MAY 19th, 2022
It’s time for new M&A ideas to bloom, register for the M&A Science Spring Summit on May 19th!
Register Now!
No items found.
 min read time

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

Due Diligence Checklist
Ensure you’re asking the right questions during the diligence process of your next transaction

This post was originally published in August 2019 and has been updated for relevancy on May 15, 2024.

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 M&A Optimization Platform can transform your company’s due diligence process, click the link and visit our due diligence page.

What is the Due Diligence Process?

Due diligence process is a solid review or audit of a company 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.

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.

Due Diligence Phase of M&A Transaction

What are the types of Due Diligence?

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 licenses, 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.

How to perform due diligence in M&A ?

Conducting due diligence is an essential component of any M&A transaction. It is a lengthy and intimidating process that involves multiple parties and phases. To conduct due diligence one should thoroughly analyze the complete business before making any informed decision and this is typically done by a potential buyer prior to any business transactions.

due diligence process

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 it will require.

Here’s a simplified guide to help you navigate through the due diligence process using a straightforward example.

Example Scenario: Imagine you’re considering acquiring a small software development company called "Tech Innovators."

Listed below are general due diligence process steps.

1. Evaluate Goals of the Project

Goal Setting:

Determine what you aim to achieve with the acquisition. This could include expanding your market share, acquiring new technology, or entering a new market. Setting clear goals helps you identify the resources needed and ensures alignment with your company’s overall strategy.


Your company wants to acquire Tech Innovators to integrate their cutting-edge software into your existing product line, enhancing your technological capabilities and market position.

2. Analyze of Business Financials

Financial Audit:

Examine the financial records of the target company to ensure they are accurate and reliable. This includes reviewing balance sheets, income statements, tax documents, and debt schedules. This step helps you assess the company's financial health, performance, and any potential red flags.


  • Balance Sheets and Income Statements: Ensure that Tech Innovators’ revenue and profits are consistent with their reported figures.
  • Inventory Schedules: Check the current inventory and how it is valued.
  • Future Forecasts: Review projections to understand the growth potential.
  • Debt Analysis: Assess any existing short-term and long-term debts.
  • Tax Documents: Verify compliance with tax obligations.

The detailed financial due diligence checklist could be found here.

3. Thorough Inspection of Documents

Document Review and Interviews:

Request necessary documents from the target company and conduct interviews with their key personnel. This helps verify that their business practices comply with legal and industry standards and provides a deeper understanding of the company’s operations.


  • Site Visits: Visit Tech Innovators’ offices to understand their operational environment.
  • Interviews: Talk to their management and key employees to gauge their expertise and company culture.
  • Legal Compliance: Ensure that all legal documents, such as contracts and intellectual property rights, are in order.

4. Business Plan and Model Analysis

Business Model Assessment:

Analyze the target company’s business plan and operational model to determine its viability and how well it aligns with your company’s goals. This step helps you understand the sustainability and strategic fit of the target company.


Review Tech Innovators’ business strategies, customer base, and market positioning to ensure that integrating Tech Innovators will enhance your company’s offerings and strategic direction.

5. Final Offering Formation

Valuation and Offer:

Combine all the collected information to form a final valuation. Use this valuation to determine the offer you will make to the target company. This step involves collaboration among various teams to ensure a fair and justified offer.


  • Valuation Techniques: Employ methods like discounted cash flow analysis or comparable company analysis to determine a fair price.
  • Offer Decision: Based on your findings, decide on the final amount you’re willing to pay and prepare for negotiation.

6. Risk Management

Risk Assessment:

Identify and evaluate potential risks associated with the acquisition. This includes financial risks, operational risks, and market risks. Proper risk management ensures that you are prepared for any challenges that may arise post-acquisition.


  • Financial Risks: Consider any financial instability or hidden debts at Tech Innovators.
  • Operational Risks: Assess risks related to integrating Tech Innovators’ systems and processes with yours.
  • Market Risks: Evaluate the potential market reaction and the impact on your existing business.

By following these steps, you can conduct a thorough due diligence process, ensuring that you make a well-informed decision when considering an acquisition like Tech Innovators. This structured approach will help you identify potential risks and benefits, ultimately leading to a successful M&A transaction.

How to perform due diligence for 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 the 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 by venture capital or private equity firms.

Beside that it is 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 also 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 performing due diligence for private equity:

  • 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?

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.

What are the requirements before starting the due diligence process ?

Cultivating good organization and strategizing is key when trying to navigate the 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:

  1. Transaction Related Documents
  2. Corporate Documents
  3. Contracts and Agreements
  4. Customers, Sales, and Marketing
  5. Procurement (Suppliers)
  6. Property and Equipment
  7. Environmental
  8. Legal, Litigation, and Regulatory
  9. Intellectual Property
  10. Financial
  11. Tax
  12. HR and Employees
  13. Insurance
  14. Operations
  15. Information Technology
  16. Industry and other

Who can perform due diligence?

Due diligence can be performed by various professionals, each bringing their expertise to ensure a thorough and accurate assessment of the target company. Here’s a breakdown of who can conduct due diligence, along with examples:

Internal Teams: These are employees from within the company, typically from departments such as finance, legal, HR, and operations. They have a deep understanding of the company's internal processes and industry context.

Example: If your company is considering acquiring another business, your finance team would review the target company's financial statements, your legal team would examine their contracts and compliance issues, and your HR team would assess their employee policies and benefits. This internal knowledge ensures that the evaluation is aligned with your company’s specific needs and goals.

External Advisors: These are third-party experts who bring specialized knowledge and experience to the due diligence process. They can include investment bankers, M&A consultants, legal advisors, and accounting firms.

Example: To ensure an objective and comprehensive evaluation of the target company, you might hire an investment bank to conduct a financial analysis, a legal firm to review legal documents and compliance, and an M&A consultant to provide strategic advice. These advisors have extensive experience in M&A transactions and can identify issues that internal teams might overlook.

Specialized Firms: These are companies that specialize in providing due diligence services. They offer comprehensive analysis and reporting on various aspects of the target company.

Example: You could engage a specialized due diligence firm to perform a thorough assessment of the target company. These firms have dedicated teams and tools designed for due diligence, providing detailed reports on financial health, operational efficiency, market positioning, and potential risks.

When to conduct due diligence?

Due diligence should be conducted as early as possible in the M&A process. Ideally, it begins after initial interest and intent are expressed but before finalizing any agreements. Starting early helps identify potential issues and allows ample time for thorough investigation.

For example: Suppose your company expresses interest in acquiring another business and signs a letter of intent. The due diligence process should start immediately after this. Early initiation allows you to uncover any financial discrepancies, legal liabilities, or operational inefficiencies in the target company before moving forward with the acquisition. This proactive approach ensures that you are well-informed and can negotiate better terms or decide to walk away if significant issues are found.

Conduct Due Diligence Process the Right Way

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

  1. 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.
  2. 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.
  3. Utilize Checklists - When teams use 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.
  4. Address Potential Risks Throughout the Process - If potential bottlenecks and risks arise during diligence, teams should address them promptly.
  5. 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.

Due Diligence Checklists

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

DealRoom M&A Optimization Platform 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 here. Our library of pre-built ready to use playbooks enables teams to thoroughly and effectively collect necessary diligence information.

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 existed.

which departments get the most scrutiny during due diligence and which the least?

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.

M&A Science Diligence Management Certification

Learn how to approach diligence, build a diligence team, the art of asking good questions, why due diligence is an iterative process, and the importance of data integrity. No degree or prior experience required.

Principal of Corporate Development Integration at Google

  • 50+ courses by M&A Experts
    Get access to diligence, integration, divestment and strategy courses. 100% online and at your own pace.
  • Get Diligence Ready
    Learn diligence strategy and critical skills, diligence requests, workflow management and receive certificate of completion

Enroll Now


Easy Due Diligence Process with DealRoom

Traditionally, the due diligence process is completed across various tools - using a virtual data room to store all documents, Excel trackers for listing requests and tracking progress, and one-off emails for back and forth deal specific communication. Unfortunately, this leaves room for inefficiencies such as version control worries, miscommunication, duplicate work, and information silos.

Easily switch from disconnected excel trackers, VDRs, & email communications to DealRoom Diligence. Reduce your diligence time by 50% by centralizing your process with built-in virtual data room, granular permissions to control access to sensitive documents and requests and by enabling transparent and clear discussions on the platform among different stakeholders for better decision-making. With AI-Powered document analysis you can analyze and extract key information from deal documents and easily create, save and share custom prompt templates across organizations and shareholders. 

Amy Weck, VP, M&A and Integrations at The Liberty Insurance stated :

Saved $200,000/ year by switching to DealRoom.  From the time cost to eliminating the need for multiple disparate solutions.

Get your M&A process in order. Use DealRoom as a single source of truth and align your team.

Join 2,000+ forward-thinking M&A practitioners

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

Subscribe for free
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.