Due Diligence Questionnaire (DDQ): What it Is + Complete Checklist

Hundreds of investment bankers, law firms, and M&A brokers use DealRoom’s software to conduct due diligence. Based on their feedback, we’ve created a due diligence questionnaire (DDQ) that we’re positive will be useful in your future transactions.

But let's start from the beginning and clarify what a DDQ is.

What Does the Due Diligence Process Look Like?

Due diligence starts by refining and reviewing the deal’s overarching goals. What you hope to gain from this transaction must be clearly articulated and remain a guiding principle for your team throughout the due diligence process. Second to that, a thorough review of business financials take place. All financial information and documentation must be collected and analyzed, which requires significant time and attention to detail. This process is called financial due diligence.

Later, a thorough review and analysis of all other areas of the business must be done to gather information about the target’s customary structure, employees, legal and regulatory compliance, real estate, technology, and intellectual property, among other categories. Typically, people utilize a data room or another management software like DealRoom's M&A Platform to conduct these procedures, communicate with stakeholders, collect documents and responses to the due diligence questions, and process requests.

At this point, interviews, surveys, and on-site visits are leveraged to gain a broader, more genuine understanding of the target company, and the real dialogue between the buy-side and the sell-side teams can begin. It should be noted that the target company will play a major role throughout this phase. Their ability to quickly share information and respond to timely requests is what ultimately moves the due diligence process along.

In the end, the acquirer should finish this stage with a better overall understanding of the company’s true value and how, if it will, meet their objectives. The buy-side will review their business model and plan, focusing on whether the two companies are a good fit and how they’ll eventually integrate. Once all risks are identified and fully analyzed, an offer or request for proposal (RFP) is formulated, ending due diligence.

Due Diligence Questionnaire Categories & Questions

1. Basic Company Information:

Firstly, the buy-side team must comprehensively understand the target company to make a responsible investment.

1. What is the organizational structure of your company?
2. Can you provide diagrams and charts of your corporate structure?
3. What are your current by-laws?
4. Can you provide a list of all subsidiaries?
5. Who are the security holders?
6. Can you provide us with your stockholder agreements?
7. Who are the key players in your organization?
8. What are their roles, and how long have you employed them?
9. Who are your board members and stakeholders, and what has their feedback been over the last three to five years?

2. Historic Financial Performance:

Financial information is often the cornerstone of due diligence, where all financial documents must be collected. This is your opportunity to seek clarity on any anomalies or inconsistencies within financial statements or records.

1. What are your operating costs and metrics?
2. What do your budget and operating plans consist of? What methodology are you using?
3. What are your accounting policies?
4. What are your investment policies?
5. What are your capital expenditures for the next 12 months?
6. What is your inventory cost system?
7. What are your cash management practices and controls?
8. Do you have any debt?
9. Do you have any existing financial arrangements or agreements?
10. Can you provide us with income statements and balance sheets?
11. What is the breakdown of your sales and gross profits by product type?
12. What are your major growth drivers?
13. What are your projections or forecasts for future financial performance?

3. Employee Management and Governance:

This category is frequently labeled “Human Resources” or HR, as the HR department will most likely answer these questions. Here, in addition to the due diligence questions asked in our “Basic Company Information” category, you’ll obtain vital information about the company’s management team, experience, and track record. The goal is to evaluate the company’s corporate governance structure and practices and assess any conflicts of interest or related-party transactions.

1. What is the current organizational chart of the company?
2. What succession planning processes are in place for key roles and leadership positions?
3. Can you provide copies of standard employee contracts, agreements, and an employee handbook or manual?
4. How are employees recruited, and what is the headcount of employees at each location?
5. How is employee performance monitored and evaluated? Can you provide the latest survey results or evaluations?
6. What is the employee compensation structure, including salaries, severance, benefit plans, and incentives, such as stock options and bonuses?
7. What health and safety policies are in place to protect employees?
8. What, if any, initiatives are in place to promote diversity and inclusion within the workforce?
9. What is the current employee turnover rate, and how has it changed over the past few years?
10. What kind of non-disclosure and non-compete amendments are in your contracts?
11. How does the company handle employee grievances? Are there any ongoing or past legal disputes involving employees?

4. Legal and Regulatory Compliance:

This section of the DDQ will determine whether the company adheres to applicable laws and regulations in its industry and jurisdiction, addressing all pending litigations, regulatory investigations, or compliance issues. You should also request intellectual property (IP) rights, contracts, permits, and licensing documentation.

1. What compliance programs or internal controls are in place to ensure adherence to relevant laws, regulations, and industry standards?
2. How are these policies monitored and enforced within the organization?
3. Have there been any violations of regulations enforced by the Office of Foreign Assets Control (OFAC), European External Action Service (EEAS), and similar local, national, or international financial intelligence agencies?
4. Has the company received any warnings, fines, sanctions, or penalties from regulatory authorities in the past five years?
5. Are there any ongoing or pending legal proceedings, lawsuits, or regulatory investigations involving the company?
6. What types of licenses, permits, and regulatory approvals are required to operate your business? Are they currently valid and in compliance with applicable laws?
7. Are any existing contracts or agreements restricting the company's ability to conduct business operations?
8. Have there been instances where your products were recalled? If so, what was the nature or scope of the recall?
9. What trademarks and patents do you currently own?
10. What websites and domains do you currently possess?
11. What processes does your company follow for developing IP?
12. Does your company possess any IP owned by a third party?
13. Is your company currently engaged in the development of new IP?

5. Product Market and Competitor Analysis:

These questions consider the company’s current market position, consumer demographics, marketing and sales strategies, competitive landscape, and prospects, identifying potential threats or changes in market dynamics.

1. What are the specific products and services you offer?
2. Do you have any products or services in development?
3. How would you describe your target market for each product or service?
4. How do you assess market demand for your products or services?
5. What demographic, geographic, and psychographic factors influence your market strategy?
6. Who are your main competitors, and what are their strengths and weaknesses relative to your products or services?
7. What are the current market trends and challenges affecting your industry?
8. How does your company plan to adapt to these changes and maintain competitiveness?
9. Who are your current suppliers, distributors, and other business partners? What is the nature of your relationship?
10. What is your pricing philosophy, and how often do your prices change?

6. Consumer Demographics:

This section of the DDQ will provide even more critical insights into the company's market positioning, growth potential, and risk factors to help stakeholders make informed decisions concerning the investments’ viability during due diligence.

1. What are the primary characteristics (age, gender, income level, education, etc.) of your target consumers?
2. How do you segment your consumer base, and what are each segment’s key insights or trends?
3. Over the last three years, who are your top customers in these segments? How did you acquire them?
4. How do you tailor your marketing and product strategies based on your consumer demographics? How are sales channels developed?
5. Can you provide examples of successful campaigns or initiatives targeted at specific demographic groups?
6. What is the breakdown of sales and gross profits by geography, product type, and sales channels?
7. What methods or sources do you use to gather data on consumer demographics and preferences?
8. What do your customer contracts or agreements consist of?
9. How have consumer demographics and behaviors changed over the past five years, and what are your anticipated future trends?
10. Who are your top ten customers for the last two fiscal years?
11. Can you provide details about the products or services they buy and the length and nature of your relationships?
12. Can you provide details on any significant customer losses your company has experienced over the past two fiscal years?
13. What were the reasons for these losses, and how has the company addressed them?
14. How do you ensure the accuracy and relevance of this data?

7. Technology and IT Infrastructure:

Assessing the company’s technology infrastructure, including software systems, hardware, and cybersecurity measures, will identify any vulnerabilities or weaknesses in the company’s IT environment. Evaluate the target's policies and procedures, data security measures, and disaster recovery plans.

Note: These questions may arise in another dedicated security questionnaire form.

1. How is the IT department structured, and what are the qualifications and responsibilities of key IT personnel?
2. Can you provide an overview of the company's current cybersecurity measures, including policies, practices, and software systems in place to protect against cyber threats?
3. What IT policies and procedures are in place to ensure compliance with relevant regulations and industry standards?
4. Are there any known vulnerabilities or weaknesses in the current IT infrastructure, and if so, what steps have been taken to address them?
5. How are the hardware and network infrastructure components in use maintained and upgraded?
6. Are there any ongoing or planned IT projects or upgrades, and what are the timelines and budgets for these initiatives?
7. How does the company handle data storage, backup, and recovery?
8. What are the policies and procedures for data protection and disaster recovery?
9. How do these implementations support the company’s operations and business processes?

8. Physical Assets and Real Estate:

Finally, the Physical Assets and Real Estate section provides essential information that impacts a company’s financial health, operational efficiency, and strategic planning, making it a vital component of a comprehensive due diligence questionnaire.

1. What real estate properties does the company currently own or lease, and where are they located?
2. Do you own or have any leases on any machinery or equipment?
3. Can you provide details on the terms and conditions of all current leases, including expiration dates, renewal options, and any associated liabilities?
4. How are the company’s real estate and physical assets utilized in its operations?
5. Are there any opportunities for optimizing their use or reducing costs?
6. Are there any pending or planned mergers, acquisitions, disposals, or major real estate property or physical asset renovations?
7. What is the value and condition of the company’s combined physical assets, including buildings, equipment, and machinery?
8. Are there any known issues or required repairs, and what methods are used to determine depreciation and maintenance?
9. What insurance coverage is in place for the company’s real estate and physical assets, and are there any gaps in coverage?
10. Are there any ongoing or potential legal disputes or environmental issues related to the company’s real estate or physical assets?

Final Thoughts

Due diligence and the subsequent questionnaire are designed to minimize risk. The DDQ provided above is just a framework to begin the process, with its specific contents depending on the target company. While the DDQ won't eliminate the need for a thorough investigation in due diligence, it can uncover early risks and red flags, allowing institutional investors to decide if proceeding with the RFP is beneficial.