Due Diligence Hub

Due diligence refers to the steps taken to manage risk when making decisions, usually when investing, either in part or all of a company. It’s how the buyer or investor determines that a business is ethical, compliant and profitable as claimed.  

Here, we’re going to look at some examples of due diligence in business and how to make the due diligence process seamless. 

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What is due diligence in business?

Due diligence is the systematic examination of a business ahead of an event such as a merger or acquisition, capital raise, IPO, or audit. The purpose of this investigation is to assess commercial and legal risks, as well as opportunities arising from the transaction.

Buying, selling or merging a company requires due diligence

Due diligence before an acquisition or merger involves a rigorous examination and evaluation of a target company’s critical documentation and data before the deal is sealed. This includes operational, financial and legal information.

The goals of M&A due diligence are to ensure a fair price is paid, potential risks in the purchase are surfaced, and the buyer has a solid grasp of the opportunity. 

Raising capital and gaining investment requires due diligence

Startups or businesses seeking to raise capital to grow or develop an idea also undertake due diligence before seeking investors. Start-up due diligence presents potential investors with a clear view of the current financial situation of the start-up. 

Investors may want to know about the reputation and strategy, intellectual property, regulatory landscape, and forecasting to show how investment funds will be used to grow the business, plus potential returns for angel or venture capital investors. The audit process will vary depending on the investor and the size of the investment. 

An initial public offering also requires due diligence to ensure the company is ready and able to function as a publicly-listed company, and is in the best shape to drive a high-value outcome.

Due diligence can support informed decision-making

Elements of due diligence come into any large transaction, particularly where there is risk involved. From tenders and procurement, where supplier due diligence and regular audits can help to eliminate, identify or prevent procurement fraud, to asset management, where visibility of the bigger picture can help identify when to divest or whether an off-market bid is worthwhile, due diligence provides the data that drives intelligent decision-making. 

Data-driven strategic review can help methodically assess a business and identify risks and opportunities, informing decision-makers about the current state of a business and supporting preparation for change.

Business exits or insolvency requires due diligence

Exiting a business, whether selling to a partner, family succession, or undergoing IPO or facing an event like liquidation or bankruptcy will require due diligence. Whatever the reason for exit, due diligence to surface the legal structure, financial details, assets and liabilities, existing customer base, key contracts and staffing arrangements, accreditations and awards and compliance factors prepares a company for the next phase.

Types of due diligence 

Due diligence covers aspects of a business from finances and tax to legal, regulatory and operational factors. During due diligence on large transactions, a variety of professionals will be engaged, from financial analysts and advisors to business experts and owners. 

In each of these areas, due diligence aims to audit a business and identify risks and opportunities, ensuring a fairer transaction for both the buy-side and the sell-side. 

The types of due diligence listed below is not an exhaustive list, but it’s a great starting point when preparing to undergo a major transaction or audit. (Scroll down to find a due diligence checklist you can work from too).

Financial Due Diligence

Financial due diligence of a business focuses on assessing the historical financial performance of the company. This might be done by an internal accounting team or external auditors. 

The aim is to build a clear picture of the current value of the business and future prospects. Auditors and accountants will ensure financial statements are complete, accurate and assess whether financial performance is sustainable. 

Legal Due Diligence

Legal due diligence includes examining compliance with laws and regulations that apply to the business as well as intellectual property, contracts and any pending litigation. 

The goal is to reveal any hidden actual or potential legal issues. 

Tax Due Diligence


This step assesses the company’s tax obligations, compliance with tax law and identifies any potential tax risks. Buyers or investors will want to be aware of any impending tax liabilities and the impact this could have on cash flow.

Operational Due Diligence

Operational due diligence considers the strategic plan, policies and processes and work instructions. The aim is to assess efficiency and identify potential for improvements. Operational due diligence can support post-acquisition integration and enables new owners to plan for a smooth integration process.

Intellectual Property Due Diligence


IP due diligence considers the risks and benefits of a target company’s intellectual property portfolio, before a buy-contract is signed or investment proceeds. 

Commercial Due Diligence

The commercial due diligence processes audit the target company’s historical activity and forecasts performance, long-term viability and potential. 


Information Technology Due Diligence


Technology is central to modern business. IT due diligence assesses infrastructure, systems, data security and identifies potential vulnerabilities.

HR Due Diligence


An assessment of the human capital of a target company, including key skillsets and key person risk.

Regulatory Due Diligence
 

Regulatory due diligence explores the compliance of the company with relevant regulations, as well as supplier, employee, project and partner compliance. It’s a comprehensive review that considers any potential breaches, whether there has been a warning or penalty or not. 

To find out more about all the different types of due diligence, see here: Types of Due Diligence

The differences between ‘hard’ and ‘soft ’due diligence

Hard due diligence is all about calculations and numbers, focused on data that is easy to quantify and measure. Soft due diligence requires a different set of skills and tools to assess aspects of a business like culture, management and critical internal and external relationships. 

Both soft due diligence and hard due diligence will consider the company’s annual reports, but the approach beyond this is quite different. 

The types of due diligence considered above contain elements of both soft and hard due diligence. Let’s take a closer look. 

Undertaking hard due diligence

Hard due diligence addresses concrete data and facts. It focuses on the financial aspects of the business, such as financial statements, expenditures and projects. This is the primary type of due diligence that is used to assess whether profit can be generated from the deal.

What is soft due diligence?

Soft DD is equally important, but not as immediately obvious or easy to quantify.. Soft due diligence is all about relationships — between the employees and management as well as between the company and suppliers, partners and other stakeholders. It also includes the customer base and how loyal the customers are. 

One key element of soft due diligence considers the human capital in a business, including talent, skills, culture and leadership. The process aims to establish whether key staff members, suppliers or customer groups are likely to stay or leave in the event of the deal going through. 

When M&A deals fail - which according to Harvard Business Review (2020) 70-90% of the time - it is usually because this human element is ignored).

The due diligence process

In its basic form, the due diligence process consists of the purchaser asking questions of the target business, and the business answering those questions with proof that shows they have answered. The bidder is legally obligated to disclose accurate information. There is then a rigorous due diligence Q&A process to clarify anything that might need further explanation before the purchase.

DD is usually conducted after you and the acquiring firm have agreed in principle to a deal, or at least that one may be beneficial, but before any binding contract is signed. 

Find out more: How do you perform due diligence

What the buyer should consider

The purchaser should consider every area of the target’s business and seek to uncover as much detail as possible about its current state of health before making their investment decision. During this process, they should spend time talking to management and key staff, understanding what documents will help confirm the viability of the transaction and verifying the integrity of all the information provided.

Purchasers should also consider their integration strategy, and how the new business entity will operate as a unified whole to maximize synergies.

Potential red flags

Potential warning signs for the buyer include any unverified, inaccurate or missing material information that could prove to be problematic later on. This could mean the prospective bidder is hesitant to share something that could be perceived as a red flag, or that they are disorganized and don’t actually know these details about their own business.

Other warning signs to watch for can include: 

• declining customer numbers and/or turnover;

• indications that the industry itself is moving into a difficult period.

Target company risks of improper due diligence

To perform due diligence, target companies and their advisors need to carefully scrutinize every aspect of a prospective bidder. The buyer or investor needs to be a good fit for the company, with terms and pricing that is acceptable. 

If there are gaps in the documentation the target compiles and shares gather, the company risks omitting critical information that could result in failure to reach a high valuation and sale price. Even worse - it could impact the reputation and future of their business.

Poor organization can result in the discovery of risks late in the process if a company has exercised due diligence improperly. This creates stress for both parties, costs time to resolve, and increases the chances that the deal will fall through.

Due diligence examples

As we’ve observed, due diligence can be concise and focused, as for selling a small business or a small part of a business, or vast in scope, where an anticipated large transaction leads to thorough scrutiny of the business. 

Due diligence can take a toll on a business and its people, so streamlining processes is critical. Here are a few examples of where due diligence might impact a business: 

• Acquiring a smaller company: the acquiring company will review the employment agreements, company culture, policy and process, any labor disputes and intellectual property as well as compliance, financial health and assets. 
• Procuring technology: a non-profit procuring IT services would assess the cybersecurity of infrastructure to identify any risks or compliance issues. 

Due Diligence Checklist

Buying a business is a costly endeavour, so it’s important you are confident you have all the information you need to make a well-informed decision.

Our Due Diligence Checklist lays out the framework for everything the seller needs to provide and the buyer needs to consider in order to progress the deal. It is a file structure that has been built from 50 million data points across 23,000+ deals to help you organize your business data and ensure nothing gets missed.

Ansarada Deals™ is a centralized Deals space bringing together a purpose-built set of solutions into one fully integrated platform. Digitize all your due diligence checklists with Deal Workflow™, a project management tool that gives you complete oversight and control. Use it to start preparing for your deal for free until the deal goes live. 

Business due diligence questions

What are the four Ps of due diligence?

• People: assess how the experience and expertise of leadership
• Philosophy: focus on whether an investment is likely to drive success and ROI
• Process: assess how key business processes are implemented and managed
• Performance: analyse how strategies perform, long term

How long does business due diligence take?

Timeframes for due diligence depend on the complexity of the transaction and size of the company involved. Generally, advisors allow 30 to 90 days but this may be extended to navigate complex regulatory requirements or evaluate intricate financial structures. Efficient planning and workflow processes, plus clear communication between parties, can expedite the process. 

How can a business prepare for due diligence?

Organise and collate all relevant documents, including financial statements, contracts, legal records and applicable regulations to give buyers or investors transparent, comprehensive information. An internal audit can help identify potential risks and prepare the business for scrutiny, address compliance issues and streamline the process. Seek legal and financial advice to identify questions that may arise during due diligence.