Due diligence is a term common to numerous fields of business that refers to the cautious investigation and care taken to understand a company’s financial situation before closing a financial transaction or pursuing a professional relationship. Due diligence saves time and money, mitigates risk — and can even improve the image of the company.
In this article, you’ll learn more about due diligence and find free downloadable templates and checklists to assist with the processes, like M&A Buyer Due Dilligence Templates, M&A Seller Pre-Due Dilligence Templates, and M&A Due Dilligence Report Templates.
Download this free virtual data room template to manage the entire M&A process. Attach documents, assign tasks, set alerts for incomplete items, and share the sheet with your team or external auditors.
Download M&A Due Diligence Data Collection Template - Excel
Before buying a company, you must thoroughly investigate several aspects of the business. Use this free Excel checklist to determine what information specific to what areas you should request from the target company.
Download M&A Buyer Due Diligence Checklist
To increase the efficiency of the due diligence process, sellers should prepare documents and information before signing the non-disclosure agreements (NDAs). Use this Word document to track which documents are easily available and which need to be prepared.
Download M&A Seller Pre-Due Diligence Checklist
After you’ve completed due diligence, you need to analyze the results and gather them into a report that summarizes the key discoveries. From there, you can make recommendations on how to proceed. This template can help you organize your findings for that report.
Download M&A Due Diligence Report Template
When computer engineers perform technical due diligence on a system, they need to ask a series of questions to help uncover flaws, vulnerabilities, and other possible issues. This Word checklist can help start that process.
Download Technical Engineering Due Diligence Checklist
With construction projects, you need to take a number of steps before you can even begin planning. Use this Word checklist to track completed items, and customize it to fit the needs of your project.
Download Construction Project Due Diligence Checklist
When establishing a long-term business relationship with a new vendor or supplier, due diligence helps you make sure the supplier can meet your expected needs and has similar business values. This checklist, available in Word, can pin down the questions to ask of your potential vendor or supplier.
Download Vendor and Supplier Due Diligence Checklist
The phrase due diligence requirements can come up in many fields, but is most common in tax preparation. Paid tax preparers must verify that they’ve met certain requirements when submitting tax returns on behalf of their clients, per Section 6695(g) of the Internal Revenue Code. Tax preparers can use IRS Form 8867 as a checklist.
Merger and acquisition due diligence is the process in which a potential buyer investigates the details of the target company, starting after they sign purchase documents. The operational and financial information that the seller provides to the buyer ensures that they overlook no details (such as litigation risks and liabilities) and that the claims about the state of the business are true. You will need data about several operational areas, including HR (which may be a separate process), IP ownership, customers and sales, contracts, and taxes. Note that a merger is where two companies join into a new company, and an acquisition is where one company buys another (this can be a stock transaction or an asset transaction).
After confidentiality agreements (like NDAs) are in place, the buyer requests documents and information from the seller and performs site visits. The buyer uses what they learn to analyze the target company’s situation.
Every situation is unique, so no single process works for all transactions — rather, each has to be customized to meet the demands of the specific transaction. A buyer will usually bring in third parties, such as attorneys, accountants, MBAs, and other analysts, as well as rely on internal experts like a CFO. By using a third party to manage the process, the executives can continue to run the business and not be deluged by document requests.
If the buyer determines the target is a good fit, it can use the information gained from due diligence to finalize the details of the transaction, including the purchase price.
Although not as common, the seller of the company can also perform due diligence on the buyer. This may be called reverse due diligence.
Due diligence is a complicated and demanding process that aims to protect both buyers and sellers. Follow these best practices to help the process flow better and ultimately come to a stronger conclusion:
Like any process, due diligence has its challenges. Here are a few mistakes that you should avoid:
When performing due diligence, begin with the following steps. While the list is not complete (and changes with every transaction), it’s a good place to start. For a full breakdown of M&A processes, read this article.
When startups and other companies decide to raise funds from venture capital (VC) firms, they are subject to due diligence. This allows the VC to analyze the company, verify the accuracy and quality of the financial information, and ultimately gain insight into whether the company is worth the investment. The process helps finalize the transactions details, including how much the VC invests and what percentage of the company it owns.
The process begins after the term sheet is signed. The company will then provide the documents and information requested by the buyer, stored in an online data room. The timeline varies from deal to deal, but the company seeking capital should promptly provide feedback; this helps keep due diligence from dragging on. For even greater efficiency, if the company doesn’t have a requested item, they should verify that it’s necessary before creating it.
Larger investments and investments at later stages require enhanced due diligence. If the VC decides not to fund a company, remove their access to the data room.
The term due diligence is common in many areas of business. Though it generally refers to a comprehensive assessment before closing a deal, it can have a different meaning depending on the practice. Below are some examples:
Individuals can also apply due diligence in their lives — for example, doing research before buying a product like a car or a mobile phone.
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