Ultimate Due Diligence Checklist: Essential Steps for Success

  • April 30, 2024
  • Michael Kendrick
  • Approx. Read Time: 10 Minutes
Cisive. Your Ultimate Due Diligence Checklist.

During a corporate acquisition or merger, a comprehensive due diligence checklist helps you stay on track when assessing the operational compatibility of all entities involved in the process. An effective due diligence process lets you assess and verify the financial information, legal compliance, internal operations, and security of the company.

This article provides an overview of the areas to consider when developing a due diligence report. It includes a step-by-step due diligence checklist that acts as a basic guide and can be adapted for different industries or company structures.

Here are a few things to consider before completing a merger or acquisition:

    • Due diligence includes looking into various aspects of a company's activities, including financial health, operational structure, market position, and even potential litigation risks. Both internal and external operations are considered during the due diligence process.
    • The purpose is to thoroughly assess the target company's strengths and weaknesses. It also identifies problems that could derail or delay the entire deal.
    • A due diligence checklist helps you stay organized when assessing the various aspects of the target company's operations.
    • Completing all the items on the checklist should give you a comprehensive overview of the target company, so you can address any potential issues before completion of the deal.
    • Outsourcing some of the research required for due diligence helps speed up the process and helps to ensure you collect all the necessary information quickly and efficiently.



Key Takeaways

Here is what you need to know to create the ultimate due diligence checklist:

        • The due diligence process looks at every aspect of a company's operations, including legal status, financial health, internal operations, and market activity.
        • Because this involves multiple areas, a checklist can help keep things organized.
        • Also, using a company with experience in due diligence investigations helps ensure you cover every aspect of the checklist and stay on track in an efficient way.


Table of Contents

  1. What Is a Due Diligence Checklist?
  2. Core Components of the Ultimate Due Diligence Checklist
  3. Crafting a Thorough Due Diligence Report
  4. Leverage Cisive's Advanced Due Diligence Services to Mitigate Business Risks


What Is a Due Diligence Checklist?

The due diligence checklist sets out the specific items you should assess and analyze before a merger or acquisition. This checklist helps keep you organized during the initial assessment process and helps to ensure you do not miss any potential problems or weaknesses that could threaten the success of your new venture.

Completing a due diligence checklist gives you a quick overview of the health of the business and shows you areas that might need to be addressed prior to the acquisition.

When due diligence is lacking, you might overlook potential problems that could affect the prospects of the merged or acquired company. Poor due diligence could even cause the entire deal to fall through.


Recommended Reading: What Is Merger and Acquisition (MandA) Due Diligence?


Due Diligence 1-1


How to Create the Ultimate Due Diligence Checklist

Creating a due diligence checklist involves assessing several topics related to efficient business operations. This includes external issues, such as legal, regulatory, and financial compliance, and internal security and human resources concerns.

Here are the items to include when creating a due diligence checklist.


1. Legal, Regulatory and Compliance

Evaluation of the legal and regulatory aspects of a deal helps ensure the acquiring party is fully aware of any legal risks or any compliance issues that must be resolved before the deal is complete.

Aspects to consider as part of legal and regulatory due diligence include the following.


Company Structure and Legal Standing

This section of your report sets out the details of company structure and compliance with business filings for legal operation, such as the articles of incorporation and certificates of good standing, DBA listings, etc. Additionally, review current regulatory and compliance programs juxtaposed to those recognized as industry standards. Assess any known pending and past legal actions and or liabilities.


Contracts and Agreements Currently in Effect

Contracts with other businesses, individuals, and organizations are included and examined as part of this section's due diligence checklist.


Intellectual Property (IP) and Trademarks

This part includes a list of all trademarks, trade names, copyrights, and patent applications both in your country and abroad. Licensing agreements, consulting contracts, and any current claims on intellectual property are also included.


2. Financial, Accounting and Budget Structure

Financial due diligence looks at the target company's financial data to evaluate the accuracy of these reports. Companies in the financial industry may require specific extra steps to take when completing due diligence for financial services.

The section on financial due diligence should include the following.


Historical Financial Statements

All information on past financial performance should be included on the official financial statements of the target company. Consider cash flow statements, balance sheets, and income statements from the company when conducting a financial assessment.


Assets and Liabilities

This part of a financial due diligence report involves everything the company owns, and any debts held by the company.

Assets may include property, equipment, supplies, and inventory. Debt includes any outstanding loans and open lines of credit.


Revenue and Expenses

Assessing the revenue and expenses of the target company gives you a good overview of potential future profit and loss.

Sales contracts, historical sales data, and pricing strategies are included in a revenue assessment. This section of your due diligence report should also include a breakdown of annual expenses and a list of necessary future expenses, such as equipment replacement or upgrade costs.

Reviewing current and past departmental budgets will help you understand how disciplined the management structure is for staying on budget against projected revenue forecasts.


Taxes and Tax Compliance

Prior tax returns, estimated tax payments, and any current ongoing audits should be listed in the tax section of a due diligence report.


Financing Agreements

If the target company has ongoing financial agreements, including mortgages on owned properties and business loans, these should be listed in this section.


Cash Flow and Financial Projections

Your due diligence report should include details on the current cash flow of the business and any financial projections for future growth or challenges. One important aspect to consider is whether the current cash flow is on track to meet future financial goals.


Recommended Reading: Your Must-Have Guide to FDIC Background Check Requirements


Screen smarter, hire safer. Get the right talent to drive your success. Speak to an expert.


3. Operational, Lean Efficiencies

Operational due diligence includes assessments of the internal processes of the target company. The goal of this section of a due diligence report is to identify operational strengths and weaknesses.

Here are some aspects to include in your operational due diligence checklist.


Business Operations

Business operations covers all the basic ways the company functions. It includes a list of products and services offered by the company, a description of the customer base, and the company's industry position in relation to major competitors.


Internal Processes

This section involves an in-depth investigation of business functions, such as sales, marketing, production, distribution, and customer service. The goal of this part of due diligence is to identify bottlenecks and inefficiencies within the internal operations of the target company.


Supply Chain

An evaluation of the supply chain involves assessing current suppliers and vendors and collecting data on inventory management practices and distribution processes.


Technology Infrastructure

The software and hardware used by a company can affect overall efficiency, so this part of due diligence looks at the IT infrastructure and individual programs and systems used by the company. A major consideration here is whether the target company's systems are compatible with systems used by the acquiring company.


4. Commercial, Market and Growth Potential

Commercial due diligence looks at market position, customer relationships, and the overall competitive landscape in the industry.

These are some items to include in a commercial due diligence report.


Market Analysis

This assessment looks at market trends, market size, competitive forces, segmentation, and projected market growth.


Competitor Analysis

Examine key competitors operating in the business landscape of your target company and describe their perceived strengths and weaknesses.


Customer and Client Contracts

Ensure you have a thorough understanding of all contracts currently in effect with clients and customers. It should include details about contract terms and conditions, renewal rates, and risks incurred when transferring these contracts to the new business.


Sales and Marketing Strategies

Sales strategies and marketing tactics should be aligned with current marketing trends. Address branding, pricing strategies, and advertising venues in this section. Review current and future revenue projections with an eye on reality verses optimism approach.  


Revenue Model Assessment

The target company should have revenue models and streams that align with the acquiring company, so a revenue model assessment helps you determine any potential upselling and cross-selling possibilities.


5. Human Resources, Company Culture

The human resources portion of a due diligence report covers every aspect of HR operations in the target company. The goal of this section is to find ways to smoothly transition employees of both companies into a merged system.

Items you should consider during the human resources assessment include the following.


Organizational Structure

Make merging roles easier with a thorough assessment of the management positions, executive roles, leadership pathways, and role requirements throughout the target company.


Employee Contracts and Agreements

Assess all employee contracts, including offer letters, bonus compensation, and non-compete agreements, on-boarding processes, including payroll processing.

Also address employee benefits and compensation, paid time-off (accrued or granted), including health plan details, stock options, and retirement plans. Consider the contractual obligations of the acquiring entity when it comes to renewing or adjusting benefit plans.

This is sometimes referred to as an employee adoption process, as employees are transitioned into employees of the newly acquired company.


Labor Agreements and Union Relationships

Collective bargaining agreements and labor agreements often remain in effect after an acquisition or merger, so use this section of your due diligence assessment to determine your company's obligations regarding labor agreements.


HR Policies and Procedures

Assess the target company's human resources department for compliance with legal regulations regarding hiring, termination, and all other regulated areas human resource operations. This may include examining recruitment, screening practices, and employee training to help ensure proper policies are in place and alignment with your company's current standards.


Screen smarter, hire safer. Get the right talent to drive your success. Speak to an expert.


6. Real Estate and Asset Valuations

Assessing the real estate holdings and asset profile of the target company helps you determine any risks or benefits related to the asset portfolio.

Below are some items to include in a real estate and asset due diligence report.


Valuation of Tangible Assets

This part of the assessment should include appraised valuations of all physical assets, including property, equipment, and inventory.


Lease Agreements and Rental Income

Evaluate all leases, subleases, and equipment rental agreements to include in this section of a due diligence report. Highlight all details about rental terms and options that could present a potential risk for the company.


Environmental Site Assessments

If the company owns or leases property, any paperwork related to environmental site assessments of the land should be indicated in the due diligence report. The acquiring company should check for applicable compliance with local, regional, and federal laws regarding environmental impact mitigation.


Infrastructure and Facility Condition

You should contract for a thorough inspection of all property, facilities, and equipment involved in the acquisition. This inspection report should indicate any regular maintenance required and define the condition of the property and equipment. Request any detailed maintenance histories related to any real properties, facilities, or equipment to support the claims of the current reported conditions.


Liabilities and Obligations

Due diligence reports should list any mortgages, liens, maintenance and inspection agreements, property tax obligations, and regular utility payments. These should collectively offer a clear overview of the costs of running the facility.


 7. IT Systems, Digital Security and Functional Contingency Plans

Information technology and digital security systems should be designed to reduce risks, such as data loss. According to IBM, the average cost of a data breach rose 15 percent between 2000 and 2003, making data handling concerns a major factor for consideration during an acquisition.

Due diligence on the IT-related aspects of a business includes those below.


Inventory of IT Systems and Software

This inventory should include a list of all hardware and software owned and used by the company. It should also describe the databases, networks, and servers used to manage information technology.


Data Security and Privacy Measures

Due diligence regarding data security includes an overview of data handling practices and a description of how the company protects client, customer, and employee privacy.


Cybersecurity Vulnerability Assessment

Investigate how the company protects against cyberattacks and the procedures for handling malicious digital activity, such as hacking or denial of service attacks.


Disaster Recovery and Business Continuity Plans

Continuity and contingency plans discuss the company's plans for recovering and continuing IT operations in a natural disaster. It should include details about alternative emergency facilities and any procedures for handling and preventing data loss.


IT Compliance and Regulatory Adherence

Check whether the target company's current IT setup meets information technology laws and standards for your industry to create this section of your due diligence report. Also indicate whether the company complies with data privacy laws in any countries where it has a digital presence.


Recommended Reading: Why Data Privacy Training Matters in Financial Services


Crafting a Thorough Due Diligence Report

This due diligence checklist can help you organize the process of assessing and analyzing a target company during an acquisition or merger. Depending on the specific industry, you may also have other concerns or considerations to include.

Once you have a due diligence report in hand, use this information to set specific contract terms during the acquisition deal and indicate anything the target company needs to address before the deal can go through.


Leverage Cisive's Advanced Due Diligence Services to Mitigate Business Risks

Acquiring a business is a massive undertaking, and due diligence is essential to complete the process in an organized and timely manner. Advanced due diligence services from Cisive can help you tackle the challenges of crafting a comprehensive due diligence report.

Contact Cisive today to speak with an expert and create a plan for a due diligence process tailored to your company's needs.


Screen smarter, hire safer. Get the right talent to drive your success. Speak to an expert.


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