Due diligence is one of the most vital components of valuing and finalizing an investment.
It presents buyers and sellers with a comprehensive look at potential investments, themselves, or a buyer.
The final product of due diligence is a thorough report that summarizes the process and supplements the decision-making.
At DealRoom we help dozens of companies organize their due diligence process and in this article, we explain due diligence report fundamentals, detail due diligence questionnaires, and show how DealRoom streamlines the diligence process.
Organizing all of the loose facts and data gathered from due diligence into a clean report can seem rather daunting.
Luckily, we’ve compiled a sample due diligence report to follow whether the investigation was routine or for merger or acquisition.
Download our free due diligence sample report and get understanding of what does a due diligence report looks like.
Writing a due diligence report is typically the next step that follows the investigation process. After excavating all of the necessary information from rigorous research and investigations, you must compile the results into an organized document. A due diligence report is essentially a document that contains a detailed summary of the due diligence process and procedures.
Virtually, every essential detail of the process should be included in the report. Exact details typically vary depending on the type of due diligence, the investment, and the deal at hand.
Nonetheless, listed are some core items that should be included in the report:
This report captures the findings of the diligence process. In turn, it allows investors to have a more clear understanding of the investigated firm.
A complete and well-documented report supplements the decision-making process for investors and business considering finalizing deals and contracts. Additionally, it substantiates forecasts for the target company’s future and lifespan.
Take businesses 'A' and 'B' for example.
Business 'A' has done its financial due diligence and has its report. On the other hand, business 'B' has not completed any due diligence or a report.
Assume that both businesses require loans from the bank. Business 'A' can refer to their due diligence report and precisely predict how long it will take to repay the loan. They can more accurately discern what to do with the loan to yield the most effective and efficient results.
Business 'B', on the other hand, can only make loose assumptions and estimations. Without background knowledge, these assumptions and estimations run a higher likelihood of being incorrect.
Writing a due diligence report may seem as intimidating as the research portion of the investigation.
The following considerations will keep you on track when drafting a report, but remember no two will be exactly the same: don’t include everything, know your audience, use a due diligence report template, reread and revise.
Compiling a due diligence report may seem as intimidating as the research portion of the investigation. An improper, carelessly made report could throw away all of the work done to this point.
Outlined some suggestions for a solid, investigative report:
With no two deals being exactly the same, costs related to diligence can vary. Many practitioners feel diligence costs should not exceed about 5% of the purchase price.
When it comes to the report itself, there are functional free due diligence report templates and sample documents online.
Additionally, fees for producing reports can vary depending on the industry and country.
The areas of concentration for the report is dependent on what type of due diligence you are utilizing.
For example, a report resulting from financial due diligence will look and have different information versus one from customer due diligence.
Likewise, a financial due diligence report created for administrative purposes will differ from those written in preparation for mergers and acquisitions.
You wouldn’t expect an administrative due diligence report to contain more information on customers than the administration of a business.
When performing hedge fund due diligence, you would assess a reservoir of investment funds and the general partners who own it.
Therefore, there are as many different types of reports as types of due diligence itself. Each corresponding report type has distinguishing properties and format.
Some examples include:
Due diligence summary reports are generally compiled by a company’s internal due diligence team or a paid third-party group. Your team may comprise of attorneys, financial consultants, and any subject matter experts that pertain to the seller.
Overall, the collective expertise should encompass the various business, legal, technical, and financial matters respective to the deal at hand. However, in smaller-scale instances, such as buying a small business, may not require more than one or two professionals.
Conducting due diligence, creating, and reviewing the report should be a team effort.
Meaning, if contracting with an external party, you should not entirely outsource them. Some information may not be meant for them. Internal employees should also be involved in the process.
Most importantly, you need to be certain that the individuals on your team are people that you trust, service agreements aside. The last thing you want is to be left with a faulty investment because of a team’s lackadaisical diligence.
A due diligence questionnaire is a list of investigative questions that is forwarded to the selling company to glean information. Depending on the type of due diligence, it may also be sent to their partners, suppliers, and even customers. The questionnaires should be highly detailed and in-depth.
They should prompt for pertinent information to provide an overview and duly supplement the analyse associated with due diligence.
Before an investment manager or potential buyer starts delving into a business’ secrets, they must sign a Letter of Intent (LOI).
This contractually displays interest in buying or investing in the firm or private equity, however, it is not binding.
Due diligence questionnaires are an essential early step in the process. The questionnaire serves as a means of obtaining the information you need. It offers the party handling the process foreknowledge of what to expect and how to go about it.
Additionally, it will help those executing the process know what to concentrate on and safeguard against misplacing priorities.
Furthermore, due diligence questionnaires, just like the due diligence report, are contingent upon what is being investigated. For example, buy side due diligence questionnaire should be somewhat different from an acquisitions due diligence questionnaire.
By asking the right questions, a prospective investor or buyer will be on the path of well-performed due diligence. Below are some questions that you should be sure to ask the seller when purchasing a firm:
You can utilize a due diligence questionnaire on a DealRoom's platform. Our M&A lifecycle management software includes a variety of pre-built ready to use questionnaires to help teams start due diligence process easily and without time waste.
Visit our playbooks gallery to find a questionnaire you need.
Due diligence is just as important as the deal itself and should be done as meticulously as possible.
Utilizing tools, such as DealRoom’s due diligence management software, helps teams complete due diligence summary reports thoroughly and accurately.
With DealRoom, you can:
DealRoom is easy to use. You can populate DealRoom with your due diligence folders and create due diligence lists right inside the room, instead of sending the due diligence list separately to your clients.
- Ovais A., Investment Banking Associate
DealRoom is a functional due diligence software that helps streamline the process. Traditionally, you would find yourself creating folders within a software and then separately forwarding the due diligence list to clients.
With DealRoom, you are able to seamlessly populate due diligence folders and create lists within the same room.