A due diligence questionnaire (often dubbed a “DDQ”) is a list of frequently asked questions during a M&A transaction. 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 DDQ 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 DDQ on itself and get a headstart on preparing information to share with the acquirer.
What does a due diligence questionnaire cover and where is it useful?
A due diligence questionnaire is useful in any type of M&A transaction. It typically covers the following categories:
Intellectual Property Information
Physical Asset Information
Depending upon the target and the transaction, additional categories, including a “miscellaneous” category, may be warranted.
Specific DDQ categories & questions
1. Company Information:
Clearly, the buy-side needs to have a comprehensive understanding of the target. Foundational company questions should include:
What is the organizational structure of your company?
Who are the key players in your organization? What are their roles and how long have they been with you?
Who are your board members and stakeholders and what has their feedback been over the last three to five year?
2. Financial Information:
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:
What are your operating costs?
What do your budget and operating plans consist of? What tools do you use?
What are your accounting policies?
What are your investment policies?
What are your capital expenditures for the next 12 months?
What is your inventory cost system?
What are your cash management practices and controls?
Do you have any debt?
Do you have any existing financial arrangements and agreements?
3. Employee Information:
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:
What do current employee contracts look like?
What is the severance agreement?
What are the benefit plans?
How are employees recruited?
What is the headcount of employees at each location? (if applicable)
Is there an employee handbook or manual?
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.
4. Legal Information:
What types of permits and licenses are required to run your business?
Are there any contracts that restrict your right to conduct business?
Have you been involved in any litigation? Are you currently involved in any litigation?
Have any of your products been recalled?
What are your compliance programs and policies?
Are you at all restricted from doing business under OFAC (or other types of) regulations?
5. Product Information:
What are the specific products and services you offer?
Do you have any products or services in development?
Who are your suppliers?
6. Consumer Information:
Over the last three years, who are your top customers? How did you acquire them?
What do your customer contracts consist of?
How are sales channels developed?
What is the breakdown of sales and gross profits by geography, product type, and sales channels?
7. Intellectual Property Information:
Intellectual property (IP) can be a complicated matter during M&A, and if not fully investigated and understood, can lead to litigation.
What trademarks and patents do you currently have?
What websites and domains do you currently own?
What is your process for developing IP?
Do you have any IP owned by a third party?
Are you currently developing new IP?
8. Physical Asset Information:
What real estate do you own?
Download due diligence questionnaire in excel
You can download a free due diligence questionnaire from our library of due diligence checklists by clicking the link below:
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.