class or series of stock

Company bylaws or articles of organization

Meeting minutes from stockholder meetings, board of director's meetings, and any committee meetings for the past three years

Stockholder agreements relating to management, ownership, or control of the company

Documents pertaining to prior financings or equity issuances. This might include:

Stock purchase agreements

Stockholder agreements

Registration rights agreements

All correspondence between the company and the directors that relate to:

Stock records

Transfer ledgers

Other records

Any documents issued by the company such as options, purchase rights, and warrants. These documents must include:

Name of the holder

Number of options

Rights or warrants issued

Date granted

Option or purchase price

Position of the holder within the company

Address list of all land, buildings, and improvements leased or owned by the company.

All pertinent government permits, licenses, or authorizations. This should include all related correspondence.

And federal, state, or local regulatory agreements in which the company is a party.

Example of Legal Due Diligence

A legal due diligence investigation can take many forms and gather many different types of information. Each legal due diligence investigation will be unique.

Take the example of a property transaction. This type of legal due diligence will need to assess:

Environmental liabilities

Real estate records

Liens on the property

Itemized list of necessary repairs

Deferred maintenance items

Compliance issues

Building code requirements

ADA regulations

The nature of the legal due diligence investigation depends upon the transaction.

Intellectual Property Map

A legal due diligence investigation gives the owner an opportunity to create an intellectual property map also known as an IP map.

An IP map documents:

Each component of IP

The inventor or creator of each IP component

The current owner or licensee of the IP component

Identifies the chain of ownership from inventor to owner to licensee. This cross references multiple supporting documents that validates each link. These documents might include:

Employment contract

Collaboration agreement

Joint venture agreement

Assignment from a student

Assignment from a contractor

Consultancy agreement

Material transfer agreement

Consent from a joint owner

Many others

There are two main goals of an IP map:

Facilitates an IP owner in undertaking a legal due diligence investigation. It helps to identify any gaps or problems. It begins the process of fixing any gaps or problems.

• The IP map can be presented to anyone who is interested in the IP and who might want to perform their own legal due diligence. This document may be able to help speed up any purchases or sales that are being done.

Proof of Due Diligence

A due diligence affidavit is provided to prove efforts made.  Often this is the case of an attempt to serve papers. The affidavit will list each attempt to serve the papers. The affidavit might also list the efforts made to locate the person being served.

The affidavit is used to show a court that all legal obligations to notify the person have been met.

How Long Does Due Diligence Take?

Legal due diligence investigation take a proportional amount of time to information. The more information that needs to be investigated, the longer the investigation takes.

A legal due diligence investigation can take anywhere from a few days to several months. The size of the company also plays a role in the length of the investigation.

The time required for the legal due diligence is determined by the buyer. Once the buyer is satisfied that enough information has been gathered, the investigation is completed.

A mistake that is commonly made is not leaving enough time to complete a thorough due diligence investigation. The limit may be due to time or budget.

Common Mistakes

Not Enough Resources

It's common for legal due diligence investigations to be limited by time and budget. This limitation can result in a lack of thoroughness. If the investigation isn't thorough, important potential problems may not be identified.

Not Completed

Some companies choose not to complete a legal due diligence prior to a sale or purchase. This greatly increases the risk of potential problems in the transaction.

Some problems may not appear for extended periods of time. There is no legal recourse for solving those problems after the transaction is complete.

Whether intentional or unintentional, owners, managers, employees, or researchers may influence the results of the legal due diligence investigation. This influence may taint the outcome of the legal due diligence investigation.

If the investigation is being done by in-house lawyers, consider getting a second opinion from unbiased lawyers.

Check Legal Coverage

The potential legal risks are often the most important aspect to assess in a legal due diligence investigation. It is pertinent to not skip this aspect of the investigation.

Protection From Mistakes

It is becoming more common for businesses to seek extra protection when entering into a transaction such as a merger or acquisition.

This extra protection can come in the form of special insurance. This insurance is known as "representations and warranties liability insurance." This insurance basically protects a business from wrongful acts.

Wrongful acts might include:

Misstatements

Misleading information

If you're considering merging with or acquiring another business, a legal due diligence investigation is in your best interest. A legal due diligence investigation provides insight into the new business. It also gives you an information to make an informed decision.

A lawyer who is knowledgeable in legal due diligence can help you complete the investigation. Consider hiring one of UpCounsel's knowledgeable lawyers.

Frequently Asked Questions

• What is legal due diligence?

Legal due diligence is an investigation into whether a business transaction is worthwhile. This type of transaction might be a merger or acquisition.

• When do I need legal due diligence?

A legal due diligence investigation is necessary anytime there is the sale or purchase of another business. It might also be necessary when evaluating the purchase of proprietary goods or services from another company.

• What's the cost of legal due diligence?

A legal due diligence investigation ranges in cost. The cost of the legal due diligence investigation is proportionate to the amount of research necessary.

Get Legal Assistance

If you are looking for help with legal due diligence as well as general advice along the way, you can post on UpCounsel to receive free custom quotes from the top 5% of attorneys with experience in your area. Customers have typically saved up to 60% on legal fees in comparison to large law firms. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures and Airbnb.

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Content Approved by UpCounsel

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• Legal Aspects of Mergers and Acquisitions
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The Ins and Outs of Legal Due Diligence

Kison Patel is the Founder and CEO of DealRoom, a Chicago-based diligence management software that uses Agile principles to innovate and modernize the finance industry. As a former M&A advisor with over a decade of experience, Kison developed DealRoom after seeing first hand a number of deep-seated, industry-wide structural issues and inefficiencies.

One area of the due diligence process stands head and shoulders above the others in terms of its complexity and its importance: Legal Due Diligence (sometimes referred to as ‘LDD’).

While it is possible to conduct due diligence yourself, the scope of legal due diligence, taking in everything from IP to litigation, may be too much for your in-house counsel.

Some of the ins and outs of the legal due diligence process are covered below.

Why conduct legal due diligence?

The purpose of legal due diligence is to gain a legal perspective on the target company . As with any component of the DD process, the ultimate aim here is to ‘check under the hood’ and ensure that everything is in order.

Buyers, or rather buyers’ legal team, approach the legal due diligence process by asking: “Is there any legal reason that we shouldn’t acquire this firm?”

This question needs to be fleshed out. Few target companies are likely to have a completely clean slate when it comes to their legal history.

Common examples include HR issues with departing employees or contractual disputes with suppliers or clients. Your legal due diligence process should set out to find the ‘red line’ issues, the deal-breakers.

What does legal due diligence cost?

Legal due diligence isn’t cheap, but it’s a lot cheaper than finding some legal skeletons in the closet six months after the deal has closed. It’s a necessary expense.

Don’t cut corners or you may end up paying the price down the line. Instead, create an agenda with the legal experts you hire, establishing where and when the costs will arrive so that everyone knows what to expect.

Legal due diligence on the sell-side

It’s good practice for owners on the sell-side to have conducted at least part of the legal due diligence. Having an external attorney sign off on some of the internal legal workings of your company is a courteous way to treat buyers.

It also speeds up the process and better prepares your business for a frictionless and timely sale. Furthermore, if both companies have in-house legal teams, this also provides a useful opportunity for an icebreaker between the two teams.

Ensuring a smooth process

The most efficient way to conduct legal due diligence is by using a virtual data room for legal due diligence , which will be shared between the buy side, the sell side and the legal teams on both sides. The buy side, in tandem with their attorney, should agree to a checklist of legal documents that will be requested from the sell side.

It’s important to establish some order at the outset. Begin processes which inevitably take longer first, allowing the typically faster items till last.

Your attorney will know from experience which documents take longer but a good rule of thumb is, the further back you go with a document which can’t be retrieved in-house, the longer it’s likely to take to process.

Obtaining a legal opinion on the target firm

Even if your legal due diligence process doesn’t raise any red flags, there will always be some element of risk.

This is where legal due diligence is subtly different from other parts of the process: Many of the risks you’re trying to uncover here won’t be hiding in plain sight - it will involve asking questions about what might be, not what has been.

To take one example, suppose you’re acquiring a small pharmaceutical firm that sells drugs with some potential side-effects that haven’t caused any issues until now.

• What are the side-effects and what kind of liability would they endow your company with should one of your customers be hit with them?
• Or several customers?
• Or even worse side-effects?

Answering questions like these is where your highly priced legal team pay for themselves: They’ll provide you with an expert legal opinion on whether you should acquire the company from a legal perspective.

The answer will rarely be a straight ‘yes’ or ‘no,’ but at least you’ll be making a far more informed decision on the back of their advice.

Legal due diligence checklist 

Having a checklist in place helps to keep everyone organized and on-task during due diligence.

The following are some examples of what you can expect to see in a checklist during legal due diligence.

ITEMS IN GENERAL LEGAL DUE DILIGENCE INCLUDE:

• Copies of agreements or instruments that place restrictions or encumbrances on assets.
• Contracts that restrict the target's right to conduct its business.
• Contracts with obligations such as covenants and indemnification.
• Summary of the target's compliance program and copies of all policies, procedures and other related documentation.
• Confirm that the firm is not restricted from doing business under OFAC regulations or similar.
• Confirm whether the target has any direct or indirect presence and/or other engagements.
• Summary of regulations applicable and/or its business, and anticipated changes
• Copies of any letters with any regulatory agencies or authorities.
• List of states and countries in which the target has operations.
• Good-standing certificates or qualification to do business from state of incorporation and states where qualified.
• Schedule of any significant U.S. import or export restrictions that relate to the target's operations.

Organization/Ownership

ITEMS IN ORGANIZATION/OWNERSHIP DUE DILIGENCE INCLUDE:

• List of current shareholders detailing the amount of shares each owns.
• List of stock transfer records.
• List of stock broker contracts and agreements.
• Evidence that outstanding stock is paid in full.
• Identify issues associated with transfering equity.

ITEMS IN LITIGATION DUE DILIGENCE INCLUDE:

• List of all threatened, pending, current, and closed litigations from the past five years.
• List of arbitrational procedings from the past five years.
• Summaries of current and closed governmental investigations and proceedings on the target, directors, and executives from the past five years.
• Responses from the company regarding audit inquires.
• List of all statutory orders, decrees, and rulings to which the company be subject.

Product/Service

ITEMS IN PRODUCT/SERVICE DUE DILIGENCE INCLUDE:

• Detailed list of all products and services.
• Verify compliance with FDA, CPSC, OSHA, and FLSA regulations for products, services, and operations.
• Copies of all product warranties.
• Summary of all material warranty claims brought.
• Summary of all product recalls.
• Identify potential liabilities associated with products/services.

Contacts/Obligations

ITEMS IN CONTACTS/OBLIGATIONS DUE DILIGENCE INCLUDE:

• Copies of service contracts.
• Copies of vendor contacts.
• Copies of customer contracts and obligations.
• Copies of outstanding contracts to purchase machinery or real estate.
• Copies of contracts for construction, architectural or engineering services for any buildings or improvements.
• Copies of operating contracts.
• Copies of employee contracts and retirement agreements.
• Change of control regulations.
• Copies of material contracts that are terminable upon a change of control or other corporate transaction.
• Copies of all joint venture, partnership, and franchise agreements.
• Identify any contracts or provisions that may be out of the ordinary course of business.

Permits/Licenses

ITEMS IN PERMITS/LICENSES DUE DILIGENCE INCLUDE:

• Summary of permits, licenses, and other authorizations including any required export control and pertinent governmental licenses.
• Summary of icense, sublicense, royalty and franchise agreements.
• Schedule of permit and license renewals and associated fees.
• Copies of automobile registrations.

Intellectual Property

ITEMS IN INTELLECTUAL PROPERTY DUE DILIGENCE INCLUDE:

• List of all patents, trademarks, trade-names, service marks and copyrights held or applied for.
• List of the creator(s) for each IP component.
• List of all patents, trademarks, and copyrights held by an employee, shareholder, director or any other affliated that are used by the target.
• Summary of material trade secrets.

Material Assets

ITEMS IN MATERIAL ASSETS DUE DILIGENCE INCLUDE:

• List of equipment
• List of real estate of a company
• Summary of inventory stock
• Technology summary

HR/Operations

ITEMS IN HR/OPERATIONS DUE DILIGENCE INCLUDE:

• List of all employees including those covered by any disability legislature in the company.
• List of OSHA citations, employee health issues related to the target, and any other adverse environmental or occupational safety or health condition or concerns.
• History of all sexual harassments accusations, charges, and convictions from the past five years.
• Copies of all current employment applications, interview guides, and hiring procedures.
• Verify compliance with equal employment opportunity and anti-discrimination legislature.
• Summaries of disciplinary and termination procedures and all involuntary employee terminations from the past five years.
• History of Unemployment and Worker’s Compensation claims.
• Verify compliance with Fair Labor Standards Act, i.e. minimum wage, child labor, etc. (if U.S. based).
• Ensure employee personnel files and Form I-9s (if it is United States-based company) are in compliance with legal standards.
• Copies of all SBCs for current benefit plans.
• Copies of all union and labor contracts.
• History of labor-related disputes, grievance procedings, and arbitrations.

Get your complete legal due diligence checklist here

Legal due diligence in a foreign country

The importance of conducting legal due diligence when acquiring a foreign firm, entering a joint venture or beginning a business partnership cannot be overstated.

This is as true for foreign companies coming to the United States as it is for American companies moving abroad: Different legal environments bring new risks. Accordingly, they require proper assessment.

When looking into acquiring a company in a foreign jurisdiction, shop around among the local legal firms, seeing which ones best fit your requirements in terms of service and cost.

If the transaction is closed, the relationship with this legal team may become long-term, so it’s worth putting extra time in at the outset to make sure it’s a fit for your firm.

The conclusion is simple: Conduct high-quality legal due diligence now to minimize the chances of unwanted legal liabilities after the transaction has closed.

The universe of legal issues in M&A is too complex to leave to chance. By conducting a thorough LDD, you give your acquisition every chance to create long-term shareholder value.

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Due Diligence Report: A Definitive Guide (+ Checklist)

Kison Patel is the Founder and CEO of DealRoom, a Chicago-based diligence management software that uses Agile principles to innovate and modernize the finance industry. As a former M&A advisor with over a decade of experience, Kison developed DealRoom after seeing first hand a number of deep-seated, industry-wide structural issues and inefficiencies.

What is a Due Diligence Report?

A due diligence report is a comprehensive, objective, and factual report into the current state of a company, organization, or property.

The document is the principal output of the due diligence process , which is an investigation or analysis of these same entities. The content, structure, and audience of the due diligence report can vary depending on the industry or the context of the entity undergoing due diligence.

In this article, FirmRoom looks at the importance of this document, how it is constructed, and why no good due diligence process is complete without one.

Why is a Due Diligence Report Critical for Business Success?

Good business outcomes are based on informed decision making.

In general terms,assuming rational actors, the more informed the decision making, the better the outcomes. The role of due diligence, and by extension the due diligence report, is to lead decision makers to a situation where they have the information they need to generate value for themselves, their company, or their organization.

The due diligence report can be impactful in a wide range of situations.

For example:

Investments

Whatever the investment (a company, piece of machinery, property, etc), a due diligence report can highlight what the investor should know in order to decide i) whether an investment should be made, and ii) a suitable offer price.

Company/Organizational Maintenance

Even for those who aren’t looking for an immediate transaction, such as company owners, can benefit from a due diligence report. Think of all those corporate scandals that might have been stopped in their tracks by company shareholders with a thorough due diligence report.

Project Feasibility

Large projects require significant due diligence to prove their sustainability. For a large infrastructure project, in addition to financials, this can include environmental impact reports, community feedback sessions, and cost benefit analyses, all of which would find their way to the due diligence report.

Partnership Evaluation

Whenever a company or organization is about to jump into a new partnership, it should only do so after becoming fully informed of the counterparty. This is true whether it’s suppliers, contractors, or JV partners. Good characters tend to produce better results, so it pays to ensure that the other side is a good character.

Taking these three contexts, we can apply them to any number of companies, organizations, markets, and industries.

Importance of Due Diligence Report

For argument’s sake, let’s look at the case of a hypothetical big box food retailer.

A due diligence report for such a company could include:

• Analysis of the supply chain to ensure that foodstuffs are being produced sustainably.
• Surveys of employees to check that all employees are being treated fairly and feel safe in the workplace.
• Surveys of customers, online and instore, to ensure that the company’s value proposition is suitable for their requirements.
• Environmental/commercial/traffic impact assessments of new store openings.
• Reports into new product development.
• Market reports showing growth of consumer demand in certain areas.

Without a due diligence report, a company risks making decisions without any or all of this information.

The consequences of this can sometimes be disastrous. Looking at real-life examples of retailers who failed to conduct adequate due diligence in different circumstances, we see that failure to generate a due diligence report can ultimately lead to billions of dollars in value destruction.

Examples include:

• In 2013, UK food retailer Tesco conducted a review of its supply chain which found that 37% of its beef products tested positive for horsemeat.
• In 2019, Walmart had to pay $282 million having being found of paying illegal bribes to foreign officials across Latin America to obtain construction permits .
• In 2003, UK food retailer Morrison’s acquired rival retailer Safeway, later admitting that it failed to conduct adequate due diligence . In 2023, the merged firm was taken over by a private equity fund, under whose management it continues to hemorrhage cash.

These are just some of the high-profile cases. And the ones that come to light. With several tiers in a typical supply chain, retailers are constantly exposed to numerous risks that place their business in jeopardy.

Ongoing due diligence, with a comprehensive due diligence report communicating findings (and minimizing legal risks) is invaluable in companies like these.

Types of Due Diligence Reports

Due diligence reports on acquisitions tend to cover every part of a target company’s operations and its environment.

Most due diligence reports, however, whether conducted internally or by third parties, will tend to focus on certain aspects of the business.

In the case of the food retailer, due diligence into supply chain partners would usually amount to a single due diligence report.

Essentially, there are as many forms of due diligence reports as there are due diligence.

When examined in isolation, it could mean that a company or organization is particularly concerned with certain findings of a broader due diligence and is deciding to double down on it, or because one part of the usual due diligence framework is considered so important that it merits its own report.

Examples here include:

Financial due diligence report

The most likely due diligence report to be produced in isolation. The financial due diligence report will often involve forensic accounting teams, who investigate the accounting practices, controls, and results of firms.

The recent accounting scandal exposed at Brazilian retailer Americanas, which used zero based budgeting (ZBB), arose because of an internally conducted financial due diligence report.

Legal due diligence report

There’s a good chance that legal due diligence reports are conducted on individuals as much as companies. These due diligence reports are sometimes called ‘background checks’ and can involve everything from checking the criminal records of an individual to legal proceedings involving members of a company’s board of directors.

Technical due diligence report

Acquisitions involving IT firms will almost certainly include an independent technical due diligence report because of the importance of these companies’ technical aspects to their overall value. These reports look at everything technology-related, from a company’s technology stack to its IT support.

Intellectual property due diligence report

Companies that achieve ‘unicorn’ status often do so through holding patents. Uber, for example, has nearly 300 patents registered under its name. For anybody seriously interested in understanding Uber’s future prospects, that’s a lot of due diligence and inevitably, it leads to an IP due diligence report.

Vendor due diligence report

This is essentially a detailed report into a company’s vendors and its supply chain. This form of due diligence report has become increasingly popular over the past two decades, as companies seek to ensure that their supply chains are sustainable (i.e., fair wages, sustainable production practices, etc.).

Internal vs. External due diligence reports

Ultimately, the biggest driver of whether a due diligence report should be internal or external is what it’s looking to achieve.

If there’s an attempt to expose some dodgy dealing by company management, it makes little sense to ask them to conduct internal due diligence.

On the other hand, if the goal is to find the reason for company underperformance, it may be better to conduct internally, hitting up those with intimate knowledge of the company for their insights.

Components of a comprehensive due diligence report

Let’s look at a general due diligence report, considering a large sized company for a joint venture with another company.

DealRoom has already provided a template for a due diligence report , which can be seen here.

The sections required in a typical report, include:

Executive Summary

Where the most important issues uncovered (or, perhaps even more importantly - issues which remain uncovered), by the due diligence process are highlighted for the reader.

Aims of the document

Whereby the document outlines the express aims of the due diligence process. It’s possible that by reading this, the reader might suggest alternative approaches to future stages of the due diligence.

Functional areas of due diligence

Whereby due diligence is conducted across the financial/legal/operational/HR/technical components, and the findings for each are clearly summarized. Each section may include its own executive summary in order to highlight the most important aspects of that function in the company.

Suggested next steps

Based on the findings of the due diligence report, the authors may decide to include next steps. This could be further due diligence, following up on some areas, or even calling off the investment/M&A/partnership, etc.

How to Write a Due Diligence Report Step-by-Step

Consider the following broad pieces of advice, when writing a due diligence report:

Assign a limited number of authors

A limited number of authors should work on the document. This tends to reduce delays by focusing responsibility. These should be involved in the due diligence process from the outset, enabling them to take notes for the report as the process progresses.

Reduce content

If it cannot be written in 20 pages, it cannot be written in 200 pages. The aim of the due diligence report is to provide an informed conclusion, not to write a document for a document’s sake. Whoever is reading the document is likely to be time constrained. They will thank you for coming to the point.

Be specific

Related to the previous point is the need to be specific. When putting the document together, always ask ‘what is the point of this section?’ and this should be followed up by ‘what do I need to say to get this across as quickly as possible?’ Flowery language has no place in these documents.

Use a report template

The due diligence process itself will tend to influence the headings in a due diligence report. That is, certain issues raised in due diligence, by their nature, will merit their own headings. That said, a due diligence report template is an excellent idea, providing a roadmap even for experienced report authors.

Due Diligence Report Templates and Examples

FirmRoom regularly works with companies and organizations putting together due diligence reports.

This is a natural extension of our due diligence software, and the two have been developed to complement each other. These reports can be tailored to an individual context (company size, industry, issue).

Leveraging Technology for Efficient Due Diligence Reporting

A due diligence report is only as good as the due diligence that underpins it.

This requires technology and a due diligence project management platform like FirmRoom.

Our solution has evolved over the past decade to become the choice of those conducting the most rigorous due diligence processes, be those billion dollar acquisitions, large legal cases, or simply conglomerates conducting a deep dive into their operations.

Our solution focuses on security, organization, and collaboration - three components that all the best due diligence processes have in common.

A due diligence report can be conducted by everyone from individuals to large organizations, and for a wide number of purposes.

A well put together due diligence report enables the reader to become informed, thus making better decisions. The document should communicate what decision makers need to know, giving the document an important role in a company’s management decision making process.

Frequently Asked Questions (FAQs)

What is a due diligence report.

A due diligence report is a comprehensive document that communicates the findings of a due diligence process, highlighting the most important issues uncovered by the process.

Who should write a due diligence report?

A trusted individual, internal or external to the company, with the ability to interpret and communicate large amounts of information should be entrusted with the due diligence report.

Quick Links

Training & Support

Due diligence report: What to include and how to write

Table of content.

Due diligence all too often becomes an exercise in verifying the target’s financial statements rather than conducting a fair analysis of the deal’s strategic logic and the acquirer’s ability to realize value from it

A comprehensive due diligence report can address this challenge by providing a thorough analysis of the deal’s strategic alignment, potential risks, and opportunities for value creation.

The article explains what a due diligence report is, how to write it, and why using due diligence software can be beneficial.

What is a due diligence report?

A due diligence report contains a detailed summary of the due diligence findings, covering the financial, legal, operational, and strategic aspects of a business or investment opportunity. 

The due diligence report is typically written by the due diligence team, which may include professionals (financial analysts, lawyers, accountants) from the acquiring company, investment bank, or external consulting firms hired to conduct the assessment. 

Creating due diligence reports helps investors and businesses to:

• Assess risk Investors can evaluate the risks associated with a potential investment, such as financial, legal, operational, and market risks.
• Identify opportunities Investors can uncover growth, expansion, or optimization opportunities within the target company.
• Make informed decisions Investors can make more informed decisions about whether to proceed with an investment, negotiate terms, or terminate a deal.

The information included in a due diligence report can vary depending on the deal type:

The type of information included in the report will also depend on the type of due diligence. For example, a financial due diligence report may focus on analyzing the company’s financial statements and tax returns while a vendor report may include information about suppliers or third-party partners that the target organization collaborates with.

Tip : A due diligence questionnaire is a great tool for streamlining the due diligence and report creation processes. It consists of a set of questions aimed at gathering detailed information from the target company or individual. It covers topics like finances, legal matters, operations, and compliance.

What to include in your due diligence report?

The due diligence report format may vary depending on the type of due diligence and its purpose. Here’s what’s commonly included: 

• Executive summary Begin with a short and straightforward summary of the key due diligence findings. This section should provide a quick overview for stakeholders who may not have enough time to review the entire report thoroughly.
• Company overview Give a quick overview of the company, its history, mission, products, target market, and achievements.
• Purpose of due diligence Clearly state why the due diligence is conducted. Is it for an acquisition, merger, investment, or other reasons?
• Financial due diligence Provide information on the company’s financial performance. This includes income statements, balance sheets, cash flow statements, and other relevant financial metrics. Additionally, assess any outstanding loans, debts, or financial obligations to understand the company’s financial health. 
• Legal due diligence Give an overview of any existing legal issues, including ongoing lawsuits, disputes, or regulatory challenges. Review contracts, permits, and licenses to ensure compliance with legal requirements. Identify any potential liabilities or risks associated with legal matters that could impact the organization’s financial performance or reputation.
• Operational due diligence Evaluate the efficiency of the company’s operations, covering production processes, supply chain management, and organizational structure. Also, assess management practices, IT infrastructure, customer relationships, and key agreements.
• Market due diligence Provide an overview of the company’s marketing and sales strategies, including competitive analysis, market trends, and growth opportunities. Evaluate customer segmentation, satisfaction, and retention rates to identify growth opportunities.
• Regulatory and environmental due diligence Review the company’s commitment to environmental sustainability and social responsibility, analyzing policies regarding energy consumption, waste management, and diversity initiatives.
• Asset information Provide an overview of the organization’s assets, including physical assets such as property, machinery, and equipment, as well as intangible assets like intellectual property, patents, and trademarks. This helps assess the company’s overall worth and potential for future growth.
• Risk management Provide a summary of operational, financial, and strategic risks, along with risk management policies and insurance coverage details. This section should describe potential vulnerabilities and mitigation measures.
• Future growth prospects Assess the company’s potential for future growth and expansion, identifying growth opportunities, strategic partnerships, and acquisition targets. Provide recommendations for maximizing growth potential.
• Conclusion and recommendations Summarize key findings and recommendations, describing identified risks and opportunities. Offer actionable steps for addressing issues and achieving long-term success.
• Appendix Include relevant supporting documents, such as contracts, legal filings, financial models, and market research reports. The appendix should provide additional context for the findings presented in the report.

How to write a due diligence report in six steps?

Creating a comprehensive due diligence report requires adherence to best practices at each step of the process. Here are some guidelines to follow:

• Include only relevant information. Don’t include every piece of information gathered during the investigation. Focus on data that can potentially influence the decision-making. Eliminate irrelevant details.
• Know who you write for . Keep the target audience in mind when writing the report. Typically, it will be senior executives or stakeholders, as they are obliged to make strategic decisions. Bear their needs and preferences in mind and ensure the report is easy to understand.
• Use templates. Leverage a due diligence report template to streamline the writing process and ensure consistency. A template provides a structured framework for organizing information effectively. You can also customize the template to suit the specific requirements and objectives of the due diligence.
• Review and revise. After completing the initial draft, review and revise the report thoroughly. Ensure accuracy, coherence, and relevance of the content. Edit and eliminate irrelevant information. Consider seeking input from colleagues.
• Take enough time . Take the time to conduct thorough research and document findings comprehensively. Rushing through the task may compromise the quality and accuracy of the final output.
• Seek clarifications and legal assistance. Look for support or seek clarifications during the due diligence process and the report creation. If needed, engage legal experts to address legal or compliance issues and ensure thorough risk assessment.

How can due diligence software help with reports?

Due diligence software , also known as a virtual data room, is a secure online platform used for storing, sharing, and managing sensitive information during the due diligence process. It can also help streamline the process of creating due diligence reports by providing various tools and features.

One of the providers offering such tools and features is iDeals — a secure data room solution created back in 2008 and now serving over a million users globally.

Here’s the functionality it provides:

• Data storage and organization Centralize and organize all relevant information in one secure platform. With all data readily accessible, creating a comprehensive report becomes much easier and less time-consuming.
• Document management Easily upload, categorize, track, and manage the documentation involved in the due diligence, simplifying and streamlining the process.
• Collaboration tools Due diligence often involves multiple team members or stakeholders contributing to the investigation. iDeals due diligence software facilitates collaboration by offering functionality like real-time document sharing, commenting, version control, Q&A section, and notifications. 
• Security iDeals offers advanced security functionality to ensure the secure creation of reports within its platform. This includes features like two-factor authentication, granular 8-level permissions, user access expiration, dynamic watermarks, redaction, and fence view.
• Customer support services iDeals provides 24/7 customer support via chat, phone, and email, with respective response times of 30 seconds, 25 seconds, and 30 minutes. Its average case resolution time is just five minutes, ensuring users receive timely assistance throughout the due diligence report creation process.

iDeals virtual data room offers a free demo and a free trial. If you’re interested in exploring the solution, contact our team and test the platform yourself.

Key takeaways

• A due diligence report is a comprehensive document summarizing the findings of due diligence, covering financial, legal, operational, and strategic aspects of a business or investment opportunity.
• Due diligence reports help investors and businesses assess risks, identify opportunities, and make informed decisions about potential investments, mergers, acquisitions, or partnerships.
• Due diligence reports typically include an executive summary, company overview, purpose of due diligence, financial analysis, legal review, operational assessment, market analysis, regulatory compliance, asset information, growth prospects, recommendations, and appendix.
• Best practices for writing an effective report include focusing on the key details and adding only relevant information, using due diligence report examples, reviewing and revising the draft carefully, and seeking clarifications or legal assistance when needed.
• Due diligence software, such as iDeals virtual data room, offers features for data storage, organization, document management, collaboration, and security, streamlining the report creation process.

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A proper due diligence report is key to finalizing an investment, merger, acquisition, or legal agreement. The due diligence report offers a comprehensive exploration and explanation of a property, a company’s financial records , or a target company’s overall standing in the marketplace.

The information in a commerical due diligence report varies depending on the industry and the purpose. If two companies are partnering, both parties will provide an M&A due diligence report. On the other hand, a financial institution may create a customer due diligence report to determine any potential risk a customer may pose to the bank.

Table of Contents

Who Writes a Due Diligence Report? 

The people who participate in the due diligence process, likewise, vary based on the type of due diligence report. In general, stakeholders in the deal will contribute their knowledge, as well as subject matter experts within the organization. 

Often, a company will have a due diligence team that will spearhead the research, organize the data, and write the report. A company’s attorneys will also play a role.

Sometimes, companies will bring in a third-party organization to assist with the due diligence process. If you choose this option, it’s important for your own attorneys, company stakeholders, and subject matter experts to collaborate. Due diligence shouldn’t be fully outsourced. 

What Is a Due Diligence Questionnaire? 

A due diligence questionnaire helps guide the investigation process, where parties gather information to compile the report. You will present the due diligence questionnaire to the other party in the deal, so they can answer questions that will help you complete your due diligence report. 

The questionnaire may also go out to potential buyers, customers, partners, or suppliers, depending on the investment or deal in question. In each case, it will present different questions .

You can download due diligence questionnaire templates and then customize them for your particular needs, whether you are doing M&A due diligence, due diligence for real estate, or due diligence if you’re purchasing a business. 

What To Include in a Comprehensive Due Diligence Report

In broad terms, your due diligence report should begin with an introductory statement describing the purpose of the report: 

• Is it to find private equity investors or secure funding?
• Is it to initiate a sale, merger, or acquisition? 
• Is it to invest in property? 
• Is it to go public with a company?

The purpose of the report will drive its structure, the research needed, and the data presented. Across most industries, a comprehensive due diligence report should include the company’s financial data, information about business operations and procurement, and a market analysis. It may also include data about employees and payroll, taxes, intellectual property, and the board of directors . 

Your Complete Due Diligence Checklist

Your due diligence report can help determine a company’s valuation and enable private equity investors , business partners, and other stakeholders to make a more informed decision regarding the target business ’s future. 

Following a due diligence checklist can ensure your due diligence report:

• Conveys all the information necessary for educated business decisions
• Is easy to follow
• Is factually accurate
• Supports all financial data with background materials or supporting documentation

When you first begin putting together your due diligence report, review the following due diligence checklist to ensure you’re including all the necessary elements: 

• Financial statements, including balance sheets, cash flow statements and profit & loss reports
• Company valuation 
• Capital structure
• Financial projections
• Products or services
• Capital assets
• Real estate assets
• Company structure
• Listing of officers/Board of Directors
• Intellectual property (patents and trademarks)
• Legal documents
• Tax information
• Inspections
• Employees and payroll
• Procurement data
• List of suppliers
• Agreements (including licensing, distribution, or franchise agreements) 
• SWOT analysis
• Relevant market research and data
• Policies and procedures

How To Write a Due Diligence Report 

Due diligence reports may be a combination of financial statements, spreadsheets, written reports, pie charts and bar graphs. So, how do you write a due diligence report? Make sure to present the information in a clear and compelling way — with illustrations that can help readers more readily grasp the relevance of your data.

In addition, the information should be comprehensive. For instance, financial reports should be accompanied by background information and in-depth analysis that will help parties better understand the data presented. 

While a due diligence report can get unwieldy with so many must-have items, it’s also important to keep it concise and engaging. When you’re writing a due diligence report, stay on target. That means keeping the information most important to your audience at the forefront. 

At the same time, you don’t have to include everything you found during the investigative process. Focus on the relevant information that can help stakeholders make the best decision for the company’s future. 

Finally, remember to re-read and revise as needed. You don’t want to wait until the last minute to put your due diligence report together. Leave plenty of time to review your work for errors, revisions, and improvements  — as making a mistake at this stage can be detrimental to closing a deal. When you can share information in fewer words, or even with a chart or illustration, do so. 

How To Write a Due Diligence Report Summary 

Your due diligence report summary is the final stage — before sharing your report, of course — in the due diligence process. 

A due diligence report summary shares the highlights of the due diligence report and lets readers know what to expect. It also outlines the due diligence process and how the information in the report was uncovered. If there are any areas of concern or exceptional details, your due diligence report summary should highlight these. 

Types of Due Diligence Reports

Many industries and professionals use different types of due diligence reports   to assess investment opportunities or improve operations, processes, and results within the organization. Below are a few industries that regularly rely on due diligence reports, along with other types of due diligence reports useful in various businesses.

M&A Due Diligence Report

If a company is undergoing a merger or acquisition , planning an IPO, or considering an expansion, a business valuation is necessary for better decisions. An M&A due diligence report should cover financial statements and projections, capital structure, and a SWOT analysis, or an exploration of the company’s strengths, weaknesses, opportunities, and threats in the marketplace. 

Real Estate Due Diligence Report

Real estate investors and developers use due diligence reports to determine the environmental impact of a project , the potential profitability of a property, the CAP ratio, expected vacancy rates, and capital improvements that may be needed. 

Other Situations Requiring a Due Diligence Report

Other professionals, industries, and situations also rely on due diligence reports. Some examples of other types of due diligence reports include 

• M&A Due Diligence Report (all encompassing; most comprehensive)
• Human Resources Due Diligence Report
• Vendor Due Diligence Report
• Commercial Due Diligence Report
• Administrative Due Diligence Report
• Customer Due Diligence Report
• Financial Due Diligence Report
• Technical Due Diligence Report
• IP Due Diligence Report
• Legal Due Diligence Report
• Environmental Due Diligence Report
• Asset Due Diligence Report
• Operational Due Diligence Report

How a Virtual Data Room Makes It Easy to Compile and Share a Due Diligence Report

CapLinked makes it easier to compile your due diligence report by enabling your staff to securely share and organize all of the data needed to create the report. They can also track changes in files, manage file permissions, and even revoke access after download. Each department can focus on the aspects of the report they need to contribute while collaborating in real-time across departmental silos. 

Tracking and managing documents that belong in your due diligence report through a cloud-based virtual data room can help readers absorb the information more easily, keep track of what they’ve already reviewed, and make comments and questions for follow-up within the files. 

When it comes time to share your report, CapLinked makes it easy and intuitive. Start your free trial today ! 

Dawn Allcot is a full-time freelance writer specializing in business, finance and technology.

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• Due diligence

How to write an effective due diligence report for M&A success

M&A success largely depends on quality due diligence (DD). Thus, poor due diligence is among the top contributors to 60% of mismatched M&A expectations and unrealized synergies. While diligence is critical, it’s meaningless unless it encapsulates the findings in an actionable due diligence report. 

This article contains 13 elements of the due diligence report , five steps to write one, and three best practices for delivering the findings.

What is a due diligence report ?

A due diligence report outlines and summarizes critical findings of the due diligence process.

The due diligence report meaning is critical to the transaction. It communicates DD findings to the executive team and lays the foundation for informed deal closing and successful post-merger integration. A due diligence report has the following functions:

• Business assessment . It collects, digests, and delivers business data to confirm (or dismiss) a strategic fit.
• Synergy assessment . It identifies, validates, and communicates M&A synergies and recommendations for post-merger integration.
• Risk assessment . It describes existing and potential risks and opportunities within business functions and facilitates risk management processes.
• Financial analysis . It summarizes the target company’s financial health data, reviews financial projections, and gives the executive team a big picture of the deal’s value.

Who writes the M&A due diligence report ?

A quality due diligence report results from a collective effort of the company’s due diligence team. 

Based on our experience, quality reports are written by contributors who conduct due diligence within specific functions — financial analysts, legal, HR, technology experts, project managers, and subject-matter experts. 

A successful business may also hire a diligence report vendor or several external advisors with experience in the target company’s industry. They provide invaluable insights into specific business functions, like cybersecurity and financials. Thus, up to 85% of non-financial companies take additional diligence costs and hire financial advisors during M&A. Meanwhile, only 14% of businesses retain in-house advisors.

• 13 critical elements of an acquisition due diligence report

A due diligence report must reflect the due diligence requirements. It refers to the target’s core business functions , such as financials, commerce, operations, IT technology, taxes, human resources, legal information, and risk management. It also relies on the due diligence questionnaire. 

While there is no set-in-stone due diligence report format, a typical piece may have the following structure:

• Executive summary
• Corporate structure and ownership
• Business model
• Sales and marketing
• Human resources
• Information technology
• Corporate culture
• Risks and issues
• Recommendations and observations

Below, you can read the diligence checklist of content analyzed and summarized in the report.

1. Executive summary

An executive summary is a high-level overview of the target company. It concisely highlights the key findings from the entire report.

2. Corporate structure and ownership

The corporate structure and ownership section provides insights into the target’s leadership framework and organizational structure.

3. Financial information

The financial section outlines the target’s financial records and performance, providing key financial metrics and observations. It evaluates the deal’s overall viability and projects post-transaction financial performance.

4. Business model

The business model evaluation outlines the target company’s strategic development and evaluates its risk-based approach. It breaks down the target company’s short-term objectives and long-term goals.

5. Sales and marketing

The sales and marketing section of the due diligence report describes the target company’s approach to revenue generation. It gives the bigger picture of the target’s business model.

6. Human resources

The human resources section of the DD report analyzes and summarizes findings about the target’s human capital. It focuses on HR integration and optimization opportunities in the post-deal phase.

7. Operations

The operations section evaluates the target’s production processes and researches potential operations synergies. The operational review emphasizes improvement opportunities, including cost reduction, supply-chain consolidation, and scaling.

8. Information technology

The IT section reviews the target company’s digital capabilities, technology value drivers, integration opportunities, and risks. It often emphasizes the results of cybersecurity due diligence in M&A transactions.

9. Corporate culture

The corporate culture section summarizes respective diligence investigations and provides insights into the core beliefs and values of the target company. It emphasizes culture compatibility and points out potential integration issues.

The legal due diligence section investigates the deal’s regulatory landscape and reviews legal risks, including intellectual property infringements, breaches of warranties, contract violations, and money laundering or tax evasion litigations.

11. Synergies

The synergies section of the due diligence report summarizes potential synergies and calculates the cost benefits.

12. Key issues and risks

The risks and issues section summarizes key transaction risks and reviews risks within each business function of the target company. It also communicates existing and potential issues at different M&A stages.

13. Recommendations and observations

The recommendations and observations section provides key post-merger directions and observations.

• How to write a due diligence report in 5 steps

Here are the five steps to write a due diligence report:

• Decide on the report structure . Draft the report’s sections based on the due diligence scope. A financial due diligence report may focus on financial matters, whereas a full report may cover all business functions within 80–100 pages.
• Collect due diligence findings . Have instant access to necessary due diligence findings, metrics, statistics, and analyses. It will help you reference materials while drafting the report.
• Draft the report . Process the main findings from each due diligence area and summarize key points. Collaborate with contributors, DD experts, and external advisors on the findings to ensure data clarity and accuracy.
• Review the draft . Check the report for accuracy, clarity, and conflict of interest. It’s a massive, time-consuming work that requires several reviews before final submission.
• Approve and submit the final draft . Make final edits, approve the report, and submit it to the acquisition team. Prepare for a series of Q&As regarding due diligence findings.
• 3 best practices for due diligence report writing

Based on our observations, the following industry practices help to refine due diligence reports, improving information delivery, consistency, and clarity:

• Ensure data traceability
• Maintain communication
• Use M&A technology

Let’s provide more detail on what each practice entails.

1. Ensure data traceability

Data availability and quality have always been limiting factors in the due diligence process. The inability to check source materials for accuracy may lead to miscalculations, over and underestimations, and unrealized M&A benefits. It’s advisable to ensure that data points are easily traceable within your report and readily available for review and validation.

2. Maintain communication

As much as 50% of transactions point out unclear reporting lines as the main pain point during the M&A, while about 30% mention a lack of general communication, according to a PwC survey. It’s crucial to establish and maintain effective communication during due diligence reporting. 

3. Use M&A technology

About 63% of dealmakers use tools other than email and spreadsheets for various M&A activities, while the rest plan to enhance digital capabilities to hold a competitive edge. Secure workspaces, such as virtual data rooms (VDRs), have become inseparable from M&A success. A virtual data room improves due diligence reporting with the following capabilities:

• 24/7 communication . Data rooms allow dealmakers to establish uninterrupted Q&A workflows with subject-matter experts and approvers. It helps DD teams maintain 24/7 communications and manage real-time feedback from executives.
• Easy data referencing . DD teams can collect, store, and share due diligence documentation in one secure system with role-based access, digital rights management, and advanced data encryption. Encrypted links and version control simplify data referencing in due diligence reports.
• Enhanced data accuracy . The full audit trail that records document edits, logins, page views, and other detailed stats complements data reviews, data referencing, and issue tracking. It improves the quality and accuracy of due diligence reports.
• Key takeaways
• A business due diligence report is the critical link between the due diligence process and the final M&A decision. It is a detailed summary of the target company that communicates due diligence findings to the executive team.
• The report’s sections vary based on its scope and the deal’s nature. A thorough report always communicates the risks and opportunities of the transaction and gives actionable insights into post-merger integration.
• Due diligence best practices include data traceability, continuous communication, and the use of virtual data rooms.
• What is a due diligence report?

Elisa Cline

Elisa is a marketing specialist with 15 years of experience. She worked for many VDR brands and gained insider knowledge of the industry.

At DataRooms.org, Elisa conducts marketing research, develops content plans, supervises content teams, and develops VDR review methodology. She envisions her mission as distributing accurate knowledge of virtual data rooms.

“My mission is to deliver accurate and relevant knowledge of virtual data rooms to as many people as possible.”

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Want the best provider? Start with our in-depth overview

How to create a due diligence report?

Creating a due diligence report is an essential aspect to consider while evaluating deals and investments. 

In this comprehensive guide, you will explore the details of creating effective due diligence reports and find a solution that streamlines the process more than you can expect.

What is a due diligence report ?

A due diligence report is a summary of the due diligence. Specifically, when companies consider partnering with a new business, their risk and compliance teams complete a due diligence process to research and uncover information. 

All their findings are then detailed in a due diligence report, including recommendations for proceeding with the business transaction (e.g., adjusting the deal structure, negotiating terms, or even canceling). 

To put it simply, every time you complete due diligence, you should also complete a report.

What is the purpose of due diligence reports?

In essence, a due diligence report is a pivotal step for investors and businesses to do the following:

• Secure more favorable terms and pricing for a transaction
• Detect and mitigate potential risks and liabilities
• Comply with legal and regulatory requirements and industry standards
• Minimize the chance  of potential disputes and litigation
• Improve their reputation and trustworthiness among stakeholders and other key players

Before moving to a due diligence report structure, we invite you to learn more about this report to help you understand how the process works.

What does a due diligence report look like?

There is no universally accepted standard for a due diligence report format and contents. Moreover, it can vary depending on the type of due diligence you are conducting (whether it is for a merger or acquisition, a third party , or data privacy). 

However, it is advisable to review a due diligence report template examples to understand the structure and content of due diligence reports. Furthermore, analyzing a sample due diligence report may help recognize risks and opportunities associated with an investment opportunity. This way, you can target due diligence efforts toward the areas that are most likely to impact the investment success.

You can check a due diligence report example here .

Who is responsible for compiling a due diligence report?

Typically, it is a company’s internal due diligence team or a paid third-party group that is responsible for writing a due diligence report. However, other internal teams should also lend their expertise to the process. 

For example, if you work on commercial due diligence, be sure to involve your marketing managers. They know better than others what to look for and how to identify potential risks.

👁️‍🗨️Pro tip : If you outsource due diligence to a third-party group, ensure that subject matter experts, legal advisors, attorneys, and company stakeholders collaborate with the outsourcing party. A balanced approach incorporating internal collaboration makes the process thorough, targeted, and aligned with the organization’s objectives of due diligence.

What is a due diligence questionnaire? 

A due diligence questionnaire, just like the due diligence report, is a way to gather information during an investigation. When you are involved in a deal, you share this questionnaire with the other party so they can answer questions that will help you write your thorough report. Based on the type of your transaction, you might also send the questionnaire to partners, potential buyers, or suppliers, with specific questions for each group.

You can find an example of a due diligence questionnaire here .

What is the best structure for a due diligence report? Follow our due diligence checklist 

The report typically covers a range of areas, including operational, strategic, legal, and financial aspects of a business. Here is a detailed breakdown of what a due diligence report should include:

As you can see, you need some effort and time to perform due diligence effectively. Therefore, we have divided it into key stages for you to use as a starting point.

Additional insights : Importance of a full technical due diligence on networks and data centers | Capacity Media  

A due diligence report in 8 easy steps

Stages may vary depending on the types of due diligence reports. So, we highlight the main traditional steps and some potential challenges parties may face. Later, we will tell you how to overcome them and prepare a due diligence report that helps you make winning decisions.

1. Preliminary assessment

In the initial stage, a buyer or investor defines the objectives and aspects of due diligence. They need to review the target company’s publicly available information, such as its website, news articles, annual reports, financial statements, etc. This way, they assess its attractiveness and identify potential concerns.

Potential challenge : Identifying relevant and reliable data sources.

2. Confidentiality agreement

Parties usually sign a non-disclosure agreement to protect the confidential information of a target company. The NDA also guarantees confidentiality security for any other sensitive information that may be shared during the process.

Potential challenge : Ensuring enforcement of confidentiality provisions across all parties involved in the due diligence process.

3. Due diligence planning

An investor forms a due diligence team comprising legal professionals, financial advisors, operational specialists, and industry experts. They create a due diligence request list outlining the information they need for a due diligence review. This due diligence checklist may include contracts, financial statements, employee records, and intellectual property documents.

👁️‍🗨️Tip : You can download a free due diligence checklist template online and see what to include in a due diligence report.

Potential challenge : Coordinating schedules and availability of diverse experts and stakeholders for the due diligence team.

4. Document reviews

When the company being evaluated provides the requested documents, the buyer’s team will review each due diligence document in detail. This team may also visit the target company’s facilities to examine its operations, manufacturing processes, and other activities. Thus, the buyer can better understand the target’s inventory, assets, and operations. 

The buyer’s team may also talk with key employees, management, clients, and stakeholders. It is a way to learn about the company’s reputation, strategies, culture, relationships, and challenges.

Depending on the nature of the business, this process may be essential for the buyer to make an informed decision.

Potential challenge : Managing the volume of documents effectively and verifying the authenticity and completeness of provided data.

5. Analysis, validation, and risk assessment

This step involves evaluating various aspects of the target company, validating the accuracy and reliability of the obtained information, analyzing the company’s valuation, and identifying potential risks associated with the acquisition. It is an iterative process that involves cross-referencing data from different sources to comprehensively and precisely understand the target company operation.

Potential challenge : Overcoming potential resistance or reluctance from the target company to provide access to sensitive information.

6. Documentation and report preparation

After assessing risks, a due diligence team creates a report highlighting key risks, opportunities, and recommendations. The report also includes contracts, financial records, and all other evidence supporting the findings.

Potential challenge : Ensuring accuracy and reliability of data obtained from various sources.

7. Decision-making and negotiation

A buyer or investor carefully evaluates the due diligence report to make an informed decision about the deal. Sometimes, they may opt to negotiate the purchase price or other terms. If due diligence uncovers issues, they withdraw from the deal.

Potential challenge : Compiling and organizing findings from various sources into a coherent report.

8. Deal closing

When both parties agree on the terms, they finalize the legal agreements and close the transaction.

Now that you know the main steps of creating a comprehensive due diligence report, you are ready to explore a dedicated online solution that streamlines the procedure. But first, a few helpful recommendations from our experts!

✔️ Bonus content !

Five quick tips for creating effective due diligence reports suitable for different types of due diligence.

Remember the following points while creating your report:

• Consistent format. Use a uniform format in the report to aid readability and enable easy data comparison. A standardized structure helps the reader navigate seamlessly and focus on the content instead of being distracted by changing layouts.
• Clear language. Good reports use clear and straightforward language to make the content accessible to all readers, regardless of their expertise.
• Visual aids. Visual aids like graphs, charts, and tables can improve data presentation by making it easier to understand large amounts of information quickly.
• Explanations. Not everyone may be familiar with industry-specific language. To make your report accessible to a broader audience, including those without technical backgrounds, it’s a good idea to explain unfamiliar terms in simple language. This way, nobody feels excluded.
• Well-organized executive summary. An executive summary is usually the first part of a report that readers engage with. Therefore, it should be well-structured and accurately summarize findings.

Finally, we are moving to a solution that makes a data-heavy and time-consuming process a breeze!

How can the due diligence software help with reports?

Due diligence software is a specialized online platform that automates workflows throughout the due diligence procedure for all parties. In particular, the solution offers secure data storage, protected file sharing, collaboration tools, and reporting features.

Now, we will focus only on the software features related to creating a due diligence report. As platforms may vary, we have selected iDeals, one of the best due diligence software providers, to show you the tool’s benefits.

1. Data storage

Intuitive document organization features allow users to categorize, tag, and index documents according to the structure of the due diligence report.

Key features

• Drag and drop bulk upload . Upload data with one click from your device into the upload window without additional plugins.
• Multiple file format support . Upload documents in any format without preparing files. 
• Labeling . Use labels as a search item and categorize documents to meet your due diligence needs.
• Full-text search . Find data instantly by applying multiple search filters or entering keywords.
• Automatic index numbering . Upload as many files and folders as you need, and the software will automatically number them when you upload, move, or delete them. 
• Windows Explorer integration . Sync data automatically between your desktop, FTP, shared folder, or corporate file storage with your iDeals workspaces. 

Even with hundreds of files, creating a due diligence report with iDeals is hassle-free. 

2. Data security

iDeals provides protected document storage with advanced encryption and access controls to protect sensitive information.

• Physical data protection . All data centers implement strict physical security measures, access policies, secure vaults, and uninterruptible power sources.
• Real-time data backup . No documents you upload to the storage can be lost or destroyed.
• Multi-layered data encryption . Data is encrypted with 256-bit AES keys and transferred with TLS protocol. Encryption keys and key vaults are stored separately from the encrypted data.
• Granular user permissions . As an admin, you define user roles and access rights to certain document storage sections and revoke them when necessary.
• Time and IP-address restriction . Restrict login from particular IP addresses and set up policies for session duration and file access expiration date.
• Remote wipe and shred . Lock and wipe encrypted data from a stolen or lost device and revoke access rights to documents even after the download.

Note : iDeals is one of the most secure due diligence software solutions. So, if data security is a priority for you, visit the official website and explore other data protection mechanisms the provider employs.

iDeals ensures data security regardless of the number of participants.

3. Q&A module

This dedicated space facilitates communication between parties. Specifically, they can ask due diligence questions, receive answers, and track all discussions related to specific documents or topics.

• Refined answer process . Users can comment on answers, reference files, and attach documents to enhance response accuracy.
• Question auto-assignment . Answers are automatically assigned to experts. Coordinators can reassign experts and modify workflow as needed. Experts receive questions without seeing the submitters’ PII, and their responses are routed to the answers coordinators.
• Question import and export . Import and export questions in bulk from Excel to and from the iDeals due diligence platform.

iDeals Q&A

There is no need for additional applications to communicate with participants. The solution provides a secure dedicated space with all the features you may need.

4. Reporting

iDeals allows users to generate customizable reports on user activity, document access, and other metrics. Thus, they get valuable insights into the due diligence process’s progress and status.

• Full audit trails . Use audit trails with every user action recorder for internal compliance.
• Insightful activity dashboards . Keep tabs on your project and make informed decisions with insights from user-friendly dashboards.
• Color-coded reports . Identify the most active user groups and documents they are most interested in at a glance.

iDeals color-coded reports

iDeals enables you to effortlessly oversee each step of data accumulation, ensure secure data usage, and track task completion by all parties your due diligence involves.

5. Other helpful features 

Below are some useful tools that can make the process easier for everyone involved.

• Single sign-on . Access all projects with a single login and password.
• IOS and Android apps . Access your workspace from all devices and all platforms, even on the go.
• Multilingual access . Access the platform in 14 languages, including English, Spanish, German, French, Italian, and Japanese.
• Real-time notifications . Set the frequency for users to receive notifications about uploaded and deleted documents via email.
• Branding . Customize workspaces, watermarks, headers, and footers for enhanced due diligence. Specify terms of use, NDA, and confidentiality agreement.

iDeals branding

We have outlined only a small part of the platform’s functionality. Therefore, we recommend learning more about it on the iDeals website and from user reviews to see what it offers and how it satisfies business needs.

Due diligence is a process of effort and time. Due diligence reporting, in turn, is critical for any business planning to conduct due diligence investigations. However, managing the sheer volume of information and multiple teams can be challenging. 

That’s where due diligence software comes in. It offers all the necessary tools to streamline each process step, including due diligence reporting.

Ronald Hernandez

Data room selection & optimization expert with 10+ years of helping companies collaborate more securely on sensitive documents.

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Due Diligence Reports Guide: Types, Structure, and Best Practices

When it comes to successful due diligence as part of a merger or acquisition transaction, proper preparation can take weeks if not months.

At this stage, creating a comprehensive, detailed due diligence report is a must. While the purposes of reports may vary — from legal to financial, commercial, and some others — best practices are all the same.

In this guide, we’ll overview an efficient due diligence process through properly built due diligence reports and questionnaires. We’ll examine types of reports, their structure for various business uses, and tools as data room for due diligence to support their preparation.

What is a due diligence report?

A due diligence report is an internal memo that summarizes key results and procedures of due diligence research . It is also an essential requirement for closing the merger and acquisition deal, which presents a detailed summary of due diligence investigations.

The comprehensive due diligence report aims to provide the party involved in the deal with an accurate understanding of the company’s future operations.

The elements of due diligence reports

For a report to be informative, it should clearly focus on due diligence requirements, be easy to read, and avoid any technical jargon. While the structure of a report may vary depending on the type of due diligence, as a general rule the report contains the following elements:

• Executive summary. This section offers a high-level overview of the investigation, including its process, focus areas, and results. It should also identify any areas of concern uncovered during the research.
• Scope of work. This section describes the scope of the investigation, such as the target company if the research is focused on it.
• Findings . This section summarizes the investigation’s findings, such as the target company’s business valuation and possession of necessary licenses and permits.
• Recommendations . This section offers recommendations based on the investigation’s findings. For example, if the target firm has a history of debt or any compliance issues, the due diligence report may recommend against the acquisition.
• Relevant documents. This section includes copies of the relevant documents reviewed during the investigation, such as financial statements or environmental reports.
• Appendices. This section includes any relevant appendices, such as compliance reports over recent years.

The need for reporting in a due diligence process

From a business perspective, the relevance of due diligence reporting cannot be underestimated, as a properly built report creates circumstances for enhanced due diligence for business partners and members of the executive team.

The primary objective of the due diligence review is to identify any potential risks or issues before finalizing the purchase , thereby aiding in the detection of future dangers.

The detailed information gathered through this report is crucial for a more efficient decision-making process. In the event that the corporation discovers any issues during the review, it may be able to negotiate more favorable terms and thus minimize the due diligence costs.

Furthermore, the due diligence report serves as a tool for the organization to understand how the target firm plans to generate additional profits. For instance, it can provide a comprehensive assessment of the target firm’s current state of affairs at the time of sale or purchase.

Types of due diligence reports

Due diligence can be broadly categorized into three main areas:

• Financial 

Legal due diligence

Legal due diligence is a detailed examination of the legal foundation of a transaction, such as ensuring that a target business possesses or can exercise the intellectual property rights essential to its future success. Other areas typically explored include structure, assets, contracts, loans, property, employment, ongoing litigation, and all other legal documents and aspects.

The legal due diligence report may consist of :

• Audits of compliance issues
• Duplicates of governmentally issues permits and licenses
• Copies of each act, report or document filed with government agencies’ help
• Descriptions of all legal documents and processes, administrative proceedings, and ongoing or past government investigations

Financial due diligence

This report type verifies the accuracy of financial information provided and evaluates the underlying performance of the business. This typically includes a business valuation of a company, review of its financial performance, assets, liabilities, cash flow, debt, and management.

The example of a financial report may consist of :

• List of all state and federal jurisdictions where taxes have been filed over a five-year period
• Act on local, state, and federal tax returns over a five-year period
• Audited financial records and balance sheets for the last five years, including management’s discussion and analysis and accompanying notes
• Correspondence between management and auditors
• A detailed business valuation and all internally generated financial models and forecasts
• All corporate decks presented to the board of directors

Commercial due diligence

Commercial report focuses on the market in which a business operates by engaging with clients, analyzing competitors, and conducting a comprehensive assessment of the assumptions underlying the business plan. The purpose is to find out whether the business plan is viable in current market conditions.

A commercial due diligence report may consist of :

• Market analysis, including market sizing and market trends
• Competitive research, including SWOT analysis on each competitor and strategies to gain market share
• Industry trends overview, focusing on industry drivers, dynamics, challenges, and growth in relation to the company’s performance
• Customer satisfaction (CSAT) assessment results, including the projected correlation between CSAT rates and business profitability

Additional types of due diligence may cover topics such as corporate records, indebtedness, labor and employment, real estate, agreements, and supplier information:

Due diligence report types

Information covered

Corporate records

• State of incorporation confirmation and a certificate of good standing
• Articles of incorporation and bylaws duplicates
• A list of executives and copies of all written communication with them
• Details on issued shares of stock and overall capitalization
• Confirmation of of any warrants, options, or securities’ existence
• Any company or subsidiary agreement copies
• Joint venture agreements and partnership agreements duplicates
• Copies of any franchise agreements, as well as any marketing or sales cooperation agreements
• Duplicates of all brokerage or investment banker agreements
• Copies of all customer or client agreements
• Licenses and subscriptions copies
• All other types of contracts not belonging to the list above

Indebtedness

• Seller and its subsidiaries indebtedness analysis, comprising loan agreements, security agreements, mortgages, and notes
• Copies of written communication with lenders demonstrating compliance with financial covenants

Employment and labor

• Detailed organizational structure description with biographies of officers, directors, and employees of a top and middle-managerial level
• A list of all employees containing detailed descriptions of their job functions, departments, locations, and compensations
• Documents detailing any non-salary compensation or benefits, such as pensions, profit sharing, deferred compensation, stock plans, and other
• Copies of employment, termination, consulting or any other agreements
• Copies of all employee handbooks, policies, and codes of conduct
• Ongoing litigation information related to employment and labor law

Real estate

• Addresses and descriptions for all property
• Copies of all site evaluations and studies as well as governmentally issued filings and reports related to real estate property
• Copies of all real estate leases
• All appraisals copies

Vendor and customer information

• A list of all clients indicating the volume of sales per each client
• Any written communication with customers or vendors addressing complaints or disputes
• A list of all vendors indicating the volume of purchases per each vendor

Best practices for creating due diligence reports

Now that you know what a due diligence report is and what elements it should consist of, let’s explore some of the best practices for creating it:

• Who should create these reports?

How to present due diligence findings in an effective way?

• What are the best report preparation practices?

What steps to follow to complete a due diligence report?

• What tools to use to support a report preparation process?

Who should create due diligence reports?

Typically, due diligence reports are put together by a company’s internal team assigned for due diligence or by a third-party group hired for this purpose. The team may consist of law and finance consultants, investment bankers, and experts from accounting firms.

The team’s collective expertise should cover various aspects such as business, legal, technical, and finance matters specific to the deal being pursued. However, for smaller-scale transactions, such as purchasing a small business, even one or two professionals may suffice.

For an effective visual representation of key points, a due diligence report should include different types of information in varying formats — from Excel spreadsheets to written reports, pie charts, and bar graphs.

The most critical aspect of presenting the information is to make it clear and compelling, with visual aids to help readers understand the data’s relevance. Additionally, the information should be comprehensive, clearly showing the sources of all presented data.

While including all necessary items in a diligence report can make it unwieldy, it’s essential to keep it concise to maintain readers’ engagement. Otherwise, they may overlook the most relevant aspects of the report.

What are the best due diligence report preparation practices?

To prepare a well-structured, legally viable, accurate and informative report, keep the following tips in mind:

• Address any problems that are discovered and describe their potential ramifications. For instance, if the target firm has compliance issues with a specific local legislation, you should discuss the potential consequences of this non-compliance and strategies to address it.
• To avoid potential issues, make sure to create a comprehensive due diligence document list and examine concerns or obstacles that the customer may face due to missing critical issues such as concealed dues or expired licenses.
• To ensure the strong structure of the report, avoid including unnecessary information and focus exclusively on the relevant area of interest or concern.
• Be patient, diligent, and detail-oriented when conducting an investigation and ask questions if something appears to be amiss.
• Seek a lawyer or attorney’s advice if you lack the background for preparing the report.

To create a comprehensive report, follow these steps:

• Determine the scope of the investigation. Decide on a type of research you need to conduct and which business transactions you’re looking to investigate.
• Collect all the relevant information. While structure and content of this information will depend on your needs, you’ll most likely need to gather financial statements, contracts, licenses and permits, and any other papers relevant to the analysis at this stage.
• Review all the available data. This step helps to identify any potential risks, missing pieces of information or areas of concern.
• Structure the due diligence report. Now you should arrange the information gathered properly. As mentioned before, the report should comprise a summary, scope of research, key findings, recommendations, relevant documents, and appendices.
• Review the report. At this stage, you should ensure that the report is accurate by approving it with the relevant parties.
• Revise the report as needed. This may be necessary due to new information or changes in the scope of the investigation.
• Finalize the report. Next, you should ensure that all the information in the report is complete and accurate.
• Submit the report. Submit the report to the relevant decision-makers to help them make informed decisions about a business transaction.

By following the steps above, you should create a comprehensive due diligence report answering all your questions and covering all the needs.

What technology tools to use to support a report preparation process?

To streamline the process of report preparation, several solutions may be used:

• Document management software — secure storage and access to sensitive data
• Due diligence software — document collection, organization, and report preparation
• Communication and collaboration software — video conferencing and extensive project management
• Analytics and visualization tools — analysis of large volumes of data in a concise manner

While all the tools above are extremely valuable, they can be substituted by one multi-purpose solution known as a due diligence data room. Using it, you can make the due diligence report and the information it contains easily accessible for all business partners. You can also keep track of what documents they have interacted with and for how long, manage documents and access rights, and ask any questions within the files or in a dedicated Q&A section.

That said, due diligence data rooms make communication, analytics, and document management easy — while keeping all processes in one place.

Due diligence questionnaire: Importance + checklist

A due diligence questionnaire, also known as a due diligence checklist, is a comprehensive list of investigative questions that is sent to the selling company, its business partners, vendors, and clients, for generating additional insights on its operations.

Due diligence checklists play a crucial role as an early step in the process. Here’s why:

• Rich tool for generating insights. They serve as a tool for gathering the necessary information and provide a clear understanding of what to expect and how to proceed with the due diligence process .
• Clearly defined needs of the process. By utilizing due diligence questionnaires, the parties involved can better focus their efforts and ensure that the most important aspects are not overlooked.
• Focus on each party’s individual requests. Usually, these questionnaires are tailored to the specific research being conducted, which maximizes the efficiency of their usage. For instance, a buy-side due diligence questionnaire will differ from an acquisitions questionnaire.

To conduct effective due diligence, it’s important to ask the right questions. Below are some important due diligence questions to start with when you consider acquiring a firm:

• Why is the business or its unit being sold? This question is critical for potential acquisitions as it can help a buyer understand if the company is worth investment. Knowing the reason for the sale can provide insight into whether the company is facing too many liabilities that the current owner can no longer bear. However, this question may not be relevant for investors or stock purchasers.
• Are the firm’s profits sufficient to continue operating? If not, are there any investment opportunities or ongoing collaborations that can be secured? Acquiring or heavily investing in a company that experiences a plummeting profit line five months later can be devastating. Therefore, it’s important to identify potential partnerships or sponsorships that can keep the company running.
• Is the company focused on growth, and is its growth even possible? It’s crucial to identify areas where the company doesn’t already sell and to understand the chances of expansion in those areas.
• What are the company’s primary commodities? For potential investors, understanding which commodities generate the most income and losses is essential. These insights can help you identify potential weaknesses or areas to focus on to pursue further growth.
• What are the main markets for the company’s primary commodities? It’s important to know the markets that the company operates in to remain competitive. Obtaining this knowledge will help you to build a proper growth strategy, with market trends in mind.
• Are there any unique product features that are crucial to the sales of any products? What intellectual properties need the most reliable protection? What are the main development stages of the final product? Understanding what creates a strong position for the company on the market and what technologies and development stages need to be paid attention to is critical for future sales.
• Are there any current or suspended proceedings associated with this business? Companies that face any legal issues that are almost impossible to recover from can be a significant risk. Therefore, it’s critical to investigate this aspect very carefully before settling on a transaction.

Asking these types of questions can help ensure a well-performed due diligence process and inform the decisions of investors, business partners, and buyers.

Let’s recap key insights from the guide:

• A due diligence report summarizes the procedures and results of due diligence research and is necessary for closing a deal.
• The main types of due diligence reports include legal, financial, and commercial. However, reports can also overview some other aspects of an organization.
• Many tools can be used to aid the report preparation process, from communication to analytics, document management, and due diligence tools. However, a virtual data room serves as a multi-purpose solution that supports all stages of report preparation, delivery, and analysis for a truly enhanced due diligence experience.
• A due diligence questionnaire is critical for report preparation. It must address all aspects of the financial well-being and legal operations of the target firm.

Most Popular From Our Blog

What is a Due Diligence Report, and How to Create One? A Comprehensive Guide

• Ossian Muscad
• November 4, 2022
• No Comments

Last Updated on January 29, 2024 by Ossian Muscad

Undertaking thorough due diligence is critical in any business transaction, merger, or acquisition. A due diligence report is a pivotal document that comprehensively analyzes a company’s business operations, financials, legal risks, and other aspects pertinent to a potential deal. It acts as an informative compass, guiding stakeholders through the complexities of making informed decisions.

This guide aims to uncover the concept of a due diligence report, articulating its definition and importance and providing a structured pathway to creating a meticulous and effective report. Whether you are a seasoned investor, an entrepreneur, or part of a corporate entity, understanding how to compile a due diligence report is essential in navigating business ventures with prudence and foresight.

What is a Due Diligence Report?

A due diligence report is a critical tool used by investors, corporations, and entrepreneurs to thoroughly understand the strengths, weaknesses, opportunities, and threats associated with a business or asset before engaging in a transaction. It is a comprehensive assessment that includes meticulous research and analysis of financial records, legal documents, business operations, and strategic positioning.

This report is instrumental in confirming the validity of a prospective investment or acquisition, ensuring that no hidden liabilities exist that could affect the outcome of the transaction. In essence, it is the groundwork that informs a party’s go or no-go decision, providing peace of mind by illuminating potential risks and validating business potential. By conducting due diligence, investors can avoid costly mistakes and minimize the likelihood of future disputes.

3 Types of Due Diligence

Due diligence comes in various forms, each addressing specific aspects of the business to aid in a comprehensive evaluation. Understanding the distinct types of due diligence, such as legal, financial, and commercial, is crucial in obtaining a holistic view of the company’s status and prospects. By meticulously analyzing these areas, investors can make more informed decisions with a clear picture of the potential risks and rewards.

Legal Due Diligence

Legal due diligence scrutinizes the legal aspects of a company, including but not limited to its ownership, compliance with regulations, and any ongoing or potential litigation. This aspect ensures any legal entanglements post-acquisition do not blindside buyers. Components typically reviewed include:

• Corporate records and structure: Documentation related to company registration, organizational setup, and governance framework.
• Contracts and agreements: Legal documents outlining the terms and conditions of business arrangements and partnerships.
• Intellectual property: Assets such as patents, trademarks, and copyrights that provide exclusive rights to creators and inventors.
• Litigations and disputes: Legal proceedings and conflicts that may arise between parties, requiring resolution through the judicial system.
• Regulatory compliance and licenses: Adherence to laws and regulations and obtaining permits and authorizations to conduct business activities.
• Employment agreements and disputes: Contracts and conflicts related to the terms of employment and potential disagreements between employers and employees.

Financial Due Diligence

Financial due diligence is a critical examination of a company’s financial health. It provides an in-depth look at the business’s fiscal stability, performance, and projections. Essential elements of financial due diligence typically encompass:

• Audited financial statements: Comprehensive review of financial records to ensure accuracy and compliance.
• Tax compliance and liabilities: Assessment of tax obligations and potential financial responsibilities.
• Asset valuation: Evaluation of the worth of assets to determine their financial value.
• Revenue and profit trends: Income and profit patterns are analyzed to identify financial trends.
• Debt structure and repayment capabilities: Examination of debt arrangement and ability to repay financial obligations.
• Forecasts and capital expenditure plans: Projections of future financial performance and planned investment in assets.

Commercial Due Diligence

Commercial due diligence evaluates a company’s market position, including its market share, competitive landscape, and growth prospects. It also assesses the viability of the business model and strategy. Key components of commercial due diligence often involve:

• Market analysis and segmentation: Identifying target markets and dividing them into segments based on specific criteria such as demographics, behavior, and needs.
• Competitive analysis: Evaluating the strengths and weaknesses of competitors to inform strategic decision-making.
• Product or service evaluation: Assessing a product’s features, benefits, and performance to determine its effectiveness in meeting customer needs.
• Customer and supplier assessments: Analyzing customer satisfaction and supplier performance to maintain strong relationships and improve operational efficiency.
• Strategic fit with potential buyers: Aligning business strategies and offerings with the needs and goals of potential buyers to maximize value and market appeal.
• Growth and expansion opportunities: Identifying potential avenues for business growth and expansion, such as new markets, product lines, or strategic partnerships.

What to Include in a Due Diligence Report?

Creating a comprehensive due diligence report is integral to a successful investment or acquisition. The report provides an investor with the needed assurance about their potential involvement with a corporate entity. It helps uncover underlying issues and confirms that the business opportunity aligns with the investor’s strategic goals. The following are key components that should be included in a due diligence report:

Executive Summary

The executive summary at the outset of a due diligence report distills the most critical findings from the full analysis into a concise and impactful overview. It highlights the key risks, value drivers, and the ultimate recommendation or conclusion regarding the prospective transaction. This section is designed to give stakeholders a snapshot view of the due diligence findings to aid quick decision-making.

Company Overview

The company overview provides a profile of the business in question, detailing its history, organizational structure, core operations, and service or product offerings. It’s a factual representation of the company’s current market position, business model, and value proposition to customers.

Purpose of Due Diligence

The section detailing the purpose of due diligence clarifies why the analysis is being conducted—whether for an acquisition, investment, or strategic partnership. It sets the objectives that the due diligence process aims to achieve, such as verifying financial health, ensuring legal compliance, and assessing the company’s strategic position within the industry.

Financial due diligence involves a comprehensive review of the company’s financial statements, cash flow, debt and equity structure, profitability, and future projections. It scrutinizes past financial performance to predict future financial viability, ensuring that the numbers presented by the company are accurate, complete, and sustainable long-term.

Legal due diligence examines a company’s legal aspects, ensuring no hidden legal issues could affect the investment. This step involves reviewing legal documents, litigation history, and compliance with relevant laws. Aspects such as contracts, intellectual property rights, employment law compliance, and dispute resolution are thoroughly analyzed. Potential investors will want assurance that there are no legal roadblocks that might obstruct business operations or transfer of ownership.

Operational Due Diligence

Operational due diligence focuses on the company’s business operations and ability to maintain them effectively. It looks into the company’s organizational structure, operational processes, IT systems, and human resources. The objective is to assess efficiency, identify operational risks or inefficiencies, and evaluate the effectiveness of the company’s management.

Market Due Diligence

Market due diligence assesses the market environment in which the company operates. This process examines industry conditions, supply and demand dynamics, market trends, and regulatory landscapes. The focus here is to determine the viability of the company’s products or services in the current and future markets and to identify any substantial market risks.

Regulatory and Environmental Due Diligence

This area of due diligence involves a thorough analysis of the company’s adherence to regulatory requirements and environmental impact. Compliance with health, safety, environmental, and industry-specific regulations is verified. Investigations into waste management, emissions, resource usage, and potential environmental liabilities are conducted to ensure the company meets all necessary environmental standards.

Insurance and Risk Management

Investigating the company’s insurance coverage and risk management strategies is vital to due diligence. The objective is to ensure that the company is adequately insured against potential risks and has appropriate risk management protocols in place. It also assesses the company’s history of claims and its approach to mitigating operational risks.

Future Growth Prospects

This section analyzes the company’s potential for future growth by considering market trends, innovation, and expansion opportunities. It takes into account the scalability of the business model, potential new products or services, and the company’s strategic vision. Understanding the future growth prospects is crucial for investors to make an informed decision.

Conclusion and Recommendations

The conclusion and recommendations synthesize the insights from the due diligence process to provide a grounded perspective on the investment opportunity. This section articulates the overall risk profile, the potential for return on investment, and any concerns or opportunities from the due diligence. Recommendations are made to guide the investor’s decision or to suggest conditions for proceeding with the transaction.

The appendix supports the due diligence report by including comprehensive documentation referenced throughout the report. This may include financial statements, legal documents, detailed analysis of operations, and any other relevant data. The appendix ensures that all information is readily available for review, providing transparency and supporting the findings presented in the report.

The Due Diligence Process

Understanding the due diligence process is vital for any entity conducting an informed transaction. This comprehensive process methodically evaluates a business before signing a contract, ensuring that all facts and figures align with expectations. Here are the key steps that make up the due diligence process:

• Preliminary Assessment : Initially, the team identifies the reason for the due diligence and gathers preliminary data to understand the target entity’s business scope and potential deal structure. This sets the foundation for the due diligence process and ensures a comprehensive understanding of the target company.
• Confidentiality Agreement : Before any sensitive material is shared, both parties sign a confidentiality agreement to protect proprietary information disclosed during the due diligence. This step safeguards the confidentiality of sensitive data and promotes trust between the involved parties.
• Due Diligence Planning : The scope of due diligence is defined, establishing which areas will be analyzed and designating the team members responsible for each area of focus. This meticulous planning ensures thorough coverage of all critical aspects and efficient allocation of responsibilities.
• Document Reviews, Interviews, and Site Visits : The company’s available financial, legal, and operational documents are scrutinized, interviews with key personnel are conducted, and physical visits to sites or facilities are made. This comprehensive approach allows a holistic evaluation of the target company’s operations and assets.
• Analysis, Validation, and Risk Assessment : Information gathered is analyzed to validate the accuracy and identify any potential risks associated with the transaction. This critical step mitigates potential risks and ensures informed decision-making during the due diligence.
• Documentation and Reporting : Findings are documented thoroughly to create a complete due diligence report, highlighting key observations and any concerns. This comprehensive report is a valuable reference for stakeholders and facilitates informed decision-making.
• Decision-making and Negotiation : Based on the due diligence report, strategic decisions are made regarding the transaction, and if proceeding, terms and conditions are negotiated. This phase marks the crucial stage of evaluating the findings and aligning on terms for the transaction.
• Closing the Deal : Once negotiations are finalized and both parties are satisfied, the deal is closed, concluding the due diligence process and beginning the post-transaction phase. This marks the successful culmination of the due diligence process and the commencement of the subsequent phases of the transaction.

What is a Due Diligence Checklist?

A Due Diligence Checklist is a strategic tool employed during the due diligence process to ensure that all key aspects of the target company are thoroughly examined. It serves as a comprehensive list highlighting the necessary documents, information, and steps needed to conduct a complete evaluation.

A Due Diligence checklist should be tailored to the specific needs of the transaction, encompassing financial, legal, operational, regulatory, and environmental categories. By systematically addressing each item, potential investors can mitigate risks and validate the details of an investment, purchase, or partnership, ensuring that the decision is based on a complete understanding of the company’s standings and potential.

The thorough compilation and analysis informed by the checklist culminate in creating the due diligence report, which is the cornerstone for making an informed business decision. It provides stakeholders with comprehensive information, allowing them to confidently make an informed decision, negotiate terms and conditions, and ultimately foster mutually beneficial partnerships.

Why Use a Due Diligence Checklist?

Utilizing a due diligence checklist is crucial because it acts as a navigational compass throughout the process. It ensures that no stone is left unturned by systematically guiding the assessment team through each aspect of the target entity’s operations, financial health, legal standings, and overall strategic position.

Not only does this checklist promote diligence and attention to detail, but it also enhances efficiency by streamlining the examination process. In addition, it helps prevent costly oversights that could result in unforeseen liabilities, post-transaction surprises, and regrets.

A due diligence checklist is key to performing comprehensive, efficient due diligence, ultimately contributing to an in-depth and reliable due diligence report, which is the bedrock of informed decision-making. It is a critical reference point for stakeholders and provides a comprehensive overview of the target company, facilitating transparency, trust, and successful transactions.

Frequently Asked Questions (FAQs)

Q1: who creates a due diligence report.

Typically, two parties are involved in creating a due diligence report: the target entity and the assessing party. The target company provides all necessary information, documents, and access to sites or facilities for review. The assessing party then thoroughly analyzes the data collected and prepares a comprehensive report. These parties may include financial advisors, legal counsel, and other relevant parties.

Q2: How long does the Due Diligence process take?

The duration of the due diligence process varies depending on several factors, such as the size of the target company, the complexity of operations, the availability of key personnel, and the thoroughness of the investigation required. On average, it can take a few weeks to several months to complete, encompassing in-depth financial, legal, and operational analysis.

Q3: Can the Due Diligence process be skipped?

Due diligence is critical in any business transaction and should not be skipped. It serves as a safeguard against potential risks, provides valuable insights into the target company, and promotes informed decision-making. Skipping due diligence can lead to unforeseen liabilities and jeopardize the success of the transaction. That’s why it is essential to conduct due diligence thoroughly and with the help of a comprehensive checklist.

Q4: What happens if issues are discovered during the Due Diligence process?

If issues or concerns are identified during the due diligence process, they are documented in the due diligence report and brought to the attention of relevant stakeholders. Depending on the severity and implications of these issues, decisions may be made to renegotiate terms, terminate negotiations altogether, or proceed with caution while addressing any.

Q5: Can a Due Diligence report be shared with all stakeholders involved?

The decision to share the due diligence report with stakeholders is at the discretion of the assessing party and the target company. Depending on the nature of the transaction, certain confidential information may be redacted before sharing, but in most cases, providing a comprehensive due diligence report promotes transparency and facilitates informed decision-making for all parties involved. In some cases, potential investors may request to view the due diligence report to better understand the target company and its standing before proceeding with negotiations or investments.

Q6: What happens after the Due Diligence process is complete?

After completing the due diligence process and creating a comprehensive report, stakeholders can use the findings to make informed decisions regarding their investments, partnerships, or purchases. Depending on the report’s outcome, parties may proceed with negotiations or terminate discussions altogether. The due diligence report also serves as a reference point for future evaluations and helps facilitate successful partnerships and transactions.

Streamline Due Diligence Report Creation and Implementation with DATAMYTE

DATAMYTE is a quality management platform with low-code capabilities. Our Digital Clipboard , in particular, is a low-code workflow automation software that features a workflow, checklist, and smart form builder. This tool lets you create customizable due diligence checklists for efficient and thorough examinations of target companies.

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In the intricate world of business transactions, the creation of a due diligence report is more than just a procedural step; it is a fundamental exercise that carries considerable weight in the decision-making process. 

A Due Diligence Report is an indispensable tool that equips stakeholders with the insights needed to navigate financial, legal, and operational risks, ensuring that each move is made with confidence and clarity. A comprehensive due diligence report is not just a formality — it’s an act of strategic foresight and a shield against the unpredictable, serving to cement a foundation of trust and success in potential alliances.

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M&A Due Diligence Issues Reporting Template

This downloadable issues report template can be used to highlight legal issues identified by counsel during the due diligence process of an M&A transaction for their client. This issues report is not intended to cover every document reviewed during the due diligence process but provides a succinct explanation of key legal issues identified by counsel that need to be addressed prior to closing, such as through supplemental due diligence requests and/or in the transaction documents themselves.

The issues report template assumes the target company in a M&A transaction is a corporation, but note that many of the categories can be updated to apply to another type of target entity, such as and LLC or LP.

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What is a due diligence checklist template?

A due diligence checklist template is essential for attorneys and legal departments involved in significant transactions such as a merger and acquisition (M&A) process. Having a checklist, timeline, or model form gives attorneys an organized and efficient document to help collect, understand, and assess all information received during both simple and complex legal processes.

What due diligence resources are available?

There are countless due diligence resources available to help attorneys and legal teams plan and execute legal tasks at both state and national levels. These documents help eliminate unnecessary delays, allowing for better client service and more effective legal guidance. 

• Checklists map out step-by-step processes for attorneys, helping to ensure that every step of a legal process is detailed. Checklists can range from simple corporate maintenance issues to major acquisitions of products or businesses.
• Model forms are exactly as they sound: templates used to make routine legal tasks easier and more efficient. These can include stock purchase agreements, merger and asset purchase forms, LLC and stockholder agreements, and any number of organizational documents.
• Practice notes and legal updates guide attorneys and keep them up-to-date on general corporate law topics such as public and private mergers, stock and asset acquisitions, as well as relevant case law. 
• Access to legal insiders and subject matter experts is also critical. Tapping into the collective knowledge and experience of reference attorneys allows for greater insights and an ability to solve problems before they present themselves.

Why should I use a due diligence checklist template during an M&A process?

A checklist, template, or other model form bring clarity and efficiency to the M&A process, giving the attorney or legal team leading an opportunity to understand the target corporation and the way it operates. This is helpful in many ways.

• First, the buyer gets a clear picture of how the target company does business. This top level, big picture look at the target company is beneficial for maintaining transparency during the overall process of acquisition, but is also useful to attorneys who will be in charge of both companies before and after the process is complete.
• Due diligence also helps determine the value of a company, which will direct the amount that is offered and eventually paid during the acquisition. This value determination occurs by examining obvious data, such as products, place in the market, cash flow, and balance sheets. However, it also takes into account information gained through employee interviews, document evaluation, and any active lawsuits or insurance settlements. This adds to the big picture assessment of the company and the merger.
• Finally, legal due diligence – despite its tediousness – makes the M&A process go faster by helping identify relevant documentation and work through any legal or regulatory problems before they snag the acquisition. Using model forms, checklists, practice notes and updates, and tool kits keeps attorneys on top of trends in corporate M&A procedures.

How does a due diligence compliance checklist help attorneys?

A due diligence checklist template makes any legal process – from simple to complex – smoother and will decrease the workload of legal teams, mitigating risks during and after the task.

• Using a checklist helps attorneys establish a big picture, understanding the acquisition and both companies in a way that allows for concise descriptions of what is at stake and what the purchase hopes to achieve. A template takes the guess work out of such complex work, streamlining and optimizing the process.
• After these initial steps, a template or checklist will help attorneys identify, organize, and complete any documents or interviews needed. This can include organizational files, contracts, employee benefits materials, and anything else that can help establish a company's value. 
• As the process ends, a checklist or template helps the acquiring company look over its work and determine if there are any holes that require more information or investigation. As the benefit of legal due diligence is mainly for the buyer, using legal checklists safeguards against missing any essential information.

When can I use a due diligence checklist template?

A checklist, template, or flowchart is useful in almost any legal situation where an attorney wants to control the process or workflow. Besides obvious topics such as financial information and strategic fit, a template can shed light on numerous other issues. These include:

• Gathering information on employee plans, such as health insurance, disability, severance plans, retirement plans, or any stock purchase or incentive plans. This is especially important during an M&A process, where the purchasing corporation needs to know what plans the target corporation offers its employees.
• Additionally, general corporate matters such as charter documents, board members, security holders, and the minutes of stockholder and board of director meetings are necessary to the acquisition process. This, of course, can be time-consuming, eating up work hours very quickly. A template or checklist helps streamline the information, making sure legal teams stay on track and investigate only the information they need.
• Finally, a due diligence checklist or template can help a target company get further intelligence on competitors. The buyer will have access to the target company's current and anticipated competitors, which may be new data. This allows the buyer to immediately determine the advantages and disadvantages of the company's products and technologies.

Make sure you're addressing all the issues with legal checklists from Practical Law

Ultimate Due Diligence Checklist: Essential Steps for Success

• April 30, 2024
• Michael Kendrick
• Approx. Read Time: 10 Minutes

During a corporate acquisition or merger, a comprehensive due diligence checklist helps you stay on track when assessing the operational compatibility of all entities involved in the process. An effective due diligence process lets you assess and verify the financial information, legal compliance, internal operations, and security of the company.

This article provides an overview of the areas to consider when developing a due diligence report. It includes a step-by-step due diligence checklist that acts as a basic guide and can be adapted for different industries or company structures.

Here are a few things to consider before completing a merger or acquisition:

• Due diligence includes looking into various aspects of a company's activities, including financial health, operational structure, market position, and even potential litigation risks. Both internal and external operations are considered during the due diligence process.
• The purpose is to thoroughly assess the target company's strengths and weaknesses. It also identifies problems that could derail or delay the entire deal.
• A due diligence checklist helps you stay organized when assessing the various aspects of the target company's operations.
• Completing all the items on the checklist should give you a comprehensive overview of the target company, so you can address any potential issues before completion of the deal.
• Outsourcing some of the research required for due diligence helps speed up the process and helps to ensure you collect all the necessary information quickly and efficiently.

Table of Contents

What is a due diligence checklist.

• Core Components of the Ultimate Due Diligence Checklist

Crafting a Thorough Due Diligence Report

Leverage cisive's advanced due diligence services to mitigate business risks.

The due diligence checklist sets out the specific items you should assess and analyze before a merger or acquisition. This checklist helps keep you organized during the initial assessment process and helps to ensure you do not miss any potential problems or weaknesses that could threaten the success of your new venture.

Completing a due diligence checklist gives you a quick overview of the health of the business and shows you areas that might need to be addressed prior to the acquisition.

When due diligence is lacking, you might overlook potential problems that could affect the prospects of the merged or acquired company. Poor due diligence could even cause the entire deal to fall through.

Recommended Reading: What Is Merger and Acquisition (MandA) Due Diligence?

How to Create the Ultimate Due Diligence Checklist

Creating a due diligence checklist involves assessing several topics related to efficient business operations. This includes external issues, such as legal, regulatory, and financial compliance, and internal security and human resources concerns.

Here are the items to include when creating a due diligence checklist.

1. Legal, Regulatory and Compliance

Evaluation of the legal and regulatory aspects of a deal helps ensure the acquiring party is fully aware of any legal risks or any compliance issues that must be resolved before the deal is complete.

Aspects to consider as part of legal and regulatory due diligence include the following.

Company Structure and Legal Standing

This section of your report sets out the details of company structure and compliance with business filings for legal operation, such as the articles of incorporation and certificates of good standing, DBA listings, etc. Additionally, review current regulatory and compliance programs juxtaposed to those recognized as industry standards. Assess any known pending and past legal actions and or liabilities.

Contracts and Agreements Currently in Effect

Contracts with other businesses, individuals, and organizations are included and examined as part of this section's due diligence checklist.

Intellectual Property (IP) and Trademarks

This part includes a list of all trademarks, trade names, copyrights, and patent applications both in your country and abroad. Licensing agreements, consulting contracts, and any current claims on intellectual property are also included.

2. Financial, Accounting and Budget Structure

Financial due diligence looks at the target company's financial data to evaluate the accuracy of these reports. Companies in the financial industry may require specific extra steps to take when completing due diligence for financial services.

The section on financial due diligence should include the following.

Historical Financial Statements

All information on past financial performance should be included on the official financial statements of the target company. Consider cash flow statements, balance sheets, and income statements from the company when conducting a financial assessment.

Assets and Liabilities

This part of a financial due diligence report involves everything the company owns, and any debts held by the company.

Assets may include property, equipment, supplies, and inventory. Debt includes any outstanding loans and open lines of credit.

Revenue and Expenses

Assessing the revenue and expenses of the target company gives you a good overview of potential future profit and loss.

Sales contracts, historical sales data, and pricing strategies are included in a revenue assessment. This section of your due diligence report should also include a breakdown of annual expenses and a list of necessary future expenses, such as equipment replacement or upgrade costs.

Reviewing current and past departmental budgets will help you understand how disciplined the management structure is for staying on budget against projected revenue forecasts.

Taxes and Tax Compliance

Prior tax returns, estimated tax payments, and any current ongoing audits should be listed in the tax section of a due diligence report.

Financing Agreements

If the target company has ongoing financial agreements, including mortgages on owned properties and business loans, these should be listed in this section.

Cash Flow and Financial Projections

Your due diligence report should include details on the current cash flow of the business and any financial projections for future growth or challenges. One important aspect to consider is whether the current cash flow is on track to meet future financial goals.

Recommended Reading: Your Must-Have Guide to FDIC Background Check Requirements

3. Operational, Lean Efficiencies

Operational due diligence includes assessments of the internal processes of the target company. The goal of this section of a due diligence report is to identify operational strengths and weaknesses.

Here are some aspects to include in your operational due diligence checklist.

Business Operations

Business operations covers all the basic ways the company functions. It includes a list of products and services offered by the company, a description of the customer base, and the company's industry position in relation to major competitors.

Internal Processes

This section involves an in-depth investigation of business functions, such as sales, marketing, production, distribution, and customer service. The goal of this part of due diligence is to identify bottlenecks and inefficiencies within the internal operations of the target company.

Supply Chain

An evaluation of the supply chain involves assessing current suppliers and vendors and collecting data on inventory management practices and distribution processes.

Technology Infrastructure

The software and hardware used by a company can affect overall efficiency, so this part of due diligence looks at the IT infrastructure and individual programs and systems used by the company. A major consideration here is whether the target company's systems are compatible with systems used by the acquiring company.

4. Commercial, Market and Growth Potential

Commercial due diligence looks at market position, customer relationships, and the overall competitive landscape in the industry.

These are some items to include in a commercial due diligence report.

Market Analysis

This assessment looks at market trends, market size, competitive forces, segmentation, and projected market growth.

Competitor Analysis

Examine key competitors operating in the business landscape of your target company and describe their perceived strengths and weaknesses.

Customer and Client Contracts

Ensure you have a thorough understanding of all contracts currently in effect with clients and customers. It should include details about contract terms and conditions, renewal rates, and risks incurred when transferring these contracts to the new business.

Sales and Marketing Strategies

Sales strategies and marketing tactics should be aligned with current marketing trends. Address branding, pricing strategies, and advertising venues in this section. Review current and future revenue projections with an eye on reality verses optimism approach .  

Revenue Model Assessment

The target company should have revenue models and streams that align with the acquiring company, so a revenue model assessment helps you determine any potential upselling and cross-selling possibilities.

5. Human Resources, Company Culture

The human resources portion of a due diligence report covers every aspect of HR operations in the target company. The goal of this section is to find ways to smoothly transition employees of both companies into a merged system.

Items you should consider during the human resources assessment include the following.

Organizational Structure

Make merging roles easier with a thorough assessment of the management positions, executive roles, leadership pathways, and role requirements throughout the target company.

Employee Contracts and Agreements

Assess all employee contracts, including offer letters, bonus compensation, and non-compete agreements, on-boarding processes, including payroll processing.

Also address employee benefits and compensation, paid time-off (accrued or granted) , including health plan details, stock options, and retirement plans. Consider the contractual obligations of the acquiring entity when it comes to renewing or adjusting benefit plans.

This is sometimes referred to as an employee adoption process, as employees are transitioned into employees of the newly acquired company.

Labor Agreements and Union Relationships

Collective bargaining agreements and labor agreements often remain in effect after an acquisition or merger, so use this section of your due diligence assessment to determine your company's obligations regarding labor agreements.

HR Policies and Procedures

Assess the target company's human resources department for compliance with legal regulations regarding hiring, termination, and all other regulated areas human resource operations. This may include examining recruitment, screening practices, and employee training to help ensure proper policies are in place and alignment with your company's current standards.

6. Real Estate and Asset Valuations

Assessing the real estate holdings and asset profile of the target company helps you determine any risks or benefits related to the asset portfolio.

Below are some items to include in a real estate and asset due diligence report.

Valuation of Tangible Assets

This part of the assessment should include appraised valuations of all physical assets, including property, equipment, and inventory.

Lease Agreements and Rental Income

Evaluate all leases, subleases, and equipment rental agreements to include in this section of a due diligence report. Highlight all details about rental terms and options that could present a potential risk for the company.

Environmental Site Assessments

If the company owns or leases property, any paperwork related to environmental site assessments of the land should be indicated in the due diligence report. The acquiring company should check for applicable compliance with local, regional, and federal laws regarding environmental impact mitigation.

Infrastructure and Facility Condition

You should contract for a thorough inspection of all property, facilities, and equipment involved in the acquisition. This inspection report should indicate any regular maintenance required and define the condition of the property and equipment. Request any detailed maintenance histories related to any real properties, facilities, or equipment to support the claims of the current reported conditions.

Liabilities and Obligations

Due diligence reports should list any mortgages, liens, maintenance and inspection agreements, property tax obligations, and regular utility payments. These should collectively offer a clear overview of the costs of running the facility.

 7. IT Systems, Digital Security and Functional Contingency Plans

Information technology and digital security systems should be designed to reduce risks, such as data loss. According to IBM, the average cost of a data breach rose 15 percent between 2000 and 2003, making data handling concerns a major factor for consideration during an acquisition.

Due diligence on the IT-related aspects of a business includes those below.

Inventory of IT Systems and Software

This inventory should include a list of all hardware and software owned and used by the company. It should also describe the databases, networks, and servers used to manage information technology.

Data Security and Privacy Measures

Due diligence regarding data security includes an overview of data handling practices and a description of how the company protects client, customer, and employee privacy.

Cybersecurity Vulnerability Assessment

Investigate how the company protects against cyberattacks and the procedures for handling malicious digital activity, such as hacking or denial of service attacks.

Disaster Recovery and Business Continuity Plans

Continuity and contingency plans discuss the company's plans for recovering and continuing IT operations in a natural disaster. It should include details about alternative emergency facilities and any procedures for handling and preventing data loss.

IT Compliance and Regulatory Adherence

Check whether the target company's current IT setup meets information technology laws and standards for your industry to create this section of your due diligence report. Also indicate whether the company complies with data privacy laws in any countries where it has a digital presence.

Recommended Reading: Why Data Privacy Training Matters in Financial Services

This due diligence checklist can help you organize the process of assessing and analyzing a target company during an acquisition or merger. Depending on the specific industry, you may also have other concerns or considerations to include.

Once you have a due diligence report in hand, use this information to set specific contract terms during the acquisition deal and indicate anything the target company needs to address before the deal can go through.

Acquiring a business is a massive undertaking, and due diligence is essential to complete the process in an organized and timely manner. Advanced due diligence services from Cisive can help you tackle the challenges of crafting a comprehensive due diligence report.

Contact Cisive today to speak with an expert and create a plan for a due diligence process tailored to your company's needs.

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How to Prepare a Legal Due Diligence Report of a Company?

Legal due diligence report refers to taking all necessary measures to protect one's interests in a certain transaction. The deal could involve buying or selling real estate, signing a contract, etc.

Table of Contents

How to Carry Out Due Diligence?

A legal due diligence report investigation involves reviewing documents and interviewing employees to gather information about a business. In order to buy or invest in a business, a legal due diligence investigation is conducted.

Every day, we encounter several business transactions. Millions of dollars are invested by individuals to buy an entire firm. If one is unfamiliar with commercial transactions, he may have puzzled about how people in the industry trust firms with their millions of dollars. Without a doubt, investing such significant sums takes time. Investors or businesses conduct an extensive study before investing even one hundred rupees. “Due Diligence” is the term used to describe this inquiry.

The term “ legal due diligence ” describes the procedure of examining and recording a company’s financial, legal, and compliance issues. Before making an investment or receiving funds, the investor particularly looks for regulatory and procedure compliance. The phrase “ due diligence ” describes the practice of thoroughly investigating something before acting. It is applied in several business transactions, each having its guidelines for performing background research and compiling the results into a report. Depending on the purpose of the report and the topic under investigation, its size and scope will change. 

Due Diligence Is Generally of Three Types:

Firm due diligence.

Firm due diligence entails a thorough investigation of the parties to a transaction, the chance that the business will succeed in the future, and the quality of the investment.

Financial Due Diligence

Financial due diligence is a crucial step in which the business’s operation, financial, and commercial prospects are confirmed. It provides the purchasing company with a clear picture of whether the purchase is worthwhile or not. It entails a thorough examination of the following: internal controls, tax compliance, audit procedures, and accounting policies.

Legal Due Diligence

It focuses primarily on a transaction’s legal ramifications. It searches for any legal hazards or warning flags. Both intra-corporate and inter-corporate transactions are typically included.

When a company or an interested investor wants to purchase or invest in a firm, a legal due diligence  examination is carried out. To ensure that the purchase or investment is advantageous, a legal due diligence investigation is conducted to gather information about the company. All relevant information and prospective liabilities are revealed during the investigation. A decision can be made with knowledge once the information has been gathered and examined. 

Why Is Legal Due Diligence Significant Nowadays?

Due diligence in legal matters is crucial for many reasons, but it’s most crucial for making wise business judgments. The reasons for this include:

• Respect for the law is essential. The counterparties to the transaction are required to abide by all applicable laws and statutes and other legal obligations. The responsibility to ensure that the legal criteria have been met is on the parties. For example, a buyer needs to confirm that the developer has the relevant permits to build the residential apartments.  
• Nearly every industry is experiencing a rise in fraud. Scams involving impersonation and fraud involving forged documents/title deeds are common in real estate transactions. Precautions can be taken in this situation to prevent loss. Therefore, a specific level of care is justifiably expected. 
• Another crucial area in which the party must pay attention is documentation. Forgery and impersonation fraud is on the rise. It becomes even more crucial to thoroughly examine the documents and confirm their veracity.  

Tools Regarding Legal Due Diligence

After realising the value of legal due diligence, the question of how to go about completing it and what tools to use arises. Due to the extremely complicated nature of both international and local economic transactions, no one analytical method can be recommended as such. One approach is to ask the target organisation a series of questions about its overall financial situation business hazards, and risk management practices. Another method is to ask the vendor to make representations and guarantees in the business contract. The third approach involves examining the financial report of the seller’s company along with the examination of the legal concerns involved in the deal.

Report on a Company’s Legal Due Diligence

Depending on the audience it is intended for, this report  can take on a variety of formats. However, a legal report of due diligence frequently includes the following information:

• A statement outlining the research topic
• Documents that support the research, including market research, corporate reports, legal records, and transaction copies
• An examination of the proposal’s strengths, opportunities, weaknesses, and threats is known as a SWOT analysis
• Information on any debts, liabilities, or other financial commitments that could impact the conditions of any business deal
• Statistics and other information, such as market research, inspection results, valuation reports, surveys, and occasionally public feedback.

Procedure for Exercising Legal Due Diligence

It   can be carried out in two different ways. Data submitted in answer to the acquirer’s questionnaire; predetermined data presented in a “data room” by the seller/target company. A significant volume of data is offered to interested parties using the data room method so they can examine, evaluate, and perform due diligence on it. Huge data are presented here. The tender process has had success with the data room method for disinvestments. By using this procedure, the vendor can maintain assurance that each bidder is given equal treatment and access to the same information or data. As a result, the information and papers provided to all bids are preserved similarly.  

After that, lawyers will prepare a legal report of due diligence that can be used to negotiate the tricky issues surrounding the warranties and representations that should be included in the purchase and sale agreement or financing contract, the disclosures that must be made, and the amount, if any, that should be set aside in escrow.  

Conclusion 

The business transaction is just as significant as a legal report of due diligence. It should be carried out with the utmost care. The report should contain all pertinent information. With different transactions, a report’s various components change. Therefore, a report includes all of the significant outcomes of a legal due diligence procedure. Additionally, it improves the investor’s perception of the company under investigation. A thorough legal report of due diligence that is well-documented is an addition to the decision-making process.

Thus, a legal report of due diligence becomes crucial to a deal. Drafting a Legal due diligence report can seem like a daunting effort, but with the correct procedures and checklists, the task can be made simpler.

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Due diligence in M&A transactions: A detailed process and checklist

M&A activity is on the rise, with over 60% of CEOs planning to make at least one acquisition in the next three years.

A crucial component of every successful acquisition is due diligence — the process involving thorough examination and analysis of the target’s business. 

This comprehensive guide to due diligence in mergers and acquisitions transactions aims to offer practical insights and strategies for conducting effective assessments. It also equips professionals with the M&A due diligence checklist needed to ensure efficiency throughout the process.

What is due diligence in M&A?

Mergers and acquisitions due diligence is the comprehensive assessment process of a target company’s financial, legal, operational, and other aspects. Its purpose is to evaluate the risks, opportunities, and synergies of the potential deal.

Through robust due diligence, both the buyer and seller gain a deep understanding of each other’s strengths, weaknesses, assets, liabilities, and overall viability. This process enables informed decision-making, mitigates risks, and helps negotiate terms that reflect the true value of the deal. 

Ultimately, due diligence activities serve to minimize surprises, enhance transparency, and increase the likelihood of a successful transaction for all parties involved.

Additional read: Merger vs acquisition — what is the difference?

The importance of due diligence in M&A transactions

Here’s how exactly due diligence helps during the M&A process from both the seller’s and buyer’s perspectives:

Types of M&A due diligence

Due diligence for mergers and acquisitions covers several distinct areas. Let’s explore each of them.

1. Financial due diligence 

This examines the target’s financial performance and condition, so the review of income statements, balance sheets, cash flow statements, financial projections, and contingent liabilities is essential. It also assesses the accuracy of financial information, identifies potential risks, and evaluates the company’s financial health.

2. Legal due diligence

This reviews the target business’s legal structure, contracts, litigation history, intellectual property rights, legal compliance with regulations, and any outstanding legal or regulatory issues. This type of due diligence ensures that the proposed transaction complies with applicable laws and regulations and identifies any legal risks or liabilities.

3. Operational due diligence

The operational review focuses on evaluating the target’s operational efficiency, processes, systems, and key performance indicators. It aims to identify operational strengths and weaknesses, assess scalability, and uncover opportunities for improvement.

4. Commercial due diligence

This type of due diligence involves conducting market analysis and evaluating the target company’s market position, customer base, competition, industry trends, and growth prospects. It  assesses the target’s competitive advantage, market opportunities, and potential threats, providing insights into its commercial viability.

5. Tax due diligence

This examines the target company’s tax affairs, compliance with tax laws and regulations, potential tax liabilities, and government audits. It also assesses the tax implications of the transaction, including any tax exposures, credits, or restructuring opportunities. Generally, tax due diligence ensures that the potential buyer understands the target company’s tax situation and can adequately plan for tax considerations in the deal structure.

6. Technology due diligence

This reviews the target’s technology infrastructure, intellectual property assets, R&D capabilities, and IT systems. It also assesses technology risks, identifies opportunities for innovation, and evaluates the scalability of technology assets. You can explore our technical due diligence checklist for a comprehensive review of the target company’s technology landscape.

Overview of the due diligence process in M&A

The key stages included in the M&A due diligence process are:

1. Preparation

• Define the scope and objectives of due diligence.
• Create a due diligence team comprising professionals from various relevant fields.
• Prepare a due diligence request list outlining the specific information and documents needed from the target company.

2. Information gathering

• Request documents and information from the target company based on the due diligence request list.
• Review financial records, legal documents, contracts, operational data, intellectual property assets, regulatory compliance, and other relevant materials.
• Conduct interviews with key personnel to gain insights into the company’s operations, culture, and future plans.

3. Analysis and evaluation

• Analyze the collected data to assess the target company’s financial health, operational performance, market position, and potential risks.
• Evaluate the compatibility of the target with the acquiring company’s strategic objectives and integration plans.
• Identify any significant issues, risks, or opportunities that may impact the transaction’s value or feasibility.

4. Report and recommendations

• Compile findings into a due diligence report detailing key observations, findings, and recommendations.
• Present the report to stakeholders, including senior management and potential investors, highlighting critical issues and their implications.
• Provide recommendations for mitigating risks, deal structuring, and optimizing value creation post-acquisition.

5. Negotiation and decision-making

• Use the insights gained from due diligence to choose the best negotiation tactics. This will help you secure favorable deal terms, including purchase price, warranties, and post-closing arrangements.
• Make decisions based on the findings of due diligence, weighing the risks and opportunities associated with the transaction.
• Finalize the transaction documents and proceed with closing the deal.

Comprehensive M&A due diligence checklist

To enhance the efficiency of your due diligence investigation, we’ve compiled a comprehensive M&A checklist.

Every M&A deal is unique, so it’s crucial to approach due diligence in a way that fits the specific situation. The checklist we’ve provided can be adjusted to meet the particular needs of each deal, ensuring a proper due diligence process.

Additional read : Explore the top winning mergers and acquisitions strategies .

Common pitfalls and how to avoid them

Due diligence in mergers and acquisitions is a complex process that presents several challenges. Let’s learn how to overcome them:

Key takeaways

• Due diligence in mergers and acquisitions refers to the comprehensive assessment process of a target company’s financial, legal, operational, and other aspects. Its purpose is to evaluate the risks, opportunities, and potential synergies of the deal.
• Comprehensive due diligence is crucial for informed decision-making and a successful merger or acquisition. It helps uncover hidden issues, assesses the target company’s viability, mitigates risks, and ensures alignment with strategic objectives.
• The process of due diligence in M&A involves various stages, including preparation, information gathering, analysis and evaluation, reporting and recommendations, negotiation, and decision-making. Each stage requires careful planning, thorough review, and collaboration among stakeholders.
• Due diligence covers several distinct areas, including financial, legal, operational, commercial, tax, and technology due diligence. Each type focuses on evaluating specific aspects of the target company to identify risks and opportunities.
• Common challenges during due diligence include communication gaps, managing large volumes of data, insufficient expertise, inquiry uncertainties, time constraints, and cultural differences. Addressing these challenges requires effective communication, resource allocation, and cultural alignment strategies.

Other insights

Tech-driven M&A: 12 essential M&A tools for dealmakers

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How to prepare a due diligence report

This article is written by Prachi Gupta who is pursuing a  Diploma in M&A, Institution Finance & Investment Laws (PE & VC Transactions) from Lawsikho .

Table of Contents

Introduction

We come across several business deals every day. People investing millions of dollars for acquiring a whole company. If one does not have much knowledge about business deals then he would have certainly wondered as to how business people entrust companies for investing their millions of dollars?

Certainly, investing such hefty amounts is not an overnight process. Before investing even a hundred rupees, investors or companies carry out a lot of research. This research is often referred to as “Due Diligence”. 

Analysing the term “Due Diligence”, one can infer that it is an act of consciously analysing something before acting on it. Now talking of it technically, it can be referred to as a conscious analysis and research done by reasonable businesses or companies before investing or carrying out any transaction. It is when this act is summarised in the form of a report, it is known as a “Due Diligence Report”. 

In this article, we are going to seek answers for various questions like what is a Due Diligence Report, what is the need for a Due Diligence Report, how is a Due Diligence Report prepared, what are the elements of a Due Diligence Report, and what are some things a person must keep in mind before preparing a Due Diligence Report.  

Due Diligence Report

Due Diligence Report is the summary of the data collected in the process of Due Diligence. Due Diligence is a process of estimating the commercial potential of an entity, comprehensive evaluation of the financial viability of the entity concerning its assets and liabilities, and; an examination and verification of the operations and material facts in relation to a proposed transaction.

There are essentially 3 types of Due Diligence:

• Business Due Diligence : It includes the thorough check of the parties involved in a deal, the future likelihood of the business, and the standard of the investment.
• Financial Due Diligence : It is an important part wherein the financial, operational, and commercial prospects of the business are validated. It gives a clear picture to the acquiring company as to whether the deal is worthy or not. It involves the review in detail of the following: accounting policies, audit practices, tax compliances and internal controls.  
• Legal Due Diligence : It covers mainly the legal aspects of a transaction. It looks for any legal red flags or pitfalls. It usually incorporates both the intra-corporate transactions, and inter-corporate transactions.

Drafting a Due Diligence report is essentially followed by the investigation process. After collecting all the relevant information from extensive research and investigations, one must produce the results into an organized report.

There are various transactions for which Due Diligence is performed. The kind of transaction determines the scope and length of the Due Diligence Report. 

The various transactions include: 

• Mergers & Acquisitions: In such due diligence, the buyer checks various factors like the commercial presence of the company, financial, litigation, patents, and other relevant information of the seller. Whereas, the seller checks the background of the buyer, financial capabilities, and various factors to ensure that the party will commit to the transaction and is capable of paying the negotiated transaction amount. 
• Joint Venture & Collaboration: When a company collaborates with another, the most important factor that is considered is the market reputation of the company and the acceptability of resources at its end. 
• Partnership : In cases of partnership, due diligence is done for strategic partnerships, strategic alliances, or such other partnerships.
• Public Offer: The aspects such as a decision on public issues, disclosure in a prospectus, post issue compliance, etc require due diligence in Public Offer.

Elements of a due diligence report

A Due Diligence Report can have various formats depending on the targeted audience. But a Due Diligence Report typically may include the following:

• A Statement describing the subject of research.
• Documents in support of the research such as corporate reports, legal documents, transaction copies, market research, etc.
• SWOT Analysis i.e. an overview of the strengths, weaknesses, opportunities, and threats linked with the proposal.
• Information regarding any liabilities, debts, or financial obligations that might affect the terms of any business dealing. 
• Statistics and other information such as surveys, valuation reports, inspections, market analysis, and sometimes public input.

The variation in the format of a due diligence report can be seen with an example. For instance, due diligence conducted by a buyer before entering into a real estate deal might create a  summary of findings related to zoning and the usage of land; regulatory and compliance issues; inspection reports; and, property assessment and taxes. 

Drafting a due diligence report

Drafting a Due Diligence Report requires to address three questions: 

• Who is the target audience?
• What is the objective of the report?
• What are the main aspects of decision making?

The various areas focused by a due diligence report are:

• It assesses the viability of the company which can be done by a thorough study of the business and the financial aspects of the target.
• It analyses the ratio and financial data to understand the monetary aspect of the proposed deal.
• It even focuses on analyzing the macro environment of the company and its impact on the same. This is necessary as no business operates in isolation.
• An important factor that is considered is the capability and credibility of the people who are operating the company.
• A due diligence report also covers any kind of pending litigations and regulatory issues.
• An important analysis in today’s time is the kind of technology available with the company. It becomes important as technology plays a major role in deciding the future actions of any company.
• It also focuses on creating a synergy between the two companies that could help in decision making.

Sections of a due diligence report

The various sections of a due diligence report can be categorised as follows: 

• Corporate Records: The legal counsel seeks to review the  principal formation documents of a target company, including the articles or certificate of incorporation and bylaws if the target company is a corporation, or the articles or certificate of organization and operating agreement if the target company is a limited liability company, including all amendments. 
• Financial Informations : It involves the review of the copies of financial statements for the past five years that have been audited, including all notes and management’s discussion and analysis.
• Indebtedness : It involves an analysis of the indebtedness of the seller in terms of loan agreements, mortgages, notes and security agreements; reviewing the relation with lenders and constant commercial code searches with each daughter company.
• Employment and Labour : It includes the detailed lists of officers, directors, and all the employees; documents related to pensions, any profit sharing, pensions, deferred compensation, stock plans, and other non salary compensation or benefits; and any pending litigations related to labour and employment law. 
• Real estate: It includes the copies of documents like insurance policies of the real property, appraisals and all studies, site evaluations, and government filings and reports prepared by consultants. 
• Agreements : All agreements of the company and its subsidiaries, real estate leases, partnership or joint venture agreements; marketing, sales, commission, distributor, franchise agreement; brokerage or investment banker agreements; client agreements; licenses and subscriptions and other material contracts.
• Supplier and Customer information : It includes the list of material customers and suppliers, correlation with the customers or suppliers related to disputes. 
• Legal : It includes copies of reports filed with government agencies, details of all the litigation and legal matters, copies of government licenses and any liabilities relating to environmental laws. 

Need for a due diligence report

• In a due diligence process, the main objective is to find any red flags before the deal is closed. It helps in checking for any potential risks in the future. 
• The information collected through the means of this report is crucial for decision making. In case, during the process of due diligence the company comes across any flaws, this could enable negotiations.
• The report enables the company to understand how the target plans to generate additional earnings. It plays like a reckoner in understanding the state of affairs at the time of the sale or purchase, etc. 

The main objective of this report is to give the dealing party a clear picture of how the business will perform in the future.

Checklist for due diligence

One could look for the following documents for performing a due diligence process:

Memorandum of Association, Articles of Association, Shareholding pattern, Certificate of Incorporation of the Company, Financial statements including Balance sheets , Profit and Loss Accounts, Income and expense statement.; Bank Statements; Income Tax Returns; Details and Information of the Directors and management of the Company; Statutory Registers; Utility Bills; Employee records; Intellectual Property Registration and other application Documents; Tax Registration Certificates; Property Documents ; Operational, Legal, other Financial Documents; etc. 

The various information one should look for during due diligence:

• Information on the company’s finances. This consists of financial statements for past years, tax returns filed and documents from accounts receivable. Information related to debt and loans could also be included in this category.
• Information on the employees of the company . This category includes information on the people holding positions in the company with their work experience. It may also include the data of the retired employees and their pension details.
• Information on the company’s assets. This category houses the details about the company’s different facilities, technology, and assets like intellectual property rights and copyrights.
• Information on partners, suppliers, and customers. This incorporates data about the different parties in the company’s supply chain and their relationships with each other.
• Legal information about the company. This includes data regarding any pending litigations, contracts, licences and permits with the company.  

Some of the aspects reviewed during due diligence:

• Reviewing Articles of Association & Memorandum of Association could enable in knowing the powers.
• Statutory Registers of the Company
• Financial Statements and Bank Accounts
• Taxation Aspects
• Legal Aspects
• Operational Aspects

Tips that could be considered while drafting a due diligence report

• While drafting a Due Diligence report if any issue is identified, one could consider discussing the same and its probable consequences. For instance, if it is identified that the target company is not compliant with a particular law, one could mention the possible consequences of such non-compliance and the ways to mitigate such  non compliance.
• Poor understanding of the task in question or purpose of Due Diligence.
• An incomplete list of documents required.
• Failure to analyze issues or the challenges which the client will land for missing  key issues such as expired licenses, hidden dues, etc.    
• To keep the report brief one must avoid superfluous information.
• One must be patient, thorough, and attentive to the details.
• One must ensure that only the relevant and the most important information are being added to the report.
• While investigating one must ask questions if something looks off. Even though one wants to trust the client, they might fluff information in the Confidentiality Information Memorandum (CIM).
• If a person does not have a legal background he must seek assistance from a lawyer or an attorney while drafting the report.

A Due Diligence Report is equally important as the business transaction. It should be done as diligently as possible. Every significant detail should be included in the report. The various elements of a report vary with different transactions. Thus, a report incorporates all the important findings of a due diligence process. Further, it gives a better picture to the investor of the investigated company. A complete and a well documented Due Diligence Report supplements the decision making process.

A Due Diligence Report thus becomes an important part of a transaction. Drafting a Due Diligence Report often seems an intimidating task but, following the right process and using the right checklists can help in making the task easier. 

• https://www.standardsfacility.org/sites/default/files/PG_343_Legal_Due_Diligence_Report.pdf
• https://www2.deloitte.com/content/dam/Deloitte/us/Documents/Real%20Estate/us-engineering-construction-ma-due-diligence.pdf
• https://dealroom.net/faq/due-diligence-report
• https://www.mondaq.com/india/operational-performance-management/17241/legal-due-diligence
• https://corporatefinanceinstitute.com/resources/knowledge/valuation/due-diligence-report/
• https://www.icsi.edu/media/portals/70/241120123.pdf  
• https://cleartax.in/s/due-diligence
• https://taxguru.in/company-law/checklist-due-diligence-company.html
• https://www.corporatefinanceineurope.eu/due-diligence/financial.htm

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Corporate legal Due Diligence – Approach and Checklist

Introduction

Due diligence is the investigation or exercise of care that a reasonable business or person is normally expected to take before entering into an agreement or contract with another party or an act with a certain standard of care. It is a one of the key exercise in corporate mergers and acquisitions. Due diligence can be of Financial, Legal, Secretarial, Asset, Human Resource, Environmental, Intellectual Property etc.

Due diligence can be carried out during the following corporate events:

> Mergers and acquisitions;

> Corporate Restructuring;

> Joint Venture, Partnerships, Collaborations etc.

> Investment rounds by PE, VC, HNIs etc.

> Initial Public Offering (IPO) and Further Public Offering; (FPO)

> Leveraged Buy-outs.

Due diligence can be a one-time exercise during above mentioned events or it can be a yearly exercise by investors choose professionals. Private equity or Venture Capital funds usually undertake Due Diligence exercise yearly in order to evaluate the Investee Company and its performance. Based on due diligence report, they take informed decisions about further rounds of investment, Enterprise value, price of securities, and/or exit from the investment.

What is Legal Due diligence?

A legal due diligence is a comprehensive assessment of the possible legal risks related to the corporate status, assets, contracts, securities, intellectual property etc. of the Target Company. It works as a precautionary exercise through which one can know the strengths and weaknesses of the Target Company and helps to identify the red flags or any legal hazards before entering into the transaction.

Objectives of Legal Due diligence

The objectives of a legal due diligence exercise may vary from case to case. However, some of the common objectives in most of the due diligence would be as follows:

• To take an informed decision on the proposed transaction;
• To assess the risk and liability;
• To uncover threats and weaknesses;
• To remove and work upon any non-compliance aspect of the Target Company;
• To arrive at proper valuation for the proposed transaction;
• To improve the bargaining position.

Importance of Due diligence

Due diligence in legal matters is crucial for many reasons, but it’s most crucial for making wise business judgments. The reasons for this include:

> The counterparties to the proposed transaction are required to abide by all applicable laws and statutes and other legal obligations. Respect for the laws of the land is must.

> Nearly every industry is experiencing a rise in fraud. Scams involving impersonation and fraud involving forged documents/title deeds are common in real estate transactions. Precautions can be taken in this situation to prevent loss.

> Litigation is very time consuming and costly exercise for anyone. So, before any transaction, one must carry out legal due diligence so that future litigation can be avoided.

Scope of Legal Due diligence

The scope of legal due diligence depends upon the proposed transaction, parties of the transactions, nature of the business of the Target Company, size of the Target Company etc. The Major Scope of the Legal Due Diligence includes the following:

> Vetting of Constitutional documents like Registration Certificates, Statutory Documents like MOA, AOA, Corporate Policies, Code of Conduct etc.

> Oversee regulatory compliance under Companies Act, FEMA, SEBI, Labour laws, Industry specific laws etc.

> Vetting of major agreements like Shareholders Agreement, Service Agreements, Commercial Agreements, Credit Facilities Agreement etc.

> Vetting of Property related documents and title including intellectual property related registration and agreements.

> Vetting of Secretarial records like Minutes, Registers, Boards Report, Annual Report etc.

> Oversee the litigation status, cases, notices etc. and possible legal costs associated with the same.

Checklist of Legal Due diligence

Legal due diligence is a complex process that can be lengthy depending on the size and nature of the Target Company. However, in most cases, checklist for Corporate Lawyers includes, but not limited to, the following:

Corporate Registration

> Examination of status of the Target Company like verification of corporate registration documents like Certificate of Incorporation, Memorandum of Association, and Articles of Association.

> Examination of other statutory documents like PAN , TAN, GST Certificate etc.

> Business specific registration documents like if entity is NBFC then NBFC registration certificate, if Target is capital market entity then SEBI registration certificate so on and so forth.

> Labour Law Registration Certificate like Provident Fund, Employee State Insurance, Professional Tax etc.

Corporate Structure

> List of Holding, Subsidiaries and Associates Companies.

> List of Promoters, Directors and Shareholders of the Target Company.

> List of Beneficial owners of Target Company in case there is body corporate shareholders.

Financial Matters

> Details of Short term and long term debt of the Target Company.

> Various legal documents like Sanction Letters, Loan Agreement, Mortgage deed, Hypothecation deed, Pledge Agreement etc. executed by the Target Company for effecting credit transactions.

> Stamp duty receipts of the above mentioned legal documents.

> ROC charge creation forms and challans on the property mortgaged or pledged of the Target Company.

Material Agreements

> All material agreements that Target Company has executed with the Customers, Clients, Holding Company, Subsidiary Company, Joint Venture Agreements etc.

> All material agreements that Target Company has executed with the Investors and/or Shareholders like Founder’s Agreement, Share Transfer Agreement, Share Subscription Agreement, Investment Agreement etc.

> All material agreements that Target Company has executed with the Directors, Key Managerial Personnel, Holding-Subsidiary Company, Employees etc.

> Copies of any agreement pertaining to provisioning of commission, revenue share, brokerage, finders’ fee, or any other arrangement relating to capital issuance and raising of investments.

> Copies of technical collaboration agreements, technology license agreements, IT agreements, data processing agreements, intellectual property development, assignment, ownership and/or licensing agreement, website design, development, trademark license agreements, technical assistance agreements or other co-operation and any arrangements with individuals or government.

> Details of list of immovable property owned by the Target Company.

> Details of Sale deed, Occupation Certificate and other legal documents verifying the ownership of the Property.

> Details of Plant and Machinery, Office equipment, Computers, Furniture and Fixtures etc.

> Details of Property taken on lease by the Target Company and Lease Agreement executed for the same.

Intellectual Property

> Details of all IP or similar rights and registration thereof.

> Details of software related rights and licensed by the Target Company.

> Details of all registered, unregistered and applied Patent, Trademark, Copyright, service marks, industrial designs, domain names, mobile applications, website etc.

> Details of any intellectual property rights licensed to and/or from third parties or any franchisee arrangements with third parties along with copies of relevant documents, including copies of all written technology licenses (including sublicenses), software licences, software license agreements, software development agreements, compulsory licenses, security agreements, royalty agreements, etc.

Corporate Secretarial

> Compliance with the provisions of the Companies Act, FEMA and SEBI rules and regulations.

> ROC Annual Compliances and Event based compliances.

> SEBI quarterly, half-yearly and yearly compliances.

> Vetting of corporate meeting minutes of the Target Company.

> Vetting of statutory registers of the Target Company.

> Vetting of various important resolutions and e-forms filled with the ROC.

> Vetting of share issuance and transfer records like form PAS-3, SH-4, Stamp duty etc.

> Vetting of various policies of the Target Company.

> Details of all pending, threatened litigation, inquiry, investigation against the Target Company and/or its Directors and Promoters.

> Details of show cause notice, demand notice or any correspondence received from government bodies having significant effect on the Target Company.

> Any judgments, decrees, settlements, consent decrees, orders or decisions rendered by courts, authorities and/or arbitration tribunals in relation to, or having implications on the Company.

> Details of any criminal proceedings initiated by / pending against Company and / or its promoters, directors and key managerial personnel, or other employees or officers.

> List of any prior, pending or threatened action against the Company related to unfair labour practice, wrongful dismissal or termination of any employee, violation of any human rights, etc.

> All current insurances, detailing the name of the insurance company, annual premium, the subject matter covered, the amount of cover, the nature of the cover, the date of the last renewal, the next renewal date, presence of bank clauses, and restrictions on assignment of insurance policies, if any, for the Company.

Human Resource

> Organisation structure along with names, designations, functions and responsibility, division-wise.

> List of all employees from the date of incorporation till date in excel sheet with following details:

• Name of Employee
• Personal Details like Address, Date of birth, Age, Gender, Marital status
• Employment Records: Date of joining along with completed years in employment of the Company; Cost to the Company (CTC); Date of resignation / termination along with reason for the same.
• Categories and work place: Present places of work; categorize them as permanent employees / contract labours / probationers / casual employees / apprentice.

> Copies of all human resources policies and manuals such as code of conduct policy, ethics policy, policy for prevention of sexual harassment, leave policy, asset usage policy, data security policy, grievance redressal policy, severance policy, etc. (if any).

> Information on any managing director or whole-time director of the Company being a director in or performing business activities on behalf of any other company undertaking business similar to the Company.

Procedure for exercising Legal Due diligence  

First of all, Target Company, Investor/Acquirer and Corporate Lawyers enters into Non-Disclosure Agreement before kick starting with the legal DD. After that professionals associated with the legal DD share their checklist or requisition list to the Target Company. To affect the smooth exchange of information and documents, a ‘Virtual data room’ is created which is secure, consolidated and remote way to gather, share, and review key documentation during the due diligence process in short period of time. Once, DD exercise is over, professional share their preliminary observation report to the Investor/Acquirer and the Target Company. Thereafter, all the parties seat together and discuss on the findings of the professional. This is the stage where further negotiation and bargaining can be done by the investor/acquirer. Once discussions are done and parties arrive at the final decisions, a final due diligence report is prepared and shared by the professional to the Target Company and Investor/acquirer.

Having seen the importance and broad scope of legal due diligence, it can be said that Legal Due diligence is must exercise before any M&A deal. If Legal DD is undertaken by the seasoned and experienced professionals, it can unearth the possible legal ramification and safeguard the interest of the acquirer/investor. It also helps in arriving at the right value of the securities and enterprise as a whole.

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Law Firms Can Keep Lateral Partners With Support at Work, Home

When a lawyer announces their departure, firms often scramble to employ strategies to retain them. However, such efforts often prove too little or too late for these lawyers. As the barriers to switching firms has eroded, law firms must abandon traditional levers to attract and retain people.

The question for law firms is how they can proactively retain talent before it reaches a critical departure. How do you ensure your new lateral doesn’t move laterally again? How do you ensure a return on the time and investment that goes into recruiting by creating a “sticky firm”?

Communication

Gaining insights into the reasons why lawyers stay or depart will help you navigate the competitive legal landscape and refine your lateral retention programs. Develop a multipronged approach to reach different talent pools, and ask candidates what they value.

According to a 2021 McKinsey study , employees leave because they feel organizations and managers don’t care about them. Rather than wait for departures to trigger feedback collection, conduct a comprehensive 360 review every 90 days throughout the lateral partner’s first year, followed by quarterly reviews in the second year and bi-annual reviews afterward.

A 360 review will allow lawyers to provide feedback on what is working and where they need support, and ensure the firm is utilizing active listening. Approaching this process with empathy, soliciting candid feedback on integration experiences, and extending the review practice to existing lawyers—not solely lateral hires—enhances the effectiveness of this approach.

Incorporate the feedback and allow the appropriate departments to support that feedback through execution.

Read More: Lateral Partner Integration Requires Business Development Plan

Create Community

Law firms must also demonstrate a willingness to invest in a lawyer’s personal development, know their organizational culture, and ensure that culture emphasizes meaning and purpose.

Mentorship initiatives can also significantly contribute to lateral lawyer satisfaction, integration, and retention. Pairing incoming lateral hires with experienced mentors—who want to help—provides a supportive network, smoother integration, and fosters a sense of belonging.

This mentorship dynamic helps laterals navigate the firm’s culture and provides a go-to resource for addressing challenges, questions, and professional growth. Mentorship and access to firm resources shouldn’t be reserved for a particular level of seniority.

Access to business development professionals should also begin as soon as the lateral walks in the door, regardless of title. Effective business development strategies can help lateral attorneys quickly build their network, develop new business, and establish themselves as part of the firm. This support can increase billable hours, revenue, and help create a more successful career trajectory.

According to the Major, Lindsey & Africa 2023 lateral partner satisfaction survey , a firm’s perceived ability to support lateral practices is a significant factor in attracting partners to their current firms. Positioning the BD team as collaborative partners in executing on promises made during recruitment and integration, and providing sufficient resources to support these objectives, is essential to lateral retention success.

Read More: Lateral Partner Recruiting Must Focus on Honesty and Clear Data

Flexibility, Paid Leave

When employees are supported during significant life events such as birth or adoption, caring for a family member, or their well-being, they’re more likely to return to work with a positive mindset. This can enhance productivity and focus, benefiting the firm’s overall performance.

A MetLife annual employee benefit trends study analyzed a subset of the Millennial generation, which represents the largest cohort in the workplace—and found that 74% of workers born between 1993 and 1998 want paid and unpaid leave benefits.

Offering paid parental leave is far less expensive than losing an employee who might otherwise quit. Employers should consider the costs of replacing workers who leave because they lack access to paid leave when raising their families.

Recruiting and training new talent is neither cheap nor easy. And once one employee quits because a workplace is unfriendly to parents, others are likely to follow. Paid parental leave is a better way to encourage lawyers to stay.

In the legal profession, the top three reasons women lawyers cite for leaving are caretaking commitments, level of work stress, and emphasis on marketing or originating business.

Business development professionals should support lawyers before and after their parental leave to help ensure a smooth transition back to work and continued success at the firm. To do this, the business development team should work with the lawyer to develop a comprehensive plan for their absence, which includes strategies for keeping clients informed and maintaining visibility while they’re away.

This may involve working with the lawyer to build their professional profile and remain top-of-mind with clients. Additionally, the business development team can help the lawyer plan their return to work, including strategies for reconnecting with clients and building new business relationships.

While law firms historically relied on brand reputation to ensure attorney satisfaction, contemporary dynamics demand a deeper understanding of why lawyers choose to stay or depart.

It’s pivotal for firms to keep in mind the competitive landscape, and craft a robust lateral retention program.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Brian J. Carrozza is director of client development at Goulston & Storrs.

Courtney C. Hudson is business development manager at Baker Donelson.

Megan K. Senese is co-founder and principal at stage, a women-owned business development and legal marketing firm.

Write for Us: Author Guidelines

To contact the editors responsible for this story: Jada Chin at [email protected] ; Jessie Kokrda Kamens at [email protected]

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