Due Diligence Report: What Should You Include [Sample] (2022)

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.

Due Diligence Report: What Should You Include [Sample] (1)

Download Due Diligence Sample Report

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.

Download Free Due Diligence Report Template

If you want to download an example of a due diligence report checklist for free, simply enter your data here and click download.

What is a Due Diligence Report?

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.

(Video) How to write a Due Diligence Report like a PRO- With Vinney Chopra & Beau Eckstein - Episode 02

What Should Be in a Due Diligence Report Checklist?

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:

Due Diligence Report: What Should You Include [Sample] (3)

  • Information on the finances of the company. This includes financial statements for past years, tax returns, and documents from accounts receivable. If there is no separate section for loans and debts, then they should fall here automatically.
  • Information about the company's employees. This catalogues information on the people holding pivotal positions in the company and their work experiences. It may also house data on retired employees too and their pension details.
  • Information on the assets of the company. This includes material on the company’s different facilities, machinery, and intangible assets such as intellectual property or copyrights.
  • Information on partners, suppliers, and customers. This details more about the different parties in the firm’s supply chain and their relationships with them.
  • Legal information about the company. This refers to items such as historical and outstanding lawsuits, contracts, licensing, and permits.

Why Do We Need to Make a 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.

Due Diligence Report: What Should You Include [Sample] (4)

How to Write a Due Diligence Report

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.

More Details:

  • Don’t Include Everything. There is certainly a temptation to include all of the information the diligence team has gathered; however, this is not only a nearly impossible task, but also a waste of time as the executives reading your report will not have the time to work through such a cumbersome text. Focus on your company’s objectives (why is it engaging in M&A?) and the objectives of the report.
  • Know Your Audience. Building off the previous point, you must keep your target audience in the forefront of your mind when writing. Most likely it will be your CEO, or perhaps your CFO, reading the report; he/she is very busy and will only want to read information relevant to making a sound decision on the deal. Again, aiming to be clear and concise will help your audience work through the report with ease and absorb the critical information. This being said, you might consider including an “Executive Summary” section in your report for additional C-suite level executives (or members of the board of directors) to utilize if they do not have time to digest the full report.
  • Use a Due Diligence Report Template. Clearly, one of the best tips or strategies for writing a due diligence report is to use a due diligence sample document or a due diligence report template. These resources will support you as you write. While the internet is cluttered with resources related to M&A practices, it should go without saying, you will want to use a technical due diligence report template created by actual M&A practitioners.
  • Reread and Revise (edit, edit, edit!). As with any written work, what happens after you finish your draft is of the utmost importance. Editing will help ensure you accomplish the first two guidelines of not trying to include everything and knowing your target audience. As you revise, ask yourself if the information is related to: the operation of the company, the purchase price or purchase agreement, risks (with the company’s operations, legal standing, or retention of key personnel), and critical financial information.

Suggestions for Writing a Due Diligence Summary Report in a Right Way

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:

  • Be patient, thorough, and attentive to details. The process is going to take time. A suitable report cannot be tossed together at the final hour. To fully reap the reports’ benefits, you will need to be at thorough as possible when logging your findings. Without a comprehensive report to refer to, it is almost like you just threw away the previous painstaking investigations and research.
  • Don’t lose focus on what’s important. With that being said, ensure you are writing about relevant subject matter. While the information you are handling may be overwhelming, you want to stick to what the report is actually on. For instance, if you are writing a customer due diligence report, you don't need to dwell much on a business’ liabilities.
  • Be concise. Likewise, you don’t want the report to go on and on and on. Investors would likely not want to read through every minute detail, thus defeating the purpose of the report.
  • Ask questions. You want to believe that a seller is honest. However, it is not uncommon for them to fluff information in the confidential information memorandum (CIM). Anytime you see something that looks off, ask questions. Additionally, you should interview people that are not directly related to the transaction for a more holistic view of a firm.
  • Seek legal assistance. Unless you are an attorney, property manager, or investments manager, you should seek legal help and advice. This way, you negate the possibility of running into law, jurisdictional, or compliance issues down the line.

How Much Does A Due Diligence Report Cost?

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.

(Video) What is DUE DILIGENCE | Meaning DUE DILIGENCE | DUE DILIGENCE checklist | DUE DILIGENCE explained

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.

Types of Due Diligence Reports

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:

  • Financial Due Diligence Report
  • Human Resources Due Diligence Report
  • Hedge Fund Due Diligence Report
  • Customer Due Diligence Report
  • Legal Due Diligence Report
  • Operations Due Diligence Report
  • Vendor Due Diligence Report
  • Due Diligence in Mergers and Acquisitions (M&A) Report
  • Administrative Due Diligence Report
  • Vendor Due Diligence Report

Who Creates the Report?

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.

What is a Due Diligence Questionnaire?

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.

(Video) Aspects of a Legal 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.

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Why do You Need a Due Diligence Questionnaire?

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.

Due Diligence Questions when Buying a Business

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:

  • Why is the company being sold? This should always be asked during potential acquisitions. In some cases, the liabilities of the company are getting too much for the current owner to bear. If you uncover why the company is being sold, you can better decide if the company is still worth buying. This question may not be relevant in all circumstances. For example, investors or stock purchasers may not need to have this question answered.
  • What are the major commodities of this company? As a potential investor or buyer, you should know what commodities generate most income and losses for the company. This can help you pinpoint areas of improvement and where you should try to maintain prosperity.
  • What are the major markets for these commodities? You will need to know which markets that the company is positioned in to remain competitive. Additionally, you need to understand their customer, client, or member base. It will allow you to better strategize and make key decisions for the company while still putting the market in mind.
  • Are the revenues generated by the company enough to keep it running? If not, are there potential partnerships or sponsorship that can be secured? The last thing you want is the profit line plummeting five months after acquiring or heavily investing in a company.
  • Is the company positioned for expansion? Is expansion even possible? After acquiring a company, you don’t want it to sit stagnate. In areas where the company doesn't already sell, you want to know what your chances are at expanding there.
  • Are there any distinguishing product features that are very important to the sales of any products? Are there any intellectual properties worth protecting? You will need to know what drives a company’s competitive advantage and what unique company property must be secured.
  • Are there any ongoing or suspended legal proceedings? Licenses and permits? Some companies find themselves in legal situations that are almost impossible to recover from. You do not want to acquire a firm that is pervading with legal issues and have to suffer the consequences. Likewise, you need to be attentive to applicable licenses and permits for proper upkeep.

Get Due Diligence Questionnaire

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.

Final Words

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:

  • Create diligence tasks list
  • Fullfill tasks and share critical information with team members
  • Assign users to key diligence roles
  • Track real-time diligence progress
  • Securely store and manage all documents and files
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.

(Video) Mergers and Acquisitions Due Diligence Explained

With DealRoom, you are able to seamlessly populate due diligence folders and create lists within the same room.

Due Diligence Report: What Should You Include [Sample] (8)Due Diligence Report: What Should You Include [Sample] (9)

Product updated ·

August 13, 2022

· 4 min read

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FAQs

What should be in a due diligence report? ›

Across most industries, a comprehensive due diligence report should include the company's financial data, information about business operations and procurement, and a market analysis. It may also include data about employees and payroll, taxes, intellectual property and the board of directors.

How do you write a good due diligence report? ›

When writing a due diligence report (what others may call an IT assessment report), keep four things in mind:
  1. Write for the target audience.
  2. Focus on the report objectives.
  3. Limit the report to information that has material impact to your company.
  4. Structure the information to be used as valuable reference material later.
2 Dec 2002

What is an example of due diligence? ›

Due Diligence Examples

Conducting thorough inspections on a property before buying it in order to make sure that it is a good investment. An underwriter auditing an issuer's business and operations prior to selling it.

What questions should you ask during due diligence? ›

Questions to ask during due diligence begin with financial information.
...
When it comes to financial information, ask for:
  • Credit reports.
  • Tax returns.
  • Audit and revenue reports.
  • List of all physical assets.
  • List of expenses (fixed and variable)
  • Gross profit margins.
  • Owner's benefit.
  • Any debt.

What are the 3 P's of due diligence? ›

Many wealth advisory firms talk about “the three P's” of manager due diligence: people, process, and performance. It is important to note that performance is only one of the three categories.

What 4 things can be done to prove due diligence? ›

To demonstrate due diligence, every food business should ensure their records cover the following in some way or another:
  • Your chosen HACCP system.
  • Your cleaning schedule.
  • Evidence that your workplace environment is compliant.
  • How you prevent cross-contamination.
  • Waste disposal.
  • Pest control.
  • Your use of suppliers.
21 Jul 2020

What should due diligence procedures include? ›

Customer due diligence (CDD) is a process of checks to help identify your client and make sure they are who they say they are.
...
Risk-based approach
  • purpose of a transaction or business relationship.
  • size of the assets or of the transactions undertaken.
  • regularity and duration of the business relationship.

What is due diligence format? ›

The Due Diligence Report includes a format and sample of information used in business transactions such as a merger or acquisition, partnership, investment, etc. The report requires research carried out prior to a financial transaction to assess commercial and legal risks, as well as opportunities.

What are due diligence items? ›

Due diligence documents are the research and analysis of a company or organization done in preparation for a business transaction (such as a corporate merger or purchase of securities). Due diligence documents typically include the following categories; legal, financial, sales and marketing, and human resources.

What is basic due diligence? ›

Basic customer due diligence involves collecting information about: the identity of a customer – from their company address to the names of their individual executives. the activities a customer is engaged in and markets in which they operate. the other entities with which a customer does business.

What are five things you would want to perform due diligence on a company? ›

Due Diligence Checklist - What to Verify Before Buying a Business
  • Review and verify all financial information. ...
  • Review and verify the business structure and operations. ...
  • Review and verify all material contracts. ...
  • Review and verify all customer information. ...
  • Review and verify all employee information.

What is due diligence questionnaire? ›

A due diligence questionnaire is a formal assessment made up of questions designed to outline the way a business complies with industry standards, implements cybersecurity initiatives, and manages its network.

What are some red flags that you might discover during due diligence? ›

Red Flags in Transaction Due Diligence
  • The same or similar entity name or address is found on any of the U.S. government watchlists. ...
  • Use of webmail email addresses, rather than a business email address.
  • No company website.
  • Multiple companies or entities listed at the same address.
  • Recent company name changes or relocation.
27 Oct 2020

Which are the five steps to client due diligence? ›

To ensure that your business is following best practices, we have put together the following five-step checklist to help improve your CDD processes.
  • Step 1: Verify customer identities. ...
  • Step 2: Assess third-party information sources. ...
  • Step 3: Secure your information. ...
  • Step 4: Take any necessary additional measures.
20 Jul 2021

What is covered under due diligence? ›

Due diligence is an investigation of a matter, usually undertaken before signing a contract. In this case, it's investigating a property before purchasing it. As part of your due diligence, there are some formal reports you can purchase, as well as some informal enquiries you can make.

What is a due diligence summary? ›

Due diligence is a process or effort to collect and analyze information before making a decision or conducting a transaction so a party is not held legally liable for any loss or damage. The term applies to many situations but most notably to business transactions.

What are the characteristics of good documentation for due diligence? ›

What documentation is needed to show due diligence?
  • Worker orientation, education, and training.
  • Workplace inspections, including corrective actions taken.
  • Incident reports, including corrective actions taken.
  • Supervisor notes (e.g., supervisor inspections, meetings with workers or contractors regarding safety, etc.).

What is the first due diligence requirement? ›

These first three due diligence requirements can be summarized as a “knowledge requirement” that has the following components: To determine if the taxpayer is eligible for the claimed benefit, the preparer must interview the taxpayer, ask questions, and document the questions and the taxpayer's responses.

What is the most important of conducting due diligence? ›

Due diligence helps investors and companies understand the nature of a deal, the risks involved, and whether the deal fits with their portfolio. Essentially, undergoing due diligence is like doing “homework” on a potential deal and is essential to informed investment decisions.

What is enhanced due diligence checklist? ›

Enhanced due diligence (EDD) is essentially what its name suggests: the process of investigating a higher-risk customer more thoroughly than you would others. It is most easily explained via comparison to standard customer due diligence (CDD).

What is the purpose of a due diligence report? ›

The Due Diligence report helps one understand how the company plans to generate additional earnings (monetary as well as non-monetary). It serves as a ready reckoner for understanding the state of affairs at the time of purchase/sale, etc.

What's included in due diligence? ›

A due diligence check involves careful investigation of the economic, legal, fiscal and financial circumstances of a business or individual. This covers aspects such as sales figures, shareholder structure and possible links with forms of economic crime such as corruption and tax evasion.

What should due diligence procedures include? ›

Customer due diligence (CDD) is a process of checks to help identify your client and make sure they are who they say they are.
...
Risk-based approach
  • purpose of a transaction or business relationship.
  • size of the assets or of the transactions undertaken.
  • regularity and duration of the business relationship.

What are the components of due diligence? ›

We uncover 9 key types of due diligence and examples of how they are used, including practical due diligence checklists.
  • Financial due diligence.
  • IP due diligence.
  • Commercial due diligence.
  • IT due diligence.
  • HR due diligence.
  • Regulatory due diligence.
  • Environmental due diligence.

What are five things you would want to perform due diligence on a company? ›

Due Diligence Checklist - What to Verify Before Buying a Business
  • Review and verify all financial information. ...
  • Review and verify the business structure and operations. ...
  • Review and verify all material contracts. ...
  • Review and verify all customer information. ...
  • Review and verify all employee information.

What is due diligence format? ›

The Due Diligence Report includes a format and sample of information used in business transactions such as a merger or acquisition, partnership, investment, etc. The report requires research carried out prior to a financial transaction to assess commercial and legal risks, as well as opportunities.

What are the characteristics of good documentation for due diligence? ›

What documentation is needed to show due diligence?
  • Worker orientation, education, and training.
  • Workplace inspections, including corrective actions taken.
  • Incident reports, including corrective actions taken.
  • Supervisor notes (e.g., supervisor inspections, meetings with workers or contractors regarding safety, etc.).

What is a due diligence questionnaire? ›

A due diligence questionnaire is a formal assessment made up of questions designed to outline the way a business complies with industry standards, implements cybersecurity initiatives, and manages its network.

What are the 3 kinds of diligence? ›

It may be divided into three degrees, namely: ordinary diligence, extraordinary diligence, and slight diligence. It is the reverse of negligence. (q.v.) Under that article is shown what degree of negligence, or want of diligence, will make a party to a contract responsible to the other.

What is the most important of conducting due diligence? ›

Due diligence helps investors and companies understand the nature of a deal, the risks involved, and whether the deal fits with their portfolio. Essentially, undergoing due diligence is like doing “homework” on a potential deal and is essential to informed investment decisions.

Videos

1. M&A Due Diligence: Due diligence report | EBCLearning.com
(EBC Learning)
2. Investors Club: Due Diligence Report Walkthrough
(Investors Club)
3. Key steps in creating a Technical Due Diligence Report
(AssetWize)
4. Third Party Thursday Video: Basics of Vendor Due Diligence
(Venminder)
5. Due Diligence Reporting
(InfoTycoon Training)
6. Financial Due Diligence
(Clive Owen LLP)

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