The feedback provided by these M&A practitioners helped us to collect needed information and compose the due diligence questionnaire that can be useful in your future transaction too.
But let's start from the beginning.
A due diligence questionnaire (often dubbed a “DDQ”) is a list of frequently asked questions during a M&A transaction or investing. These questions are broken down into categories and work to provide key information to the buyer.
While the DDQ will vary depending upon the deal type and target company, there are basic categories practitioners have learned to investigate and baseline questions practitioners have learned to ask.
Using a due diligence questionnaire can allow the acquirer to get a jump on the lengthy due diligence process by anticipating the information it will need to gather.
Conversely, if the target has ever been on the buy-side, it can turn the due diligence questionnaire on itself and get a headstart on preparing information to share with the acquirer.
A due diligence questionnaire is useful in any type of M&A transaction. It typically covers the following categories:
Depending upon the target and the transaction, additional categories, including a “miscellaneous” category, may be warranted.
Clearly, the buy-side needs to have a comprehensive understanding of the target. Foundational company questions should include:
Financial information is often the cornerstone of due diligence and many, many financial documents must be collected. Here are baseline questions to begin the process:
This category is often labeled “Human Resources” or HR as the HR department will most likely be answering these questions. In addition to learning about employees in the above “company information” category, the buyer will also want to ask:
Note: One of the most efficient strategies for this category is to ask for an overview of all employees, the length of their employment and their job descriptions.
Intellectual property (IP) can be a complicated matter during M&A, and if not fully investigated and understood, can lead to litigation.
You can utilize DealRoom due diligence questionnaires from our library of templates by clicking the banner below:
There you can find:
The due diligence process begins with refining and reviewing the overarching goals of the deal.
What you are hoping to gain from this transaction must be clearly articulated and remain in the forefront of the team’s mind throughout the rest of the due diligence process, working as a guiding force.
Second, a thorough review and analysis of business financials takes place.
As seen below, the amount of financial information and documentation that must be collected and studied requires a significant amount of time and attention to detail. This process is called financial due diligence.
This thorough review and analysis is then done for the other areas of the business, such as
Usually people utilize data room or special due diligence software like DealRoom to conduct due diligence. Here is how the requests and documents collection can look there.
Additionally, at this point in the process, interviews, surveys, and on-site visits are often leveraged to gain a broader, perhaps even more genuine, understanding of the target company.
Consequently, at this time a real dialogue occurs between the buy-side and the sell-side.
An important outcome of this stage is the buy-side should end with a better overall understanding of the company’s true value and how/if it will meet the buy-side’s goal.
It should also be noted the sell-side (also known as the target company) plays a major role in how much time this part of the process takes - its ability to share information quickly and respond to requests in a timely manner helps this stage of the due diligence process move along.
Next, the buy-side will review the target’s business model and plan, focusing on if the two companies are a good fit and keeping an eye on what integration might look like.
Finally, an offer is formulated and risks are fully analyzed and brought to light.
Due diligence is designed to mitigate risk, and a due diligence questionnaire can help begin the process.
Certainly, the DDQ outlined above is simply a framework to use during initial due diligence work. The DDQ can be fleshed out depending upon the specific target involved in the deal.
While the DDQ does not eliminate all the work and investigation involved in diligence, it can identify early risks and red flags, allowing the buyer to decide if it would be advantageous to proceed.