Due diligence is defined as the research and analysis of a company or organization done in preparation for a business transaction (such as a corporate merger or purchase of securities).
What does Due Diligence Mean you can read here.
Originally, the term was closely associated with the concept of effort and then morphed into legal and business terms. Its roots are certainly appropriate, given due diligence is notorious for the amount of time and effort it requires for the acquirer to get a true understanding of the target company.
In fact, major companies such as some of the Big Four (PWC, EY, KPMG, and Deloitte) put a cap on the number of consecutive diligence projects employees can work on (learn about Due Diligence Process in Mergers and Acquisitions (M&A)).
Not surprisingly then, M&A practitioners are invariably on the hunt for ways to make due diligence more efficient and perfect acquisition questions to ask.
Consequently, the concept of using checklists and playbooks to gather information about a target business has become quite popular.
While we believe practitioners should be wary of blindly following due diligence checklists since practitioners must first focus on their own companies’ strategies, goals, and values, there are basic due diligence questions for acquisitions that M&A practitioners can start with; these checklists and templates can help with initial due diligence and give less experienced acquirers a sense of standard due diligence questions when buying a business.
100+ Commonly Asked Questions During Due Diligence
While there is a multitude of M&A due diligence questions (or a due diligence questionnaire) that could be asked, typical due diligence questions to ask an acquisition target in hopes of gathering information can be broken down into the following categories:
1. Financial Information
Questions to ask during due diligence begin with financial information.
Specifically, collecting financial statements from the last three to five years, tax-related due diligence questions are especially important.
This financial information includes:
- Balance sheets
- Accounts payable
- Accounts receivable
- Income statements.
Also, you will want to ask for:
- Tax returns (usually the last three years)
- Credit reports
- Reports demonstrating the value of all products
- Dissection of gross profit margins
- Dissection of expenses (both fixed and variable).
When it comes to financial information, ask for:
- Credit reports
- Tax returns
- Audit and revenue reports
- List of all physical assets
- List of expenses (fixed and variable)
- Gross profit margins
- Owner’s benefit
- Any debt
Check out DealRoom's financial due diligence checklist.
2. Company Information
A strong understanding of the target company is essential; therefore, corporate structure due diligence questions and business due diligence questions include:
- Current by-laws of the company
- Ownership information
- Overview of the structure of the company (diagrams and charts are valuable here)
- List of security holders
- Communication with stockholders
- List of outsourced work - freelancers, consultants, etc.
- Major competitors
- Annual reports from the last three to five years
3. Product Information
Focus on the product’s suppliers and competitors, as well as current and future marketing plans. Specific questions related to trends in the product industry have also proven to be useful. With this in mind, product M&A questions to ask include:
- With this in mind, ask about:
- All services and products
- Production costs
- Production margins
- Past and predicted growth rates
4. Customer Information
Knowing all of the customers, and honing in on the most substantial customers in terms of sales, is key. Additionally, sales lists, contracts, policies, and major correspondence need to be shared with the buy side’s diligence team. Looking at marketing, it is also helpful to learn how these customers were found and, ultimately, acquired. Customer information also becomes highly legal, as all contact and correspondence with the customer’s attorney should be disclosed, as well as any litigation.
- In a nutshell, ask about:
- Customer database
- Marketing strategies (there are additional, more exhaustive marketing due diligence checklists as well you might consult depending upon your deal)
- Customer communication
- Purchasing agreements
- Refund policies
- Litigation and/or threats of litigation
5. Employee Information
Employee information is invaluable for due diligence since employees are what make the company successful. Consequently, the buy-side must have a clear understanding of all employee roles and responsibilities. In addition, knowing who the key players are is critical because the buy-side will want to work to retain these individuals - remember, it is essential to think about integration early on in the deal’s lifecycle, even during diligence.
In short, ask for:
- A list of all employees, with key players noted
- A description of each job/team role
- Contracts and benefits - including non-compete, non-disclosure, and severance agreements
- Human Resource employees and policies as well as any filed complaints
- Personnel turnover rate in the last two to three years
In addition to reviewing any past or present litigations, the acquirer will want to meet with the company’s lawyer(s).
Also, ask about:
7. Intellectual Property
Intellectual property (IP) lawsuits have been collecting a fair amount of buzz over the last few years. While physical property, products, and documents make up the bulk of due diligence, intellectual property should also be considered a typical due diligence question for the acquirer. The buyer will want to examine all of the patents, copyrights, and trademarks the company has.
When it comes to specific IP, be sure sure to ask:
- Who owns the intellectual property?
- If a larger group owns the information, who controls the rights to it?
- Has the IP been patented?
- Is there a way to generate more revenue related to the IP?
- Are there other works that stem from the IP?
- What type of income - fixed or variable- will stream from the IP?
8. Physical Asset
Physical assets arise a bit in the financial category but also deserve their own deep dive. This category also covers location due diligence questions as it relates to real estate.
Essentially, ask about:
- All forms of real estate - offices, data centers, warehouses, and storage centers; furniture should also be taken note of here
- Product-related inventory and equipment
The following may or may not be applicable, depending on the deal at hand:
- Environmental information, such as health and safety notices, information related to any hazardous substances or underground storage tanks
- New product development and benefits/risks of new product
A complete Due Diligence Checklist Template can be found here.
You can also check playbooks specific to your deal type.
Read also about how to write a Due Diligence Report
Additional Due Diligence Best Practices
M&A practitioners agree the following can help the acquirer maneuver intelligently through due diligence:
- Diligence team members must have an eye toward integration. Specifically, there should be some overlap between members of the due diligence team and members of the integration team.
- Use technology designed for M&A to assist with the cumbersome process of diligence. Virtual data rooms (VDRs) are one place to start; however, a data room alone will only ease the sharing of documents. A data room paired with a project management platform can allow both sides to work more efficiently and eliminate redundancy. You can read more about how to select M&A software here: Data Room for Due Diligence Process and 4 Things to Consider When Choosing Due Diligence Software.
- Adopt a more Agile workflow, which will allow teams to focus on a few key objectives and pivot more easily throughout diligence and the rest of the life cycle of the deal.
- Review multiple sample due diligence checklists and templates for acquisitions (sometimes also referred to as acquisition due diligence questionnaires) to determine which questions/checklists/templates best suit your M&A due diligence checklist needs.
- Once all of the information is gathered, verify the deal is appropriate for your company’s strategy and goals; consider not only synergies (which includes focusing on due diligence valuation questions) but also culture and values.
Communication is essential during diligence, and while every aspect of diligence cannot be covered in one piece, having a sense of typical acquisition due diligence questions via a buy side due diligence checklist provides the acquirer with a solid foundation (for instance, this M&A due diligence checklist from Deloitte is a powerful resource).
It is important to note that before tackling diligence you must confirm your company is ready for an M&A transaction.
Not only should your company be financially stable before acquiring another company, but it should also be staffed appropriately to handle the acquisition.
Finally, be sure to understand the target’s motivation for selling. This might require additional questions and conversations not answered by typical due diligence questions and document sharing.