business plan due diligence checklist

The Ultimate Guide to the Due Diligence Process in M&A

Table of contents

Due diligence is the process that allows buyers to fully understand target companies in mergers and acquisitions.

For confidentiality purposes, companies do not disclose every detail of their operations to every company that expresses an interest.

Thus, the due diligence process allows the buyer to gain more insight into the company, its people, and how it operates.

If you’d like to know more about how DealRoom can transform your company’s due diligence process , click the link and visit our due diligence solution page.

What is Due Diligence Process?

Due diligence process is a solid review or audit of a company, usually undertaken before a financial transaction, usually merger or an acquisition. The aim of due diligence in business is to ensure that any decision taken regarding the company in question is an informed one, maximizing your chances of adding value in an M&A transaction.

Due Diligence Review

The due diligence process throws up lots of information on the target company, across all of its operational areas. The goal of the due diligence review is to piece together all of this information into a coherent story.

This usually involves the people in charge of the due diligence process convening and deciding if there’s anything that was disclosed in the process that changes their initial opinion on a deal.

For example:

• can the deal still go ahead?
• should it go ahead with a certain set of covenants?
• what concerns should be raised with the target company?

These are typical of the questions that will arise during the due diligence review.

The History of Due Diligence

“I like not fair terms and a villain’s mind.”

This line from Shakespeare’s Merchant of Venice shows that some form of due diligence existed all the way back to 1605 .

In fact, the first known usage of the term ‘due diligence’ came shortly before Shakespeare’s play in 1598 . But due diligence may be as old as transactions themselves - with the transaction itself creating a need to know more about the other side.

It wasn’t until the 20th century that due diligence took on the more structured form that we know today. The first time that due diligence is mentioned in SEC documents was 1933 , but it is fair to assume that the arrival of more sophisticated management accounting methods in the second decade of the twentieth century, saw the first tentative steps in modern due diligence.

What Types of Due Diligence are There?

In mergers and acquisitions, we typically think of four major types of due diligence:

• Financial due diligence : Focusing on the financial performance of the company until the present date and ensuring that the numbers presented in the financial statements are accurate and sustainable.
• Legal due diligence : Focusing on all legal aspects of the company and its relationships with its stakeholders. Areas typically analyzed include licences, regulatory issues, contracts, and any legal liabilities that may be pending.
• Operational due diligence : Focusing on the company’s operations - essentially looking at how the company turns inputs into outputs. This is generally considered to be the most forward looking type of due diligence.
• Tax due diligence : Focusing on all of the company’s tax affairs and ensuring that its tax liabilities are paid in full to date. Due diligence in tax also looks at how a merger would affect the tax liabilities of the new entity created by the transaction.

Why is Due Diligence Important?

A merger or acquisition is the biggest corporate transaction that any business will undertake.

Due diligence enables companies to undertake these transactions from an informed standpoint.

It can add significant value for the buyer by showing where the target company’s weaknesses (or red flags) are as well as identifying some opportunities within the target company that it previously wasn’t aware that existed.

What are the Challenges of Due Diligence?

Gaining an in-depth understanding of a company can be a highly specialized process beyond most people without experience in the field.

There tend to be a myriad of challenges, but the following are usually among the most commonly encountered:

• Not knowing what questions to ask: It is vitally important to know in advance what the issues are and what diligence questions need to be asked to investigate them properly.
• Slowness of execution: Asking sellers to acquire documentation or information can take time, often with the consequence of delaying the transaction’s closing.
• Lack of communication: Sellers, even willing sellers, tend to regard due diligence as a hassle, leading to impatience, poor communication, and even friction.
• Lack of expertise: There is a good chance that you’ll have to bring in some hired hands tor at least some parts of the due diligence process (e.g., an IP expert).
• Cost challenges: Due diligence can be expensive, running into months and extensive specialist hours, making many erroneously think that they can cut corners.

{{cta-block3="/cta"}}

Conducting Due Diligence

Conducting due diligence is an essential component of any M&A transaction.

To conduct due diligence means to thoroughly analyse a commercial business. It is done typically by a potential buyer prior to business transactions.

How to conduct due diligence on a company differs by transaction, but there are certain steps that are common to each deal. As a general rule, the larger and more complex the deal, the more due diligence will be required.

DealRoom has been a catalyst for due diligence in hundreds of M&A transactions, and the following steps for due diligence were present in each of them:

• Income statements
• Balance sheets
• Partnership agreements
• Existing contracts
• Profit/loss records
• Annual reports
• Tax filings
• Business and operational practices

You can find the detailed due diligence checklist below.

Due Diligence Checklists

DealRoom's Due Diligence Reports and Playbooks help team efficiently manage due diligence from the start. Diligence incorporates many moving parts and it is critical to a deal's success.

Our library of pre-built ready to use playbooks enables teams to thoroughly and effectively collect necessary diligence information.

Access the Diligence Templates Gallery

Due diligence process steps, policies and procedures.

Due diligence in M&A is a lengthy and intimidating process that involves multiple parties and phases. Listed are general due diligence process steps.

1. Evaluate Goals of the Project

As with any project, the first step delineating corporate goals. This helps pinpoint resources required, what you need to glean, and ultimately assure alignment with the firm’s overarching strategy.

This involves introspective questions revolving around what you need to gain from this investigation.

2. Analyze of Business Financials

This step is an exhaustive audit of financial records. It ensures that documents depicted in the Confidentiality Information Memorandum (CIM) were not fluffed.

Additionally, it helps gauge the company’s asset health, asses overall financial performance and stability, and detect any red flags.

Some of the Items inspected here include:

• Balance sheets and income statements
• Inventory schedules
• Future forecasts and projections
• Revenue, profit, and growth trends
• Stock history and options
• Short and long-term debts
• Tax forms and documents
• Valuation multiples and ratios in comparison to competitors and industry benchmarks

The detailed financial due diligence checklist could be found here .

3. Thorough Inspection of Documents

This due diligence step begins as a two-way conversation between buyer and seller. The buyer asks for respective documents to audit, conducts interviews or surveys with the seller, and goes on site visits.

Responsiveness and organization on the seller’s end are key to expedite this process. Otherwise, it may create an arduous experience for the buyer.

Following, the buyer examines the information collected to ensure proper business practices as well as legal and environmental compliances. This is the major part of due diligence process.

Overall, the buyer gains a better understanding of the firm as a whole and can better appraise long term value.

4. Business Plan and Model Analysis

Here, the buyer looks specifically at the target company’s business plans and model. This is to assess whether it is viable and how well the firm’s model would integrate with theirs.

5. Final Offering Formation

After information and documents are gathered and examined, individuals and teams collaborate to share and evaluate their findings.

Analysts utilize information collected to perform valuation techniques and methods. This substantiates the final dollar you are willing to offer during negotiation.

6. Risk Management

Risk management is looking at the target company holistically and forecasting risks that may be associated with the transaction.

How Long is Due Diligence Period

While road mapping, it may seem difficult to forecast how much due diligence is enough.  Despite its comprehensive nature, the due diligence process should only last between 30 and 60 days .

This is achievable if delegated to an efficient, dynamic team from multiple business functions. Ultimately, you want to close the deal as soon as possible, while also being thorough.

But, in reality, it is impossible to uncover all issues and potential complications during the investigation. Some items will not be uncovered until integration. However, the same idea applies to potential benefits.

This reinforces the importance to be energetic and efficient while maintaining quality to meet the due diligence period deadline.

How Many Due Diligence Requirements are There

Cultivating good organization and strategizing is key when trying to navigate due diligence process and meet the necessary requirements.

So you can stay systematic, outlined below is a typical due diligence management folder structure for M&A transactions:

• Transaction Related Documents
• Corporate Documents
• Contracts and Agreements
• Customers, Sales, and Marketing
• Procurement (Suppliers)
• Property and Equipment
• Environmental
• Legal, Litigation, and Regulatory
• Intellectual Property
• HR and Employees
• Information Technology
• Industry and other

How to Do Due Diligence on a Private Company

No two M&A deals are the same.

Each incorporates its own character of size, business owner and leadership personalities, culture, and industry to create a unique transaction.

One factor that makes transactions more complex and due diligence process more complicated is when a company is privately held.

Unlike publicly traded companies, private companies are not auctioned and traded conventionally on the stock market.

Investors cannot easily buy shares unless they are founders, employed there, or have invested via venture capital or private equity firms.

Aside from it being more difficult to invest in private companies, they are not obligated to publicly disclose as much information. Compared to private companies, public companies are also held to stricter business and accounting practice standards.

While buying out privately owned companies and startups may have a high payoff and rewards, they come with distinct complexities. These may affect or hinder the M&A process.

To save some headaches down the line, detailed here are some best practices for the private equity due diligence process:

• Understand Your Financial Situation - Before even researching companies or drafting out an LOI, you need to look at your own books. Do you have enough resources to complete the transaction and bounce back if it does not work out? If not, maybe consider a smaller scale investment or wait a little while.
• Accounting Procedures and Financial Statements - Publicly held companies must abide by GAAP and IFRS and are audited regularly to ensure compliance. Regulations on privately held companies are not as strict. This allows them to use different accounting procedures or even practices off the beaten path. Rather than traditional accrual accounting, it may not be unusual to see cash-basis or something else more arbitrary.
• Size - Private companies are almost always smaller than public. This doesn’t only mean fewer employees and less office space, but also likely smaller revenues.
• Human Resources Practices - Smaller, younger businesses may not have standardized HR processes. Here, you want to check out items such as questionable terminations, harassment charges, hiring practices, and if/what workplace policies exist.
• Legal - The last thing you want from any investment is to soon find that it is riddled with legal issues. Some details to consider here are tax compliance, any past or outstanding lawsuits, and overall obedience to applicable jurisdictions.
• Valuation - Valuation methodologies are the same between private and public companies. However, you have to adjust for lack of liquidity and publicly available market caps.
• Management and Leadership - The company you are considering buying could have been the brainchild of siblings or friends. Meaning, they could be a little protective. You will want to meet and get to know them to determine if there is any hostility associated with the transaction. By and large poor, disgruntled management will trickle down the m&a buy side due diligence process and negatively impact the business.
• The Business - Overall, do you believe in the company, their strategy, and mission? Is this something you see as truly being successful?

Conduct Due Diligence Process the Right Way

Conducting proper due diligence is an important, yet tedious process. Here are a few helpful tips:

• Use a Diligence Management Software - Diligence management software combines the features of a traditional virtual data room with project management capabilities. This allows users to not only securely store data, but effectively manage and share files as well.
• Start Early - The diligence process can be extremely time-consuming. It’s best to get started early in an organized manner. When teams utilize a tool like DealRoom, they can start the process within minutes.
• Utilize Checklists - When teams use a diligence management software, they can easily create organized checklists. For example, rooms can be broken down into different stages of diligence. Users can efficiently check items off as they are completed.
• Address Potential Risks Throughout the Process - If potential bottlenecks and risks arise during diligence, teams should address them promptly.
• Employ Experts - Hiring M&A professionals such as investment banks and consultants make the due diligence process more efficient. Deal teams have experience with conducting diligence and know the necessary steps to take.

Easy Due Diligence Process with DealRoom

Traditionally, due diligence process is completed using a virtual data room , Excel trackers, and one-off emails.

Unfortunately, this leaves room for inefficiencies such as version control worries, miscommunication, duplicate work, and information silos.

With DealRoom , all diligence can be managed within the platform.

Teams no longer have to switch between multiple platforms and this allows diligence to be completed up to 40% faster. They can effortlessly share information and collaborate internally, as well as externally with clients.

Final Thoughts

The due diligence process is never easy, but that doesn’t mean it has to be inefficient and disorganized. With the proper software and workflows in place, diligence can be straightforward and productive.

After all, the information that is discovered during diligence is critical to a deal’s success.

Due Diligence Software like DealRoom, equips teams with the proper tools to be thorough, yet efficient, and to close deals faster.

Free Resource: Due Diligence Checklist

This exhaustive list of requests ensures you’re asking the right questions during the diligence process of your next transactions

Related articles

Get your m&a process in order. use dealroom as a single source of truth and align your team..

Get weekly updates about M&A Science upcoming webinars, podcasts and events!

Mergers & Acquisitions – They say selling a business is an art – we’ve turned it into a science

Get started today. At Morgan & Westfield, there are never any long-term contracts.

Morgan & Westfield is a leading M&A firm. Here are some of the people who make it happen.

Our goal is to help you successfully exit your business. Here are answers to some of our most commonly asked questions.

Selling a business is complicated. We make it simple.

Morgan & Westfield offers transparent a-la-carte pricing—no hidden fees, no long-term contracts.

If you’re thinking of selling but not quite ready yet, browse our free resources.

Real stories from real clients who have sold their businesses through Morgan & Westfield.

Morgan & Westfield sold in 100+ industries. Whatever your business, we’ve got you covered.

Morgan & Westfield has completed transactions in 100+ industries globally, representing business owners and buyers in North America, Central America, South America, Europe, and Asia.

Morgan & Westfield is committed to making the process of buying a business as simple as possible. Browse our businesses for sale now.

Here is an overview of the process of buying a business, presented in concise summaries from our experts.

From processing and manufacturing to production and distribution, we’ll give you the advice you need to maximize the value of your company when it comes time to sell.

Business services firms differ in the services they offer, so we customize our solutions to meet and exceed clients’ service goals.

Morgan & Westfield serves as a trusted partner to plumbing and HVAC businesses, mechanical and commercial contractors, and other home service enterprises looking to sell.

Comprehensive articles on every step of the process of buying or selling a business in the M&A industry.

The Art of the Exit, A Beginner’s Guide to Business Valuation, The Exit Strategy Handbook, Closing the Deal, Acquired, and Food and Beverage M&A

M&A Talk is the #1 podcast on mergers & acquisitions. We talk to the most experienced professionals in the industry to uncover their secrets.

Food & Beverage Talk is the #1 podcast exclusively focused on the food and beverage industry. We offer interviews with the top experts in the food & beverage industry.

Priceless advice for entrepreneurs of middle-market businesses with revenues up to $100 million.

Don’t be confused or intimidated by any terms or abbreviations in the M&A world. You’ll find answers here.

Downloadable templates for seamless deal success.

At Morgan & Westfield, we employ consistent strategies to help ensure your transaction remains confidential from beginning to end.

If you would like to speak with us about buying, selling, or valuing a business.

Need a quote for your M&A article or segment? Contact us today for media resources and appearances.

At Morgan & Westfield, we’re always looking for talented deal makers, agents, analysts, professionals, office owners, and associates to join our remote team.

Knowledgebase Topics

M&a due diligence | checklist & overview.

Executive Summary After you accept an offer or letter of intent (LOI) on your business, the buyer will begin due diligence. Due diligence is the process of gathering and analyzing information to help the parties determine whether or not to proceed with a business transaction. This period of time normally lasts 30 days but can be extended if both parties agree. In most circumstances, the buyer can walk away from the transaction if they are unsatisfied for any reason during due diligence. So, what’s a seller to do? Start by conjuring up your best Boy Scout. Start by being prepared. Doing proper due diligence on your own business will uncover any problems and give you a chance to resolve them before a buyer discovers them. We’ll show you how to do that in this article, in which we also answer the following questions: What documents are typically given to the buyer before they make an offer? What documents are usually given to the buyer after they make an offer (during due diligence)? How should the seller manage buyers who request too much information before they make an offer? How long does due diligence usually last? What can the seller do to speed up due diligence? What are reps and warranties, and how do they impact due diligence? What is the typical due diligence process? How should you prepare your business for due diligence? Be sure to especially check out our sample due diligence checklist in the article below. It contains more than 70 items spread among seven broad categories. And you thought this would be the easy part.

What is the Purpose of Due Diligence?

Businesses are complicated — there are hundreds of factors buyers must take into consideration when deciding if they would like to move forward with the transaction.

When evaluating a home for sale, buyers can quickly form an opinion on the value and suitability of a home and hire an inspector to conduct a home inspection. Homes and other tangible purchases often require little to no due diligence. However, buying a business involves assessing many intangible factors that are not readily apparent and are more difficult to assess and evaluate.

As a result of this increased complexity, purchasers of businesses go through a lengthy and thorough due diligence process before completing the transaction.

This process does not begin until an offer is accepted by both parties.

With a business, the seller’s representations are verified during due diligence only after a letter of intent is mutually agreed upon. If all buyers conducted their due diligence before making an offer, sellers would spend a tremendous amount of time with many buyers and would risk a leak in confidentiality.

Conducting due diligence with multiple parties simultaneously may also lead the seller to lose focus on their business, and the value of the business may therefore decline. The buyer must accept the seller’s initial representations before an offer is accepted — only after an offer is accepted does the buyer have the opportunity to verify the seller’s representations.

Before accepting an offer, the seller should be cautious regarding what information is shown to a buyer. The seller should be helpful to the buyer, but they shouldn’t show them everything they ask to see. At some point, the seller should politely and tactfully ask the buyer to make an offer.

List of Documents and When They Are Shared

Here’s what to share BEFORE the offer is accepted:

• Confidential information memorandum (CIM)
• Profit and loss statements (P&Ls)
• Balance sheets
• Summary or abstract of the lease, but not the entire document
• Equipment list
• Sales literature and brochures

Here’s what to share AFTER the offer is accepted (during due diligence):

• Federal income tax returns
• Bank statements
• Invoices and receipts
• Full copy of the lease
• Leases, such as premise and equipment leases
• Third-party contracts, such as supplier or vendor contracts
• Sales and use tax reports
• Staffing and payroll-related documents, including job descriptions and employment contracts
• Insurance-related documents like workers’ compensation as well as health and liability insurance
• Equipment inspection reports
• Licenses and permits
• Marketing, advertising, and promotional documents
• Environmental documents and inspections
• Franchise-related documents

The list above isn’t typical for every business. Each business will have its own unique due diligence structure. Most due diligence requests are more extensive than the list above.

Handling Buyers That Request Too Much Information

How do I handle a buyer who is requesting too much information (e.g., bank statements and tax returns) prior to submitting an offer?

Before receiving an offer, you should be cautious with what you show to buyers. You should certainly be helpful and engage with the buyers but do not give them everything they ask for. At some point, you should politely and tactfully ask them to present you with an offer.

Explain to the buyer that a thorough investigation can be conducted only after an offer is accepted. Tactfully point out that once an offer is accepted, the buyer will have plenty of time to perform their due diligence and verify the accuracy of your representations.

Explain to the buyer that you are making representations and that these representations are verified during due diligence.

How Long is Due Diligence?

Due diligence can take any period of time as long as both you and the buyer agree. The typical due diligence period for most small to mid-sized businesses is 30 to 60 days.

The length of due diligence should be based on the following:

• Availability of information. If the seller responds promptly to the buyer’s document requests, the due diligence period can be shorter.
• Turnaround time. This depends on how fast the buyer reviews the information. If the seller provides information that’s concise, organized, and clear, you’ll speed up the due diligence period.
• Communication. If the seller is more available to the buyer, this may also shorten the due diligence period.

The Importance of ‘Representations’ and ‘Warranties’

Due diligence is never perfect — it can never uncover every potential problem with a business. You can never be absolutely assured that the business is without problems. In fact, there is no such thing as a “perfect” business.

If due diligence doesn’t ensure that the business is problem-free, what can be done?

“Representations” and “warranties” are statements and guarantees by the seller of a business relating to the assets, liabilities, and other elements of the business being sold. In the purchase agreement, the seller will have to make factual statements regarding the condition of the business, covering nearly all aspects of the company. These are referred to as “‘reps and warranties.”

Essentially, the seller is assuring the buyer that their representations are true, and if proven to be otherwise, the buyer is entitled to seek legal remedies, which could result in the seller reimbursing the buyer for damages. The representations and warranties collectively serve to mitigate the risk of any material defects that were not discovered during due diligence.

• A representation is a statement of fact. If a representation is untrue, it is “inaccurate.”

For example, a seller may represent that the assets of the business are in good repair, that all inventory is salable, that there are no hazardous substances used in the business, that the business has operated in compliance with all laws, or that the seller has the legal capacity to sign the purchase agreement.

• A warranty is an assurance. If a warranty is untrue, it is “breached.”

For example, a seller may warrant that they will operate the business in a regular and normal manner and will comply with all laws until closing, or that they will pay all payroll taxes that will come due from past operations up to the time of closing.

• Representations and warranties in the purchase agreement assure the buyer that legal remedies may be available if the seller fails to disclose any material facts regarding the business that aren’t discovered during due diligence. This assures the buyer that additional protection is available if the seller is not fully forthcoming during due diligence.

The Process

Here’s a summary of how due diligence fits into the sale process:

Letter of Intent

The parties negotiate and accept the letter of intent.

Due Diligence

The due diligence period begins immediately after the letter of intent is accepted by the parties.

Purchase Agreement

The parties normally begin preparing a draft of the purchase agreement during due diligence. The purchase agreement often takes several weeks to negotiate and finalize, so the process usually starts during due diligence to ensure an efficient closing with minimal delays.

Conclusion of Due Diligence

At any point during due diligence or upon its expiration, the buyer may decide they are satisfied with their investigation of the business and will proceed with the transaction. The buyer may do this because the buyer and the seller have resolved the contingencies, or even if there are pending contingencies, the buyer may feel confident enough to enter into a definitive agreement.

When this happens, the buyer and seller will sign an agreement stating that due diligence has concluded. This signifies the completion of due diligence and the parties’ decision to end the investigation and proceed to a definitive agreement.

Additional Deposit, If Applicable

For smaller transactions, the buyer will place an additional deposit with the escrow company upon signing off on the completion of due diligence. If the transaction is canceled due to the buyer’s fault before a definitive agreement is signed, the buyer will forfeit both the initial and additional deposits. Otherwise, these deposits will be applied to the final purchase price.

Contingencies that Survive Due Diligence

There are often contingencies that survive due diligence, such as bank financing, franchisor approval, lease assignment, or license transfers. These remain as contingencies and are resolved between the conclusion of due diligence and the closing. The buyer may cancel the transaction if these contingencies are not met.

Once the contingencies are met, the closing may occur. In most cases, the purchase agreement is signed at closing. However, it may sometimes be signed prior to closing.

Due-Diligence Checklist

Here is a sample due diligence checklist:

• Advertising contracts
• Customer list
• Inventory count
• List of key competitors
• Marketing material
• Operations manual
• Preliminary equipment inspection
• Premises lease
• Summary of key lease terms
• Supplier and vendor list
• Supplier/vendor contracts
• Health insurance policies
• Liability insurance policies
• Workers’ compensation policies and history

Related Resource

• Do You Need Tax Insurance When Selling Your Business?
• Description of any real estate owned
• Equipment inspection
• Equipment leases
• List of all assets included in price
• Inventory list

Financial/Tax

• Accounts payable schedule
• Accounts receivable aging schedule
• Annual personal property tax certificate
• Backup data of adjustments to financials
• Breakdown of sales by customer
• Breakdown of sales by product type
• Copies of existing loan or financing agreements
• Customer or client agreements
• Documentation for add-backs to financial statements
• Financial budgets and projections
• Full QuickBooks or accounting software file
• General ledger or detailed list of all transactions and expenses
• List of monthly sales since inception
• Merchant account statements
• Payroll tax reports
• Profit & loss statements
• Utility bills
• An Introduction to Financial Due Diligence for Sellers
• Benefit plans
• Compensation arrangements
• Detailed schedule of payroll expenses
• Employment, agency, and independent contractor agreements
• Job descriptions
• List of outside contractors
• Other employment-related agreements
• Overview of personnel turnover
• Schedule of owners, officers, employees, independent contractors, consultants, and their titles, length of service, and compensation benefits
• Summary biographies of key management
• Articles of incorporation/organization
• Business license
• Certificate of status/good standing from Secretary of State
• Copies of licenses, permits, certificates, registrations, and other from all governmental authorities
• Copy of all key contracts
• Corporate/LLC by-laws or operating agreements
• Corporate/LLC minutes
• Description of environmental liabilities
• Fictitious business name statement (DBA)
• Financing agreements
• Information for copyrights
• Information for patents
• Information for trademarks and service marks
• List of liens against the business
• Other third-party agreements or contracts
• Pending lawsuits
• Phase 1 and 2 environmental studies
• Preliminary UCC search results
• Previous purchase agreement and related documents for business
• Resale permit
• Seller’s disclosure statement

Tips for Conducting Due Diligence

Be Emotionally Prepared. Due diligence can be a grueling time for the seller. You must be prepared to commit a substantial amount of time and energy to the process. Some buyers’ objective is to wear you down, discover problems, and then attempt to renegotiate the terms of the deal. Be prepared for this possibility by preparing for due diligence so problems are uncovered and resolved before a buyer discovers them. You should also attempt to remain emotionally unattached to the process so you can negotiate from a detached, objective perspective.

Buyer Type Determines Thoroughness. Individuals are generally less thorough than companies in conducting due diligence. However, some individuals can be especially thorough if they are detail-oriented, are very risk-averse, or have a CPA or attorney advising behind the scenes. Most companies are thorough, especially if they have completed multiple acquisitions in the past.

Exclusivity. Keep your business on the market even once you’ve received an offer unless you have negotiated an exclusivity period with the buyer.

Don’t lose your focus. You must be prepared to spend significant time and energy during the due diligence process. By the time you reach the due diligence stage, you may feel as if you are almost done, but this is a critical stage where the sale can be made or lost. If you lose focus at this point, the deal can die. You are only on the fifty-yard line at this point. There is still a lot of work to be done before the sale is complete. It’s important that you stay engaged and actively involved in due diligence in order to reach your ultimate goal of a smooth closing.

Involve Your Accountant. Since much of the documentation needed for due diligence is financial in nature, you should consider including your accountant or CFO in your plans as early as possible to help prepare for due diligence. The more cooperation you have from your team, the smoother the process will go.

Designate a Point Man. The point man should be the quarterback during the transaction and should orchestrate the communication with all parties involved and review all information before it is released to the buyer. Many professional advisors will lose you as a client if the transaction is successful and they may not be inclined to conclude the transaction as quickly as possible due to their hourly-rate fee structure. Being the point man yourself or appointing someone within the company will help simplify the due diligence process.

Contact the Landlord Early. The lease is one of the most critical elements of the process and needs to be carefully orchestrated. Issues around the transfer of a lease are common, so the process must be handled with care. Landlords are not required to approve the lease transfer, and delaying the landlord’s involvement can create issues that delay the closing or prevent it altogether. We recommend involving the landlord as early as possible in the process.

Prequalify the buyer. Be sure that you have pre-qualified the buyer before negotiating and accepting an offer. You want to be sure that you are negotiating with a buyer who has the financial capacity to close the transaction.

Tell the Buyer You are Prepared. If you’ve prepared your business for sale and organized all the documents, be sure to mention the same in early conversations with buyers. You could say something like this:

“I’m a motivated, serious seller who has prepared my business for sale with the help of a certified public accountant (CPA). I have all the necessary documents ready for due diligence, including tax returns, leases, equipment lists, financial statements, and more.”

Why Should I Prepare for Due Diligence?

Can’t I just prepare the documents when the buyer requests them?

Preparing your business for sale greatly increases your chances of success. Laying the groundwork for due diligence helps convince the buyer to agree to a shorter due-diligence period and decreases their perception of risk in your business.

By organizing the documents so they are ready for review, you’ll ensure the process is quick and simple. Immediately after you accept an offer, the buyer can start reviewing the documents. Time is your greatest enemy. Time can kill all deals. By preparing for due diligence, you potentially speed up the process and dramatically improve your chances of closing the deal.

You also increase the chances of receiving an offer. Many times, buyers are reluctant to make an offer on a business because they don’t want to risk the time and financial investment in performing due diligence only for there to be an undisclosed problem. Preparing for due diligence mitigates these concerns for buyers.

We highly recommend that you prepare for due diligence as early as possible. This is where your accountant or CFO can really help with gathering the documents you need.

In one recent transaction we worked on, due diligence was significantly delayed because the seller did not have copies of bank statements on hand and it took several weeks to obtain copies from the bank. This delay ended up resulting in a price concession because the economy took a dip during this time period.

You also demonstrate to the buyer that you’re serious when you take the time and effort to prepare your business for sale. Buyers prefer dealing with motivated, prepared sellers. Buyers are more likely to spend time with a seller whom they know has prepared for the sale.

How Should I Prepare for Due Diligence?

Preparing your business for due diligence is straightforward.

It involves assembling and organizing the documents that most buyers request and review during the due diligence period. You should then retain a third-party expert to review these documents and uncover any issues the buyer may discover during due diligence. You should then address any issues once they are uncovered.

The advantage to preparing for due diligence is that you will have the opportunity to resolve any issues on your own time , without the added stress of the transaction being dependent on its outcome. The need for having your financials prepared and organized as well as ensuring everything is ready from an operational and legal standpoint cannot be understated.

Preparing for financial due diligence is one of the most important parts of successfully closing the sale of your business. Because the number one deal-killer of business sales is incomplete or inaccurate financial records, this should prompt you to make it a priority to ensure that your financials are in order. Otherwise, you risk losing the buyer since financial inaccuracies will likely be discovered during due diligence.

No one wants to invest enormous amounts of time with a buyer only to lose them due to something that could have been prevented. Pre-sale financial due diligence should be conducted by a third party, preferably a CPA. Ideally, this should be conducted at least three to six months prior to beginning the sale process. This will give you ample time to resolve any issues that are uncovered during the process.

Conclusion We strongly recommend that you invest time preparing your business for due diligence. Most business owners skip this step altogether. By preparing for this process, you will greatly improve the chances of a successful sale. Additionally, demonstrating to the buyer that you have prepared for due diligence increases the buyer’s confidence in your business and reduces their perception of fear. Due diligence can be heaven or hell. If you have your financials in order, and all is well from an operational and legal standpoint, chances are due diligence will be uneventful and your business deal will take flight and bring you one step closer to the closing of your dreams. If you are unprepared and the buyer finds things amiss during due diligence, you will find yourself on the horns of a dilemma. Being prepared can go a long way in facilitating the outcome you want.

The Art of the Exit

The complete guide to selling a business with $1 million to $10 million in annual revenue.

Less than a third of businesses on the market actually change hands. So what does this mean for you? Think about it – with a significant amount of your wealth tied up in your business, planning your exit is one of the most critical decisions you’ll make.

Written by Jacob Orosz , President of Morgan & Westfield

The Art of Selling a Business With $10 Million to $100 Million in Annual Revenue

For a business to sell for what it’s really worth – or even more – you need to properly prepare. But too many entrepreneurs put off planning the sale of their business until the last moment. Acquired will help you prepare your business for sale and walk you through the sales process, dodging the pitfalls along the way. Planning your exits is one of the most critical initiatives you’ll undertake. Don’t go it alone.

Download Your FREE PDF Copy: Food and Beverage M&A

" * " indicates required fields

Download Your FREE PDF Copy: The Art of the Exit

Download your free pdf copy: acquired.

A comprehensive guide to M&A due diligence with a 20-point checklist

Starting or expanding a company or being part of a merger or acquisition carries many opportunities. It also brings many risks. When considering a merger or acquisition (M&A), it’s crucial to consider all elements; doing your M&A due diligence is a prerequisite.

It’s vital to consider the company’s debts, liabilities, problem contracts, litigation risks, intellectual property risks and much more. Acquiring a private company carries even more risks because they haven’t stood the test of the markets, and buyers have less access to information from public sources.

Either way, it’s not a process you want to hurry through, regardless of how attractive the offer may be. The best and most secure way to ensure due diligence is with  due diligence technology  that provides critical and comprehensive insights. Choosing the right due diligence software and working through an M&A due diligence checklist are the first steps in tackling mergers or acquisitions.

What Is M&A Due Diligence?

An obvious question might be,  “what is due diligence?”  and more specifically, “what is M&A due diligence?”

As part of your wider  governance, risk and compliance (GRC) strategy , M&A due diligence plays an important role. Expanding your business by acquiring or merging with another can be exciting. But it can also pose compliance challenges.

• Can you be sure that the company you are joining forces with takes the same thorough approach to governance and compliance that you do?
• How does it manage risk, both internally and within its third-party suppliers?
• What are its track records on  anti-bribery and corruption  and  ESG issues like human rights and sustainability?

Why Is M&A Due Diligence Important?

When you start to consider these issues, it’s easy to see that when you’re looking to acquire or merge with another organization, M&A due diligence is vital.

The reasons why M&A due diligence matters now include:

• Corporate compliance is a  hotter topic than ever . Businesses must comply with applicable regulations and legislation — and evidence that they are doing so. If you’re looking at M&A activity, you need confidence that the companies in your sights apply the same rigor to compliance that you do.
• Anti-bribery and anti-corruption requirements are ever-growing. Any company you buy or merge with has to have the same standards of  ethics and business integrity  as you.
• There are also financial imperatives; if you’re considering an M&A, you need to ensure you’re not opening your company to unexpected risks. Establishing the financial position of the business you want to merge with is essential.
• Reputation risk can be a real threat to today’s corporations. An M&A that potentially jeopardizes your company’s reputation can have severe repercussions — a watertight M&A due diligence process can help to prevent this.
• It’s more important than ever that you’re on top of issues like ethics, provenance and sustainability.  Legislation  that mandates approaches to these throughout the supply chain makes it essential for companies to manage their own and their suppliers’ track records here. And of course, this  ESG due diligence  is also highly relevant if you’re buying another business.

Building a robust anti-bribery and anti-corruption program requires performing regular due diligence on third-party intermediaries. This protects your organization’s reputation, attracts investors and clients through transparent and ethical practices, and defends company leaders from personal liability. But how much and how often should this due diligence be conducted?

At a minimum, the following  20 items should be on all companies’ merger and acquisition due diligence checklist:

20 Items That Should Be on Every M&A Due Diligence Checklist

1. Financial Matters

Buyers should ask for a full report of financial statements and metrics for the past, present and future when carrying out M&A due diligence. Ask for documents related to the audit, 401(k) balance, accounts receivable, current and contingent liabilities, and all other financial matters. Of particular concern is whether the company has the capital to continue operating through the acquisition.

2. Technology and Intellectual Property

M&A IT due diligence is important. As part of the M&A due diligence process, buyers should inquire about the scope of the seller’s technology and intellectual property, including information on patents, trademarks, copyrights, licenses and trade secrets. Carefully evaluate any problems, disputes, encumbrances and litigation over technology and intellectual property.

3. Sales and Customers

Buyers will want to gain a good understanding of the company’s customers and sales approach. Discussions should focus on customer retention, issues with risks related to product concentration, customer satisfaction and unusual product return activity.

4. Strategic Fit With Buyer

Buyers should explore whether there’s a strategic fit between them and the company they want to acquire. M&A due diligence questions should include: whether the company has products, services and technology that the buyer doesn’t have and whether key people will expect to stay on — or if the company can expect them to stay on — after the acquisition.

5. Material Contracts

One of the most time-consuming parts of due diligence is reviewing all of the material contracts and commitments of the company. Buyers will want to pay special attention to contracts that would adversely affect the company if they were terminated.

6. Managerial or Employee Problems

Due diligence in M&A situations should include an exploration of labor disputes and problems, employment agreements, compensation plans, retirement benefits and the potential for layoffs.

7. Litigation

Sellers should provide buyers with an overview of past, present or threatened litigation as part of the M&A due diligence process. This includes injunctions, settlements, consent decrees, matters in arbitration, insurance claims, threatened governmental proceedings and judgments.

8. Tax Matters

Both parties in a merger or acquisition should share and discuss tax information for the last five years, including federal, state, local and foreign income sales; government audits; IRS Form 5500 for 401(k) plans; tax sharing and transfer pricing agreements; correspondence with taxing authorities; and settlement documents with the IRS and other government taxing authorities.

9. Antitrust or Regulatory Matters

Due to increased scrutiny over  antitrust matters , any M&A due diligence checklist should include an analysis of the scope of antitrust issues. The acquisition may require getting approval from a regulator. Discussing and verifying any prior antitrust or regulatory inquiries or investigations is important.

10. Insurance

All mergers and acquisitions due diligence activities should include a review of  every type of insurance  policy, including health insurance, E&O, D&O, liability, property, umbrella, workers’ compensation, car, intellectual property, key man insurance and employee liability insurance.

11. General Corporate Matters

It’s standard practice for the seller to offer up all organizational documents and general corporate records as part of the M&A due diligence process. These include charter documents, tax authority certificates, lists of subsidiaries, meeting minutes, and lists of officers, directors and security holders.

12. Environmental Issues

Environmental issues run the gamut from environmental audits, testing, environmental permits, EPA notices, potential Superfund exposure, asbestos exposure, contractual obligations, use of petroleum products, records of public agency investigations, and any records pertaining to environmental litigation or claims. As we’ve mentioned, the growing focus on sustainability makes understanding the environmental track record essential to due diligence in M&A transactions.

13. Related Party Transactions

Buyers should enquire about agreements or arrangements between the company and any current or former director, officer, employee or stockholder that entitles them to compensation or where they may have an interest in any asset. These are called  related party transactions  and should be included in any M&A due diligence

14. Governmental Regulations, Filings and Compliance With Laws

M&A due diligence in the area of governmental regulations includes things like citations, notices or pending or threatening investigations or governmental proceedings. This area includes material reports to government entities, costs of regulatory compliance, and the status of all government permits and licenses.

15. Property

Due diligence in M&A should also include a review of all property, including deeds, leases, deeds of trusts and mortgages, title reports, other interests in real property, operating leases, conditional sale agreements, financing leases, and sale and leaseback agreements.

16. Production-Related Matters

Merger due diligence reviews may include due diligence on production-related matters, such as lists of subcontractors and suppliers, manufacturing summaries, schedule of backlog orders, inventory reports, supplies, service contracts, and other agreements related to research, development, manufacturing and testing of the company’s products.

17. Marketing Arrangements

The M&A due diligence process includes a review of the company’s marketing strategies and arrangements, including sales, distributor, agency and franchise agreements. It also includes sales literature, price lists, catalogs, purchase orders, agreements and press releases.

18. Competitive Landscape

Purchasing companies will want to know the target company’s principal current and anticipated competitors. They’ll also be interested in technologies that could make current technology or manufacturing processes obsolete and the advantages or disadvantages between them and their competitors.

19. Online Data Room

The success of mergers and acquisitions depends on both parties having access to an online data room or virtual data room. The best virtual data rooms have search capabilities for all documents, the ability to bookmark and print pertinent documents, and a due diligence checklist provided by the buyer to cross-reference and review. The virtual data room should have a disclosure schedule, and any updates to the data room should be automatically notified to the buyer’s counsel.

20. Disclosure Schedule

The company should prepare a comprehensive disclosure schedule addressing all of the issues stated above very early in the planning stages of the M&A due diligence process.

How Can Software Help With M&A Due Diligence?

As you can see, mergers and acquisitions transactions involve a substantial amount of due diligence by the buyer and its counsel. A robust due diligence solution can play a vital role and ensure that this process goes smoothly, complicated as it is.

Software can enable all relevant M&A due diligence documentation to be curated and visible to all interested parties. It can ensure that all steps in the mergers and acquisitions due diligence process are addressed, and findings captured.

You can read more about the importance of M&A due diligence, the role of a due diligence checklist in mergers and acquisitions and the benefits virtual data rooms and other M&A due diligence software can deliver, in Diligent’s whitepaper,  Implementing a Risk-based Due Diligence Program .

Solutions Solutions

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

Resources Resources

• Research & Reports

Company Company

Your data matters.

Due Diligence Checklist: Everything You Need to Know

A due diligence checklist is an organized way to analyze a company that you are acquiring through sale, merger, or another method. 12 min read updated on February 01, 2023

Updated June 28, 2020:

What Is a Due Diligence Checklist?

A due diligence checklist is an organized way to analyze a company that you are acquiring through sale, merger, or another method. By following this checklist, you can learn about a company's assets, liabilities, contracts, benefits, and potential problems. Due diligence checklists are usually arranged in a basic format. However, they can be changed to fit different industries.

A due diligence checklist is also used for:

• Preparing an audited financial statement or annual report
• A public or private financing transaction
• Major bank financing
• A joint venture
• An initial public offering (IPO)
• General risk management

Why Is a Due Diligence Checklist Important?

The main reason you need a due diligence checklist is to make sure you don't overlook anything when acquiring a business. Having a due diligence checklist allows you to see what obligations, liabilities, problematic contracts, intellectual property issues , and litigation risks you're assuming. Most of the documents and information on your due diligence checklist is available on request. Once you have the information, it's up to you to analyze it and decide whether it's a good investment.

Another reason a due diligence checklist is important is that the buyer needs to know if the company is a good fit for its business. If the selling company provides a service the buyer doesn't, it becomes beneficial. It also provides a way to measure the length and cost of integration, as well as potential revenue.

Company sales, mergers, and acquisitions should all follow the same checklist to avoid unforeseen issues. Sellers might also create a reverse diligence checklist to analyze the buyer.

What Should I Have in My Due Diligence Checklist?

Most due diligence checklists involve 19 categories about a company:

• Any potential antitrust issues as a result of the purchase.
• A list of any prior regulatory or antitrust issues.
• Issues involved in a Hart-Scott-Rodino filing with the Federal Trade Commission.
• Any Exon-Florio issues for national security and foreign investment.
• A list of Department of Commerce filings.
• A list of software used by the company.
• A list of software licenses bought to analyze other companies.
• The current system usage and age of equipment.
• Outsourcing agreements with IT companies.
• The software's level of customization.
• A list of interfaces that link systems together.
• An analysis of the system. Legacy systems often need maintenance. From this analysis, you can choose to keep the current system or replace it.
• An outline of a disaster recovery plan should systems crash or become damaged.
• Articles and press releases about the company within the last three years.
• A list of all independent professionals that have worked with the company within the past five years. This includes accountants, lawyers, and consultants.
• A copy of insurance claims over the past three years.
• Worker's compensation
• General liability
• Personal and property
• Directors and officers
• Errors and omissions
• Product Liability
• Intellectual Property 
• A list of all pending litigation.
• Descriptions of threatened litigation.
• A list of unsatisfied judgments.
• Documents about injunctions or settlements.
• Copies of insurance policies that protect against litigation.
• History of problems with regulatory bodies such as the SEC or IRS.
• A review of all board minutes, shareholder minutes, and audit minutes.
• Lists of products and services offered.
• Lists of products and services in development.
• Correspondence and documents related to regulatory approval of product line.
• Summary of complaints.
• Summary of warranty claims.
• Tests, evaluations, studies, and surveys about products or services under development.
• A list of major customers and product applications.
• Current market share values.
• Expense trends over the past five years.
• Questionable expenses that you can cut.
• Employee loans. This might include pay advances or long-term loans.
• If a company owns many fixed assets, it could show a reactive approach to market trends.
• Valuation, inspection, maintenance, utilization, and replacement rate are all topics to know about fixed assets.
• Speed and nature of change within the industry.
• List and description of competitors, including strengths, weaknesses, market position, and basis of competition.
• Current ad programs, marketing budgets, and printed marketing materials.
• Research on ways to get new business.
• A list of distribution channels , marketing opportunities, and marketing risks.
• Surveys and market research on company products.
• This shows how the company's marketing efforts stack up against competitors.
• It should also show the company's dedication to creating a brand.
• A list of coordination protocols between the sales and marketing departments.
• A schedule of the company's 12 to 20 largest customers, as well as sales within the last two years for each.
• Issues about keeping customers after the sale.
• A description of the company's credit policies.
• A description of the company's purchasing policies.
• Supply and service agreements.
• A schedule of unfilled orders.
• A list and explanation of any major customers lost within the past two years.
• A list of strategic relationships or partnerships .
• Revenue listed by customer
• A list of the top 10 suppliers, as well as business deals within the past two years.
• Plans for new hires
• Quota average
• Sales cycle
• Compensation and commission
• Organization
• Productivity
• Skills match
• Federal, state, local, and foreign tax returns for the past three years, including net loss or profit.
• A list of any tax liens.
• IRS Form 550 0 for 401(k) plans.
• State sales tax returns for the last three years.
• Excise tax filings for three years.
• Audit reports.
• This shows if the company pays a lump sum or quarterly taxes.
• You can also see if the company is paying the correct amount in taxes.
• Tax settlement documents over the past three years.
• Detailed explanations of general accounting principles.
• A schedule of financing for debt and equity.
• A list of undisclosed tax liabilities.
• Monthly manufacturing yields.
• Agreements and relationships with any subsidiaries, partnerships, or joint ventures.
• Copies of contracts between the company and directors, officers, affiliates, and minimum 5 percent shareholders.
• Loan agreements including promissory notes , financing details, and lines of credit.
• All nondisclosure and noncompete agreements.
• A list of mortgages, collateral pledges, indentures, and security agreements.
• Installment sales agreements.
• Guarantees involving the company on any level.
• Copies of quote, invoice, purchase, and warranty forms.
• Distribution, sales, marketing, and supply agreements.
• Contracts, transcripts, or letters of divestitures from any merger or acquisition within the past five years.
• Options and stock purchase agreements affecting company operations .
• Off-balance sheet liabilities.
• Explanation of supply chain and supply restrictions.
• Transportation costs.
• A list of inventory systems to track incoming and outgoing goods and find obsolete goods.
• Power of attorney agreements.
• Exclusivity agreements.
• Franchise agreements.
• Indemnification agreements.
• Copies of federal, state, and local licenses, permits, and consent forms.
• Any documents about proceedings with a regulatory agency.
• A list describing or identifying any environmental liabilities or contingencies.
• A list of hazardous materials used in production.
• A list of any superfund exposure.
• Copies of notices and filings with the Environmental Protection Agency (EPA).
• A list of all environmental investigations and pending litigation.
• Environmental audits for each company property.
• A description of company disposal methods for hazardous materials, recyclables, etc.
• A list of terminated licenses or permits.
• Costs for environmental compliance.
• Listings of all owned or leased property and locations.
• Copies of deeds, mortgages, real estate leases, title policies, and zoning approvals.
• A list of Uniform Commercial Code (UCC) filings.
• A list of leased equipment.
• A list of major equipment sales and purchases over the past three years.
• A schedule of fixed assets with locations.
• A list of foreign and domestic patent applications .
• A list of copyrights.
• A list of trademarks and trade names both domestic and abroad.
• A description of methods used to protect trade secrets .
• Descriptions of all technical information within the company.
• Patent clearance documents.
• Work-for-hire agreements.
• Summary of claims or threatened claims on intellectual property.
• Copies of all consulting agreements, invention agreements, and licenses of intellectual property to and from the company.
• A list of all licensing revenue and expenses.
• Copies of stock purchase and stock option benefits for employees.
• Worker's compensation claims history.
• Unemployment claims history.
• List of employees and their positions, current salaries, years of service, and total compensation over the past three years.
• An explanation of the company's salary philosophy.
• Pay history and pay freeze information, which helps you decide if current employees will expect a raise soon.
• All nondisclosure, noncompete, and nonsolicitation agreements between employees and company.
• Resumes, history, and experience of key employees such as senior level management.
• A list of union affiliations and contracts.
• List and description of all employee health and welfare insurance policies.
• Descriptions of any labor disputes, arbitration, or grievances settled or outstanding over the past three years.
• Copies of collective bargaining agreements.
• Evidence of compliance with IRS Section 409A in regards to stock options .
• Evidence of compliance with IRS Section 280G in connection with the purchase.
• A list of any officers in criminal or civil litigation.
• Actuarial reports for the past three years.
• Layoff and severance package information.
• A list of harassment, wrongful termination , and discrimination disputes within the past three years.
• A copy of the employee handbook including policies on vacation, sick days, benefits, holidays, and paid leave. This allows you to compare your current situation with others in the industry.
• Turnover data for the past two years.
• Documents on pension plan funding and distributions.
• Copies of all Occupational Safety and Health Administration (OSHA) examinations.
• The results of formal and informal employee surveys.
• The Articles of Incorporation and any amendments.
• A list of company bylaws and amendments.
• A list of company assumed names.
• A list of all states or countries where the company does business, has employees, or owns/leases an asset.
• Annual reports for the last three years.
• A copy of the company's minute book.
• An organizational chart.
• A list of all shareholders and percentages owned.
• A Certificate of Good Standing from each Secretary of State where the company does business.
• Active status reports in the state of incorporation over the past three years.
• Agreements on voting trusts, subscriptions, puts, calls, options, and convertible securities.
• Audited financial statements (cash flow, balance sheet, income statement, footnotes) for the last three years, including an auditor's report and quarterly and annual statements.
• Auditor's correspondence for the past five years. These are letters sent to management that outline areas to improve profits and efficiency.
• Unaudited financial statements for comparison.
• Company credit report.
• A schedule of accounts receivable
• A schedule of accounts payable. Check these for any overdue or unpaid accounts that might impact profit.
• An aging schedule of accounts payable and accounts receivable.
• Search for any clauses that increase debt if a company is sold.
• Scan for any related parties that have loaned money to the company. This includes manager, investors, and shareholders.
• A list of unrecorded liabilities, which you usually find when interviewing the seller or employees.
• A list of collateral for debt.
• A schedule of depreciation and amortization methods over the past five years.
• Analysis of gross margins.
• Analysis of fixed and variable expenses.
• A list of the company's internal control procedures.
• A list of assets and liabilities.
• A schedule of inventory.
• Projections should include revenue by product type, customer, and channel.
• Projections should also include all financial statements such as a balance sheet, cash flow statement, and cash-on-hand.
• A list of growth drivers and possible clients and customers.
• Industry and company pricing plans.
• Analysis of projected expenditures and depreciation.
• Any perceived risk in foreign markets such as inflation, political strife, and exchange rates.
• The general ledger.
• Analyst reports.
• Breakdown of sales and gross profits by geography, channel, and product type
• Planned projection vs. actual sales chart.
• Current shares outstanding.
• A list of all stockholders with options, warrants, and notes.
• A list of non-operational expenses. Many companies put operating expenses in this category to pad their earnings.
• Public filings. If the company is publicly traded, it must file a Form 10-K annual report, Form 10-Q quarterly report, and other issues on the Form 8-K . You can get these from the Securities and Exchange Commission (SEC) website .
• Recurring revenue stream. This is a key value driver from the company. It shows loyal customers and how much they bring to the business.
• Backlog. Creating a monthly backlog of the past year shows true revenue. It also shows decreasing or increasing revenue trends.
• Pricing philosophy. This lets you know how the company prices its goods or services.
• Estimating philosophy. If the company has a special order, it should have an estimate department. Analyzing this provides you with a detailed list of profit or loss.

With this comprehensive list, you leave nothing to chance. It covers all the company's major operations, leaving you with detailed, unbiased information.

After Compiling Your Due Diligence Checklist

Once you have all the information, you must analyze it thoroughly to see the potential for:

• Profit Margins
• Operational efficiency upgrades
• Market competition and market review
• Monitoring trends in the market
• Examining the impact of new technology

After reviewing your due diligence checklist, you have the option to buy all the shares or assets.

Advantages of buying shares:

• No need to transfer titles or property.
• Taking advantage of existing government licenses.
• Taking over all contracts without need for assignments.
• Receive all employees without entering into new contracts.

Things to consider when buying shares:

• Their price.
• Examining the Articles of Incorporation about the sale of shares.
• Warranties.
• Share transfer forms and share certificates.
• Any changes in the board of directors.
• Changing the auditors or secretaries.
• Bank accounts.
• Procuring transfer forms with secretary's signature.

Advantages of buying assets:

• No need to take over debts and liabilities.
• No need to take over contracts or obligations.
• No need to continue employing any worker you don't want.

Things to consider when buying assets:

• Identifying assets.
• Pricing assets.
• Procuring all licenses and permits from various parties.
• Considering restrictive covenants.
• Choosing which employees to keep.
• Making arrangements with debtors and creditors.
• Drafting sale and purchase agreements.

Other Issues to Consider

• How is the company organized?: A company's organization structure is key for liquidity and return on an investment. Potential incorporations include an LLC , LP, C-Corp, and S-Corp .
• Does the corporate structure foster growth?
• Who is on the board of directors?: You need a board of directors whose goals are in line with your own.
• Does the company do its financial auditing in-house or outsource it?
• Are revenues realistic?
• What is the current and potential market size?
• Interview all employees.
• Conduct an independent competitive analysis.
• Consult a tech firm.
• Conduct independent market analysis.
• Review all financial documents.
• Interview board members, consultants, and advisers.

Questions to Ask With a Due Diligence Checklist

A long list of documents and correspondence from the company you wish to buy is not always enough. You must ask questions about the sale or the business. You might also need answers the documents don't offer.

• Why are you selling the business?

You must  ask this question before buying a business. If a seller doesn't have a good answer, it's a red flag. Most often, the business is being sold to raise funds for another business venture, divorce, estate tax, or retirement. Some are sold because of poor business practices or operating at a loss.

• Have you attempted to sell before?

Sellers are reluctant to tell about failed sales. However, it might shed light on the company's underperformance.

• Do you have a business plan ?

A business plan is important to see how a business operates. Without one, must find out on your own. You can also use this document to compare projections to actual sales.

• How easily can competitors enter or leave the market?

This question helps you find out how hard or easy it is to start the business. If competitors leave and enter freely, you might be able to start a project on your own.

• How complex is the business model?

Every business has many moving parts. If there are too many subsidiaries or the model is too complex, managing it could be difficult.

• Do you have an organizational chart?

An organizational chart shows you the departments within a company. It lets you see which managers deal with certain parts of the organization. A legal organizational chart helps you see subsidiaries, incorporations, and minority and majority investors hidden within the company.

• What is your geographic structure?

If the organization operates in many regions, knowing the geographic structure is important. This shows how regions are carved up. In addition, it shows if there are enough sales, marketing, and distribution to support each region. If not, you can see where to improve from within.

• Have there been any other acquisitions?

Knowing if there have been any other sales of companies in the industry lets you see trends. If there's a period of consolidation, this might affect the price you're willing to pay.

• Do you have an online data room?

Online data rooms allow you to find the information you want quickly and easily. A good seller will make this room available to you as soon as you start negotiations . Quality data rooms make it easy to search via an index, table of contents, or search bar. If possible, you should be allowed to print documents.

• What is on your disclosure schedule?

Anything not covered in the due diligence checklist must be included on a disclosure schedule. This document should make sure everything is covered. If something isn't, you can add it to your list of demands.

Buying a business isn't easy. It requires planning and a thorough analysis of your due diligence checklist. Even with experience, you'll probably have questions along the way. That's why you should post your lega l need at UpCounsel. These lawyers know the ins and outs of business sales, mergers, and acquisitions.

Hire the top business lawyers and save up to 60% on legal fees

Content Approved by UpCounsel

• IP Due Diligence Checklist
• Legal Due Diligence
• Legal Documents Needed to Sell a Business
• What Is A Due Diligence Period Buying Business?
• How to Start a Business: A Comprehensive Guide for Entrepreneurs
• IP Due Diligence
• Parts of Business Plan and Definition
• What Does Sale of Assets Mean
• LLC Checklist
• What Is an Asset Purchase of a Business?
• Atlanta Business Lawyers
• Austin Business Lawyers
• Boston Business Lawyers
• Chicago Business Lawyers
• Dallas Business Lawyers
• Houston Business Lawyers
• Los Angeles Business Lawyers
• New York Business Lawyers
• Philadelphia Business Lawyers
• San Francisco Business Lawyers
• Seattle Business Lawyers
• Charlotte Business Lawyers
• Denver Business Lawyers
• Jacksonville Business Lawyers
• Las Vegas Business Lawyers
• Phoenix Business Lawyers
• Portland Business Lawyers
• San Antonio Business Lawyers
• San Diego Business Lawyers
• San Jose Business Lawyers
• View All Business Lawyers

How to Prepare for Due Diligence: A Checklist 

by William Lieberman | Jan 9, 2024 | Capital Raising , Financial Strategy

Great CEOs always look to the future, and sometimes, this leads to the realization that you must prepare for desirable opportunities because these events will undoubtedly lead to a due diligence process. Although it may sound daunting, by getting a jumpstart on the process, you can lay the necessary groundwork to improve your outcomes significantly. Our CFOs have helped countless clients navigate this exercise, so below, I provide insight into what it entails and a sample due diligence checklist you can tailor to your situation.

What is Due Diligence, and Why is It Important?

Due diligence involves carefully investigating a company, contract, or complex asset to validate and understand its strengths, weaknesses, and viability. Organizations perform due diligence when exploring potential financial transactions, such as debt or equity investments, partnerships or joint ventures, mergers and acquisitions, or real estate purchases.

Companies undergo due diligence to determine whether the transaction makes sense, given what each party wishes to achieve. In other words, it is vitally important because it helps you develop confidence in the other party’s ability to uphold their end of the bargain before pressing forward.

How to Prepare for Due Diligence

For this post, we assume that you expect to be the subject of due diligence and must get your internal story straight to impress a potential investor or acquirer. In other words, you expect to be on the “sell side” of the financial transaction.

Preparing for due diligence is a significant undertaking that takes time and resources, and although you could finish it in a month or so, I recommend you plan on 3 to 6 months. With that in mind, here are the basic steps.

1. Clarify what you wish to accomplish.

For instance, to raise capital, you must determine how much you need, how you plan to use the funds, and whether you prefer debt or equity financing . Due diligence is a requirement regardless, but whereas a lender (debt investor) will primarily be interested in your historical financials, equity investors will require much more information.

Also, remember that we undergo this exercise to prepare for a deal that will benefit both parties. So, think through exactly what you hope to get, what you can offer the other party in return, and the concessions you are willing to make. What is negotiable, and what is not?

2. Determine who will do what and where you will capture the information.

In small-to-mid-size companies, the CFO typically leads this process, regardless of whether you are preparing and cooperating with another company’s due diligence or looking at other organizations you wish to acquire. But they don’t do it alone.

You can expect them to set up a “data room,” like a Dropbox folder with clearly labeled folders. Then, they will collaborate with other team members to determine who will provide the necessary information. For example, the Chief Technology Officer (CTO) will likely be responsible for any documentation needed for a technology audit. In contrast, your Chief Human Resources Officer (CHRO) will gather all personnel and payroll records in preparation for a discussion about your people, culture , etc.

3. Develop your due diligence checklist.

Refer back to your decisions in step 1 and think through the entire due diligence process from the investor’s perspective. What information will they need to see? What questions are they likely to ask? How can you tell your story concisely and truthfully yet positively? Due diligence checklists can differ depending on your goals, company, industry, growth stage, etc., and they can grow in scope, with lenders typically requiring the least information and prospective buyers the most.

For example, lenders will focus most of their due diligence on the details of your financial records. They will perform a financial audit, scrutinize every asset, and verify how cash flows through your business – asking for purchase orders, quotes, contracts, invoices, and bank statements. In contrast, those seeking an exit and the eventual sale of their company must consider who might be interested in buying a business and what they will need to know. Spoiler alert: they will want to see everything – financial and legal documents, strategic plans, details of how your business operates, etc.

4. Gather the necessary information, analyze it, and adjust.

Once you have every scrap of information necessary, please review it carefully. Remember, this is a sales process, so you must take the perspective of your target audience and poke holes in your due diligence materials. Look for and address any red flags, then decide how to answer questions to improve your chances of a successful deal.

An experienced CFO can tremendously help in this process. They can give you an unbiased perspective and help you prepare for important meetings.

The Due Diligence Checklist

With this context in mind, below is a list of potential items for your due diligence checklist. Since every due diligence exercise requires insight into your financials, we share that information first. You are also welcome to download our sample due diligence checklist that we use as a starting point when working with clients who ask for guidance. It contains more detail, but every situation differs, so please modify it to fit yours.

Financial Due Diligence

• Historic Financials: Audited financial statements for the last three fiscal years (income statements , balance sheets, cash flow statements, and corresponding monthly management reports).
• An analysis of fixed and variable expenses, revenue streams, assets, and liabilities, including any justifications and accounts receivable and payable aging reports.
• A detailed monthly cash flow analysis (budget vs. actual).
• Working capital trends quarter-by-quarter.
• Tax returns, including any necessary reconciliation guidance to financials.
• Any other historical documents that provide insight into your company’s financial health.

Business and Financial Models

• Financial projections for the next three to five years (month-by-month) in spreadsheet form.
• A copy of your business plan and any relevant expansion or marketing plans.

Legal, Corporate, and Compliance

• Legal structure or Articles of Incorporation documents – such as Memorandum and Articles of Association, Certificate of Incorporation, applicable charter documents and company by-laws, and any amendments.
• Company structure chart – including details on subsidiaries, equity investments, branches, agencies, etc.
• Management and Operations Organizational Chart – business divisions and key employees.
• Names and addresses of each director, secretary, and company auditor.
• Details on the share capital of the company.
• Shareholder agreements, arrangements, understandings, or communications, like your annual report. These can be legally binding, such as formalized stock purchase agreements, or not.
• Certificates of Good Standing for every foreign country and state where the company operates.
• Details of all licenses, consents, permits, and authorities the company holds to conduct business.
• Details on any significant claims or litigation made by or against the company.

Overview of Assets & Liabilities

• Details of all owned or leased properties, including mortgages, liens, tenancy, valuation, etc.
• A list of any material financial or physical assets and relevant details, such as factoring arrangements, conditional sales, credit sale agreements, or management or maintenance agreements.
• Copies of any material equipment leases or rental agreements.
• A list of all existing loans or similar arrangements, including relevant documents.
• Details on any guarantees, indemnifications, suretyship, or comfort given by the company for the benefit of another company.

Material Contracts, Negotiations, and Agreements

• Agreements with key customers, suppliers, or service providers – existing or in progress.
• Joint venture, partnership, or consortium agreements – existing or in progress.
• Details of all company insurance, including claims made by or against the company.
• Lists of all company employees – existing or incoming, including their relevant details such as name, position, employment date, salary, benefits, CVs, references, and employment contracts.
• Information on employee turnover rates, engagement, participation in labor unions, etc.

 Intellectual Property

• Details of all intellectual property (owned or belonging to third parties), including trade secrets such as special techniques or formulas used to manufacture your products.
• Form of Proprietary Information and Invention Agreements signed by current and past employees and consultants.
• Copies of any patents, copyrights, and trademarks.

Technology & Techniques

• Details on the company’s core technology, including areas that might be eligible for IP protection, competing technologies, and what makes the technology unique.
• An explanation of company software or technology development frameworks and methodologies, including how it protects itself from security breaches.
• Information on the company’s supply chain and any relevant advantages, potential risks, or vulnerabilities.

Preparing for Due Diligence, the Bottom Line

A last-minute scramble to prepare for due diligence is stressful and unlikely to produce positive results. So, if you believe you might undergo a significant financial transaction in the coming year or want to be ready for any opportunities, set aside some time to prepare. You will be glad you did, and, as always, we welcome you to reach out if we can help.

Related Posts

Mr. Lieberman is the founder and CEO of The CEO’s Right Hand, Inc., a New York-based consulting services firm that provides the full breadth of strategic, financial and operational advice to founders, CEOs and Executive Teams. As an experienced entrepreneur himself, he has served in various C-suite leadership and advisory roles across a wide spectrum of industries.

His first venture was CMR Technologies, a FinTech company based in San Francisco serving the investment management consulting space. From CMR, Mr. Lieberman formed Xtiva Financial Systems, a software company specializing in sales compensation solutions for the financial services industry. Mr. Lieberman served as Xtiva’s CEO, building the company to over $10 million in revenues and 100+ clients. He also served as the President and CFO for Interactive Donor, a New York-based Benefit Corporation which incentivizes charity through rewards.

Mr. Lieberman holds double Masters degrees, one in Business Administration and the other in Computer Science from the University of California at Los Angeles. He completed his Bachelors in Computer Engineering from the University of California at San Diego.

Contact William Lieberman [email protected] 646-277-8728

Recent Posts

• 3 Tips for Choosing and Implementing Professional Services Software
• What is Workplace Culture and Why Every CEO Should Care
• How to Read an Income Statement for a Service Company
• How to Minimize Inefficiencies in Your Real Estate Business
• What Is a Revenue Model and Why Does It Matter?
• How to Avoid Goal-Setting Mistakes as a Financial Services CEO

Are you ready to get back to running your business?

The CEO’s Right Hand takes charge of your finance, accounting, human resources, and other foundational functions so you can focus on what you do best – running your company. We then arm you with reliable data so you can make confident and timely business decisions.

Fill out the form to get in touch. One of our team members will contact you within one business day.

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.

Related posts

How to Prepare for Levels 2-6 DOT Inspections

The Department of Transportation regularly conducts safety inspections on any commercial motor...

Employee Offboarding Checklist for Easy Exits

The way an employee leaves your company is just as important as how they arrive. An effective...

Healthcare Risk Management Software: Secure Your Facility

Healthcare risk management software helps keep hospitals, clinics, and other medical facilities in...

Business development

• Billing management software
• Court management software
• Legal calendaring solutions

Practice management & growth

• Project & knowledge management
• Workflow automation software

Corporate & business organization

• Business practice & procedure

Legal forms

• Legal form-building software

Legal data & document management

• Data management
• Data-driven insights
• Document management
• Document storage & retrieval

Drafting software, service & guidance

• Contract services
• Drafting software
• Electronic evidence

Financial management

• Outside counsel spend

Law firm marketing

• Attracting & retaining clients
• Custom legal marketing services

Legal research & guidance

• Anywhere access to reference books
• Due diligence
• Legal research technology

Trial readiness, process & case guidance

• Case management software
• Matter management

Recommended Products

Conduct legal research efficiently and confidently using trusted content, proprietary editorial enhancements, and advanced technology.

Fast track case onboarding and practice with confidence. Tap into a team of experts who create and maintain timely, reliable, and accurate resources so you can jumpstart your work.

A business management tool for legal professionals that automates workflow. Simplify project management, increase profits, and improve client satisfaction.

• All products

Tax & Accounting

Audit & accounting.

• Accounting & financial management
• Audit workflow
• Engagement compilation & review
• Guidance & standards
• Internal audit & controls
• Quality control

Data & document management

• Certificate management
• Data management & mining
• Document storage & organization

Estate planning

• Estate planning & taxation
• Wealth management

Financial planning & analysis

• Financial reporting

Payroll, compensation, pension & benefits

• Payroll & workforce management services
• Healthcare plans
• Billing management
• Client management
• Cost management
• Practice management
• Workflow management

Professional development & education

• Product training & education
• Professional development

Tax planning & preparation

• Financial close
• Income tax compliance
• Tax automation
• Tax compliance
• Tax planning
• Tax preparation
• Sales & use tax
• Transfer pricing
• Fixed asset depreciation

Tax research & guidance

• Federal tax
• State & local tax
• International tax
• Tax laws & regulations
• Partnership taxation
• Research powered by AI
• Specialized industry taxation
• Credits & incentives
• Uncertain tax positions

A powerful tax and accounting research tool. Get more accurate and efficient results with the power of AI, cognitive computing, and machine learning.

Provides a full line of federal, state, and local programs. Save time with tax planning, preparation, and compliance.

Automate workpaper preparation and eliminate data entry

Trade & Supply

Customs & duties management.

• Customs law compliance & administration

Global trade compliance & management

• Global export compliance & management
• Global trade analysis
• Denied party screening

Product & service classification

• Harmonized Tariff System classification

Supply chain & procurement technology

• Foreign-trade zone (FTZ) management
• Supply chain compliance

Software that keeps supply chain data in one central location. Optimize operations, connect with external partners, create reports and keep inventory accurate.

Automate sales and use tax, GST, and VAT compliance. Consolidate multiple country-specific spreadsheets into a single, customizable solution and improve tax filing and return accuracy.

Risk & Fraud

Risk & compliance management.

• Regulatory compliance management

Fraud prevention, detection & investigations

• Fraud prevention technology

Risk management & investigations

• Investigation technology
• Document retrieval & due diligence services

Search volumes of data with intuitive navigation and simple filtering parameters. Prevent, detect, and investigate crime.

Identify patterns of potentially fraudulent behavior with actionable analytics and protect resources and program integrity.

Analyze data to detect, prevent, and mitigate fraud. Focus investigation resources on the highest risks and protect programs by reducing improper payments.

News & Media

Who we serve.

• Broadcasters
• Governments
• Marketers & Advertisers
• Professionals
• Sports Media
• Corporate Communications
• Health & Pharma
• Machine Learning & AI

Content Types

• All Content Types
• Human Interest
• Business & Finance
• Entertainment & Lifestyle
• Reuters Community
• Reuters Plus - Content Studio
• Advertising Solutions
• Sponsorship
• Verification Services
• Action Images
• Reuters Connect
• World News Express
• Reuters Pictures Platform
• API & Feeds
• Reuters.com Platform

Media Solutions

• User Generated Content
• Reuters Ready
• Ready-to-Publish
• Case studies
• Reuters Partners
• Standards & values
• Leadership team
• Reuters Best
• Webinars & online events

Around the globe, with unmatched speed and scale, Reuters Connect gives you the power to serve your audiences in a whole new way.

Reuters Plus, the commercial content studio at the heart of Reuters, builds campaign content that helps you to connect with your audiences in meaningful and hyper-targeted ways.

Reuters.com provides readers with a rich, immersive multimedia experience when accessing the latest fast-moving global news and in-depth reporting.

• Reuters Media Center
• Jurisdiction
• Practice area
• View all legal
• Organization
• View all tax

Featured Products

• Blacks Law Dictionary
• Thomson Reuters ProView
• Recently updated products
• New products

Shop our latest titles

ProView Quickfinder favorite libraries

• Visit legal store
• Visit tax store

APIs by industry

• Risk & Fraud APIs
• Tax & Accounting APIs
• Trade & Supply APIs

Use case library

• Legal API use cases
• Risk & Fraud API use cases
• Tax & Accounting API use cases
• Trade & Supply API use cases

Related sites

United states support.

• Account help & support
• Communities
• Product help & support
• Product training

International support

• Legal UK, Ireland & Europe support

New releases

• Westlaw Precision
• 1040 Quickfinder Handbook

Join a TR community

• ONESOURCE community login
• Checkpoint community login
• CS community login
• TR Community

Free trials & demos

• Westlaw Edge
• Practical Law
• Checkpoint Edge
• Onvio Firm Management
• Proview eReader
• Legal Technology, Content and Solutions
• Due diligence business investigations checklist

Due diligence business investigations checklist Are you on track? Use our due diligence business investigations checklist to make sure.

When you’re conducting a due diligence business investigation, you want to make sure you’re dotting all the I’s and crossing all the T’s. Conducting thorough due diligence investigations requires attention to detail, a well -thought-out game plan and persistence.

Due diligence expert Cynthia Hetherington has developed a handy checklist to help frame up successful due diligence investigations of businesses. Her firm, the Hetherington Group, is a consulting, publishing, and training firm focusing on intelligence, security and investigations. With over 20 years’ experience conducting investigative due diligence, corporate intelligence, Internet and online investigations they have formulated methodologies based on experience and subject expertise.

She takes abstract concepts and incorporates them into a blueprint for action, such as this checklist. It’s a tool that can be immediately integrated into operations, potentially saving you time, money and effort.

Use this checklist to help structure your investigations — and make sure nothing falls through the cracks.

Assets / Liabilities

• Property Ownership
• Vehicles / Watercraft / Aircraft
• Security Ownership (5% Owners)
• Business Reports
• Credit Reports
• Intellectual Property
• Causes (political, charitable, sponsorship)
• State and FEIN Identifiers
• Business status (profit, non, charity)
• Industry codes (NAICS, SIC)
• Business address
• Contact numbers
• Email addresses
• Social media profile addresses

Company Biography

• Executive management
• Company history
• Company statements (mission, sales objectives, purpose)
• Federal contracting (Sam.gov)
• Secretary of State / Corporation filings
• Permits (OSHA)
• Professional licenses
• Professional association affiliations
• Charitable donations
• Political donations
• Bankruptcies
• Liens / Judgments / Tax
• Sanctioning / Regulatory
• Property (Foreclosures)
• News/Literature
• Social Media (beyond biographical)
• Open Sources (surface web)

The cost of compliance for banks: preparing for FinCEN’s customer due diligence rule

Preparing IT to address ultimate beneficial ownership/customer due diligence rules

Investigations

CLEAR online investigation software makes it easier to locate people, businesses, assets and affiliations, and other critical information. With its vast collection of public and proprietary records, investigators can dive deep into their research and uncover hard-to-find data.

Business Acquisition Due Diligence Checklist

Identify target business.

Gather detailed financial information of the target business

• 1 Income Statement
• 2 Balance Sheet
• 3 Cash Flow Statement
• 4 Tax Return

Scrutinize financial statements and reports for authenticity

• 4 Liabilities
• 5 Profit/Loss

Approval: Financial Information

• Gather detailed financial information of the target business Will be submitted
• Scrutinize financial statements and reports for authenticity Will be submitted

Perform an analysis of the market and competition

• 1 Industry Trends
• 2 Market Share
• 3 Competitor Analysis
• 4 Market Size
• 5 Market Dynamics

Evaluate the company's growth and profitability potential

Review the operational procedures of the business.

• 1 Production
• 2 Logistics
• 3 Supply Chain
• 4 Quality Control
• 5 Customer Service

Ensure compliance with industry regulations and standards

• 1 Regulations
• 3 Certifications
• 4 Standards
• 5 Legal Obligations

Approval: Regulatory Compliance

• Ensure compliance with industry regulations and standards Will be submitted

Investigate the company's customer base and relations

• 1 Demographics
• 2 Retention Rates
• 3 Satisfaction Surveys
• 4 Key Client Relationships
• 5 Customer Growth Potential

Assess the value and condition of the company's tangible assets

• 2 Equipment
• 3 Inventory
• 5 Machinery

Identify potential legal and tax implications of the acquisition

• 1 Contractual Obligations
• 2 Intellectual Property Rights
• 3 Labor Laws
• 4 Environmental Compliance
• 5 Liabilities
• 1 Corporate Taxes
• 2 Capital Gains Tax
• 3 Sales Tax
• 4 Transfer Pricing
• 5 Tax Deductions

Review the management team and employee structure

Evaluate the company's technology and intellectual property rights.

• 2 Trademarks
• 3 Copyrights
• 4 Software Systems
• 5 IT Infrastructure

Approval: Technology and Intellectual Properties

• Evaluate the company's technology and intellectual property rights Will be submitted

Examine the company's marketing strategies and presence in the market

• 1 Marketing Campaigns
• 2 Brand Reputation
• 3 Online Presence
• 4 Customer Acquisition Strategies
• 5 Marketing ROI

Analyze any existing or potential liabilities and risks of the company

• 2 Litigations
• 3 Warranty Claims
• 4 Insurance Coverage
• 5 Intellectual Property Disputes

Verify the accuracy of all provided information

Finalize the acquisition plan and structure based on the due diligence findings, approval: acquisition plan.

• Finalize the acquisition plan and structure based on the due diligence findings Will be submitted

Take control of your workflows today.

More templates like this.

Original text

Thinking about buying a  business? It can be a great idea, if you do your homework. This is a complex decision that requires a careful analysis of physical properties, financial statements, and the relationships between the business and its customers, its community, and its competitors. Don't try to do this analysis alone- get professional help to evaluate and price the business, particularly if you don't have at least three years of experience in owning and operating a similar enterprise. Some advantages and disadvantages of purchasing an existing business include the following:

• The business has an existing established relationship with both customers and suppliers.

• Financing will be easier to obtain providing the business has a good profit history.

• Operations can begin right away; current inventory can be sold to produce immediate cash flow.

Disadvantages

• The cost may be higher than starting from scratch as often you are buying "goodwill."
• Existing problems can be hidden until after the sale.
•  Inventories may be obsolete due to their age; equipment may be faulty.

Recommendations

I. Require the seller to put in writing and warrant every essential part of the business, including:

• that the financial statements which should be attached as exhibits are true and correct
•  that there are no hidden liabilities of any kind (tax claims, lawsuits, or supplier bills).
•  a complete list of everything being purchased: leases, contracts, amounts owed to suppliers, amounts owed by customers, inventory, fixtures, equipment, signs, computer hardware and software and anything else that will contribute to the success of the business.

2. If the financial statements have not been audited by a certified public accountant, have it done. If the seller won't pay the cost, you should do so in order to make sure your investment is a wise one.

3. Detemine whether there is an industry association that can provide you with "normal" financials to be used to compare against the financials of the business you’re buying.

Average financials for most types of business can be found in the Annual Statistical Report published by the Risk Management Association (RMA), available in the business section of most libraries.

4. Fairly safe investments will return 5% annually. Consider this when reviewing the selling price. There are companies that do business valuations for a fee; it's probably worth paying the fee to do the valuation to avoid paying too much for the business.

5. If you are paying more for the business than the assets are valued, recognize that you are buying "goodwill" -- an intangible asset that may be amortized over a 15-year period.

6. Make sure to involve your banker. The purchase and sales agreement state the agreed upon price, lists what is being bought, indicates what actions are required by the seller (such as an environmental study) and by the purchaser (such as seeking financing), and sets the time the agreement is binding on both parties. Your banker needs this agreement to determine how he or she can help you finance the selling price, and whether the down payment is adequate. The bank also needs to know what is being purchased as some of it may be considered collateral.

7 Determine why the seller is selling the business

8. Determine how long this business can be expected to last. Are there factors that could terminate the business, such as a road being built that destroys the business location?

9. If there is a lease, talk to the owner of the property to be sure the terms of the lease will remain the same. This is an excellent time to discuss renewal terms and termination possibilities.

10. Ask the owner to let you work in the business prior to making a decision to buy. There is no better way of judging whether the business volume is satisfactory, whether you will enjoy working in that business and whether there are any problems you need to straighten out before the sale is finalized.

11. A business is often successful due to the personality of the owner. If this is the case, you have to decide whether you will be able to make the business as successful with your personality.

12. Make sure the seller signs an agreement not to compete for the next 10 years or so. This is especially important if you feel his or her personality was the reason for the success of the business.

13. Investigate neighborhood businesses that are not direct competitors to learn what they have to say about the growth of business in your area, what problems they see for the future, and how they feel about the business you're buying.

14. Have a credit check done on both the owner-sel1er and the business itself.

15. Check with suppliers to determine if the inventory you are buying is valued correctly.

16. If there are employees, talk to them about whether they will remain if you buy the business. Get any other information they are willing to provide.

17. Talk to some of the customers. Find out if they are satisfied with the business as it is now.

18. Determine if this business' prices are competitive. Visit every competitor to see if there are any changes underway that might influence your business.

19. Check with government agencies. Local agencies can tell you about licensing, environmental requirements, zoning rules, and whether there are taxes due for any local or state agency (licenses, personal property tax, franchise tax, income tax, and property tax). Federal agencies can tell you whether income tax, social security, Medicare, and unemployment tax payments are up to date.

20. Prepare a business plan. If you need help, consult your local SCORE office. Your business library might have an actual business plan for your industry for you to study and utilize to prepare your own.

21.  When buying an existing business, it is important whether the Purchase and Sale Agreement is for the purchase of assets or stock.  As a general rule, it is preferable for the buyer to purchase only assets, not stock.  If the Buyer purchases all the stock in the company, he acquires all existing liabilities associated with the business, whether known or unknown.

On the other hand, if it is an assets-only purchase, the Purchase and Sale Agreement could, and should, provide that the Buyer is acquiring certain listed assets, including the exclusive rights to the use of the name of the business.  The Agreement should also provide that the Buyer is acquiring no liabilities associated with the business, arising before the closing, other than those specified, such as accrued vacation and other Human Resources benefits for those employees who will be retained.  The HR aspects are important.  The Agreement should identify which employees will be retained, and the level of pay and benefits they will receive.

Whether it is a stock or asset purchase, the Seller should be required to indemnify the Buyer against any unforeseen liabilities that may appear after the closing.  It is often a good idea to hold a part of the purchase price in escrow for a period of time, as a hedge against such unpleasant surprises.

So you have decided to purchase an existing business.  Regardless of whether the deal is structured as an asset transaction, a stock transaction or a merger, make sure you know what you are getting into by requiring detailed information from the seller regarding its business operations and finances.  The following is a checklist of information and documents you should review:

A.         Organization and Good Standing .

• The Company’s Articles of Incorporation, and all amendments thereto.
• The Company’s Bylaws, and all amendments thereto.
• The Company’s minute book, including all minutes and resolutions of shareholders and directors, executive committees, and other governing groups.
• The Company’s organizational chart.
• The Company’s list of shareholders and number of shares held by each.
• Copies of agreements relating to options, voting trusts, warrants, puts, calls, subscriptions, and convertible securities.
• A Certificate of Good Standing from the Secretary of State of the state where the Company is incorporated.
• Copies of active status reports in the state of incorporation for the last three years.
• A list of all states where the Company is authorized to do business and annual reports for the last three years.
• A list of all states, provinces, or countries where the Company owns or leases property, maintains employees, or conducts business.
• A list of all of the Company’s assumed names and copies of registrations thereof.

B.         Financial Information.

• Audited financial statements for three years, together with Auditor’s Reports.
• The most recent unaudited statements, with comparable statements to the prior year.
• Auditor's letters and replies for the past five years.
• The Company’s credit report, if available.
• Any projections, capital budgets and strategic plans.
• Analyst reports, if available.
• A schedule of all indebtedness and contingent liabilities.
• A schedule of inventory.
• A schedule of accounts receivable.
• A schedule of accounts payable.
• A description of depreciation and amortization methods and changes in accounting methods over the past five years.
• Any analysis of fixed and variable expenses.
• Any analysis of gross margins.
• The Company’s general ledger.
• A description of the Company’s internal control procedures.

C.         Physical Assets.

• A schedule of fixed assets and the locations thereof.
• All U.C.C. filings.
• All leases of equipment.
• A schedule of sales and purchases of major capital equipment during last three years.

D.         Real Estate.

• A schedule of the Company’s business locations.
• Copies of all real estate leases, deeds, mortgages, title policies, surveys, zoning approvals, variances or use permits.

E.         Intellectual Property.

• A schedule of domestic and foreign patents and patent applications.
• A schedule of trademark and trade names.
• A schedule of copyrights.
• A description of important technical know-how.
• A description of methods used to protect trade secrets and know-how.
• Any "work for hire" agreements.
• A schedule and copies of all consulting agreements, agreements regarding inventions, and licenses or assignments of intellectual property to or from the Company.
• Any patent clearance documents.
• A schedule and summary of any claims or threatened claims by or against the Company regarding intellectual property.

F.         Employees and Employee Benefits.

• A list of employees including positions, current salaries, salaries and bonuses paid during last three years, and years of service.
• All employment, consulting, nondisclosure, nonsolicitation or noncompetition agreements between the Company and any of its employees.
• Resumés of key employees.
• The Company’s personnel handbook and a schedule of all employee benefits and holiday, vacation, and sick leave policies.
• Summary plan descriptions of qualified and non-qualified retirement plans.
• Copies of collective bargaining agreements, if any.
• A description of all employee problems within the last three years, including alleged wrongful termination, harassment, and discrimination.
• A description of any labor disputes, requests for arbitration, or grievance procedures currently pending or settled within the last three years.
• A list and description of benefits of all employee health and welfare insurance policies or self-funded arrangements.
• A description of worker’s compensation claim history.
• A description of unemployment insurance claims history.
• Copies of all stock option and stock purchase plans and a schedule of grants thereunder.

G.          Licenses and Permits.

• Copies of any governmental licenses, permits or consents.
• Any correspondence or documents relating to any proceedings of any regulatory agency.

H.         Environmental Issues.

• Environmental audits, if any, for each property leased by the Company.
• A listing of hazardous substances used in the Company’s operations.
• A description of the Company’s disposal methods.
• A list of environmental permits and licenses.
• Copies of all correspondence, notices and files related to EPA, state, or local regulatory agencies.
• A list identifying and describing any environmental litigation or investigations.
• A list identifying and describing any known superfund exposure.
• A list identifying and describing any contingent environmental liabilities or continuing indemnification obligations.

I.          Taxes.

• Federal, state, local, and foreign income tax returns for the last three years.
• States sales tax returns for the last three years.
• Any audit and revenue agency reports.
• Any tax settlement documents for the last three years.
• Employment tax filings for three years.
• Excise tax filings for three years.
• Any tax liens.

J.          Material Contracts.

• A schedule of all subsidiary, partnership, or joint venture relationships and obligations, with copies of all related agreements.
• Copies of all contracts between the Company and any officers, directors, 5-percent shareholders or affiliates.
• All loan agreements, bank financing arrangements, line of credit, or promissory notes to which the Company is a party.
• All security agreements, mortgages, indentures, collateral pledges, and similar agreements.
• All guaranties to which the Company is a party.
• Any installment sale agreements.
• Any distribution agreements, sales representative agreements, marketing agreements, and supply agreements.
• Any letters of intent, contracts, and closing transcripts from any mergers, acquisitions, or divestitures within last five years.
• Any options and stock purchase agreements involving interests in other companies.
• The Company’s standard quote, purchase order, invoice and warranty forms.
• All nondisclosure or noncompetition agreements to which the Company is a party.
• All other material contracts.

K.        Product or Service Lines.

• A list of all existing products or services and products or services under development.
• Copies of all correspondence and reports related to any regulatory approvals or disapprovals of any Company's products or services.
• A summary of all complaints or warranty claims.
• A summary of results of all tests, evaluations, studies, surveys, and other data regarding existing products or services and products or services under development.

L.           Customer Information.

• A schedule of the Company’s twelve largest customers in terms of sales thereto and a description of sales thereto over a period of two years.
• Any supply or service agreements.
• A description or copy of the Company’s purchasing policies.
• A description or copy of the Company’s credit policy.
• A schedule of unfilled orders.
• A list and explanation for any major customers lost over the last two years.
• All surveys and market research reports relevant to the Company or its products or services.
• The Company’s current advertising programs, marketing plans and budgets, and printed marketing materials.
• A description of the Company’s major competitors.

M.         Litigation.

• A schedule of all pending litigation.
• A description of any threatened litigation.
• Copies of insurance policies possibly providing coverage as to pending or threatened litigation.
• Documents relating to any injunctions, consent decrees, or settlements to which the Company is a party.
• A list of unsatisfied judgments.     

N.         Insurance Coverage.

• A schedule and copies of the Company’s general liability, personal and real property, product liability, errors and omissions, key-man, directors and officers, worker's compensation, and other insurance.
• A schedule of the Company’s insurance claims history for past three years.

O.        Professionals.

• A schedule of all law firms, accounting firms, consulting firms, and similar professionals engaged by the Company during past five years.

P.        Articles and Publicity.

• Copies of all articles and press releases relating to the Company within the past three years.

Copyright © 2024 SCORE Association, SCORE.org

Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.

EU Adopts Mandatory Rules on Corporate Sustainability Due Diligence That Will Apply to Many US Companies

On 24 April 2024, the European Parliament voted to adopt the Corporate Sustainability Due Diligence Directive (CSDDD), meaning it will now become law and necessitate a shift in corporate attitudes to responsible business conduct. The CSDDD will apply to European Union (EU) and non-EU companies with activities in the EU meeting the thresholds outlined below. For the first time, it will introduce comprehensive mandatory human rights and environmental due diligence obligations, with significant financial penalties and civil liability for companies that do not fully comply. It also will create a new obligation for companies to adopt and put into effect a climate transition plan, as well as a requirement for companies to report on their due diligence processes. This will likely be a heavy lift for most in-scope businesses, as these requirements reframe existing international soft laws [1] as mandatory obligations. Companies not in scope but in the value chains of businesses that are in scope also will feel the effects of the law, and can expect increasing sustainability-related information requests, contractual requirements and climate-related transition requests.

The new due diligence obligations created by the CSDDD will apply in addition to other more specific due diligence obligations introduced under the EU’s Conflict Minerals Regulation , the EU’s Batteries Regulation , the EU’s Deforestation Regulation and the new procedures companies will have to adopt to ensure compliance with the EU’s ban on products made with forced labour , which also was approved by the European Parliament this week.

Which companies does the CSDDD apply to?

The CSDDD applies to EU and non-EU companies, including most regulated financial undertakings, that satisfy the turnover and employee thresholds. It also applies to ultimate parent companies of groups that satisfy the same thresholds on a consolidated group basis.

The EU has adopted a phased-in approach for the CSDDD with the obligations applying between three and five years from the date the law enters into force.

The CSDDD only applies to those companies that meet the relevant thresholds for two consecutive years. 

We also will be closely tracking national implementation of the CSDDD into the laws of the EU member states, since EU member states are permitted to bring additional companies in scope of the CSDDD and/or require compliance sooner.

Franchisors and licensors

Lower financial thresholds apply to companies that rely on franchise or license models where the company’s or group’s agreements with third parties ensure a common identity, a common business concept and the application of uniform business methods.

What does the CSDDD require in-scope entities to do?

Mandatory climate transition plans.

The CSDDD will require all in-scope companies to adopt and put into effect a climate transition plan which aims to ensure, through best efforts, that the business model and strategy of the company is compatible with all of the following:

• Limiting global warming to 1.5 degrees Celsius in line with the Paris Agreement.
• The EU’s objective of achieving climate net zero greenhouse gas (GHG) emissions by 2050, including all related interim targets for 2030 (i.e., a reduction of net GHG emissions by at least 55% compared to 1990 levels) and 2040.
• A transition to a sustainable economy.

A company’s climate transition plan must include, amongst other things, science-based, time-bound targets covering Scope 1, 2 and 3 GHG emissions for 2030 – and every five years after until 2050. The transition plan needs to be updated annually and must contain a description of the progress the company has made towards achieving its targets. For those companies in scope of the Corporate Sustainability Reporting Directive (CSRD), their plan will be subject to audit. The 2030 emissions target will, in practice, require many companies to take steps to comply before the CSDDD fully applies to them, otherwise they risk not being able to achieve the target set.

Critically, this is an obligation of means and not of results. While the CSDDD recognizes that specific circumstances may lead to companies not being able to reach their targets, for traded companies, in particular, there remains a risk of securities litigation where targets disclosed in regulated filings go unmet. Even for nonlisted companies, there are risks of claims being brought under new EU green claims rules if reported targets are known to be unachievable (and therefore potentially misleading).

Mandatory human rights and environmental due diligence

Under the CSDDD, companies also will be required to identify and, where necessary, prioritize, prevent, mitigate, bring to an end, minimize and remediate potential and actual adverse human rights and environmental impacts whilst engaging in stakeholder consultation throughout. Companies will need to refresh their mandatory human rights and environmental due diligence assessments at minimum every 12 months and, where not already required to report on their processes under the CSRD, they will be required to publish an annual statement on their due diligence processes.

In-scope companies’ due diligence efforts must cover their own operations, the operations of their subsidiaries, and operations carried out by direct and indirect business partners in their ‘chain of activities’. A company’s ‘chain of activities’ covers the upstream activities connected to a company’s product or service – including design, extraction, sourcing, and manufacture of raw materials and products. It also covers certain downstream activities, including the distribution, transport and storage of products, but not their disposal or end use.

As the downstream impacts of services are entirely excluded, regulated financial undertakings are therefore only subject to due diligence obligations for the upstream part of their chain of activities. However, the CSDDD envisages the possible introduction of sustainability due diligence requirements for the financial services industry as early as 2026. 

What does mandatory human rights and environmental due diligence require in practice?

In practice, this means companies will need to:

1. Integrate mandatory human rights and environmental due diligence into their policies and risk management systems at all relevant levels of operation.

These policies must be developed in consultation with the company’s employees and representatives and must be updated periodically.

2. Identify and assess actual and potential adverse human rights and environmental impacts.

Adverse human rights and environmental impacts include, for example, forced labour, pollution and biodiversity loss, and must be assessed throughout a company’s own operations, those of its subsidiaries and, where related to its chain of activities, those of its business partners. This will require companies to map their chain of activities and carry out in-depth assessments in those areas where adverse impacts are most likely to occur and/or are most severe. Mandatory stakeholder consultation is a critical part of this identification and assessment process.

3. Prevent – or, where not possible, mitigate – potential adverse impacts and where impacts are identified, bring them to an end.

The CSDDD provides for risk-based due diligence, aligned with the UNGPs’ focus on severity and likelihood. These obligations are not obligations of result but obligations of means (i.e., companies are not expected to guarantee that adverse impacts will never occur or that they will always be stopped). Companies must nevertheless take appropriate measures that are capable of effectively addressing adverse impacts identified in a manner commensurate to the nature of the adverse impact. Measures might include cascading contractual clauses or targeted support for small and medium-sized enterprises (SMEs) in the form of training or even targeted financial aid. As a last resort, where efforts to prevent or mitigate have been unsuccessful, companies may be required to terminate their business relationship. Stakeholder consultation will play an important role in each instance to inform and support a company’s decisions and actions.

4. Provide remediation where the company causes or causes jointly with subsidiaries or business partners (e.g., by facilitating or incentivizing) an actual adverse impact.

Remediation here means the restitution of affected persons, communities or the environment to a situation equivalent to or as close as possible to the position they would have been in had the adverse impact not materialized. Where a company neither causes nor contributes to the impact arising in its chain of activities, the company is nevertheless expected to use its influence to bring to an end or minimize the extent of the impact.

5. Prioritize where necessary.

Companies should prioritize adverse impacts based on their severity and likelihood without regard to business-related factors, such as the company’s potential liability or the leverage the company might have. Once the most salient adverse impacts have been addressed, companies must then address those less salient.

6. Engage in stakeholder consultation.

The CSDDD mandates ‘meaningful’ stakeholder engagement throughout the due diligence process. Stakeholders include individuals and communities whose rights or interests are or could be impacted, as well as civil society organizations. Companies are expected to pay particular attention to the needs of vulnerable stakeholders and must address barriers to engagement.

7. Establish and maintain a notification mechanism and complaints procedure.

These processes must be publicly available and transparent, and they must enable impacted persons, trade unions and civil society to submit legitimate concerns regarding actual or potential adverse impacts.

8. Do more than rely on contractual assurances alone.

Companies will not be able to rely on cascading contractual assurances alone to satisfy their due diligence obligations under the CSDDD. Where used, contractual assurances must be accompanied by ‘appropriate measures’ to verify compliance and should be designed to ensure that responsibilities are shared appropriately by the company and the relevant business partner and avoid the complete transfer of due diligence obligations. The European Commission is expected to publish voluntary model contract clauses before the end of 2026.

Enforcement

The CSDDD will be enforced nationally by the authorities of the EU member states. Companies that do not comply with the CSDDD may face sanctions from national administrative authorities – including fines of up to 5% of their global turnover.

New civil liability regime

The CSDDD introduces a civil liability regime whereby companies could be liable for damages where they ‘intentionally or negligently’ failed to prevent, mitigate, bring to an end or minimize an adverse human rights impact which led to damage. The civil liability is subject to a five-year limitation period and excludes damage caused solely by the activities of a company’s business partners. Civil society and nongovernmental organizations will be able to bring claims for collective redress on behalf of victims. National courts also are expected to implement mechanisms to address procedural barriers for claimants.

Exclusion from public tenders

It also is possible that national authorities will make compliance with the CSDDD a criterion for the award of public contracts and concessions.

Next steps?

The CSDDD enters into force 20 days after its publication in the Official Journal of the EU. Prior to publication, the CSDDD will need to be formally approved by the European Council (expected 23 May). This means that the CSDDD will likely enter into force during Q3 2024. Member states will have two years after entry into force to transpose the legislation into national law, and the requirements will start to apply to companies three, four and five years after entry into force, depending on the size of the company.

We will be closely tracking national implementation of the CSDDD and how it impacts existing national due diligence regimes in the EU – e.g., the German Supply Chain Due Diligence Act (LkSG) and the French law on the duty of vigilance – already in force, along with proposed regimes – e.g., the Dutch Child Labour Due Diligence Act. Member states have discretion under the CSDDD to expand the scoping thresholds, the downstream activities in scope and the measures available for remediation.

If you have any questions or would like support understanding the implications of this new regime, please contact a member of  Cooley’s international ESG and sustainability advisory team .

[1] The CSDDD is broadly aligned with the United Nations’ Guiding Principles on Business and Human Rights (UNGPs) and the Organisation for Economic Co-operation and Development’s Guidelines for Multinational Enterprises (OECD guidelines).

Related insights

Related services, related contacts.

This content is provided for general informational purposes only, and your access or use of the content does not create an attorney-client relationship between you or your organization and Cooley LLP, Cooley (UK) LLP, or any other affiliated practice or entity (collectively referred to as “Cooley”). By accessing this content, you agree that the information provided does not constitute legal or other professional advice. This content is not a substitute for obtaining legal advice from a qualified attorney licensed in your jurisdiction and you should not act or refrain from acting based on this content. This content may be changed without notice. It is not guaranteed to be complete, correct or up to date, and it may not reflect the most current legal developments. Prior results do not guarantee a similar outcome. Do not send any confidential information to Cooley, as we do not have any duty to keep any information you provide to us confidential. This content may be considered Attorney Advertising and is subject to our legal notices .