Due diligence questionnaires became integral to investments, mergers, acquisitions, and vendor risk management. They offer a deep assessment of potential risks and opportunities, empowering business leaders to make well-informed decisions and avoid unexpected challenges.
Since due diligence questionnaires are of utmost importance, we explore this procedure in detail. Read on and learn the following:
- What is a due diligence questionnaire?
- When do companies issue DDQs?
- What companies use due diligence questionnaires most often?
- What are the goals of due diligence questionnaires?
- What areas does a due diligence questionnaire cover?
- What practices improve the DDQ process?
What is a due diligence questionnaire?
A due diligence questionnaire is a set of questions designed to assess various company aspects before a merger, acquisition, investment, or partnership. This comprehensive evaluation helps uncover critical information about the target company’s financial status, legal matters, operational efficiency, market position, and potential risks.
Note: A due diligence questionnaire is also called a due diligence checklist or DDQ.
What is the difference between due diligence questionnaires and security questionnaires?
Before initiating a business partnership, parties complete due diligence and security questionnaires, which involve distinct procedures. Security questionnaires are technical and can be standardized. Due diligence questionnaires, in turn, allow for more interpretation.
Other differences are as follows:
- Industry. A DDQ is more common in finance, while a security questionnaire is more widely used in technology.
- Scope. Due diligence questionnaires cover multiple topics. Security questionnaires focus on compliance and assess the effectiveness of security controls and best practices in protecting the company from cyberattacks and data breaches.
- Process. Due diligence questionnaires can be conducted regularly throughout the customer lifecycle to explore new business opportunities and partnerships. Security questionnaires are often completed during the initial stages of a partnership and periodically after to ensure ongoing compliance with security standards and practices.
Next, we examine cases in which due diligence questionnaires are commonly used.
When do companies issue DDQs?
A DDQ brings companies the most value in the following cases:
- Mergers and acquisitions due diligence
Due diligence is integral to M&A transactions. Before finalizing the deal, the buying organization needs to ensure that the investment is solid and likely to be profitable. This involves examining general company records, employee information, financial data, current contract obligations, and legal matters. If a company chooses between similar opportunities, it can use this information to compare business risks and value.
- Investment due diligence
Due diligence questionnaires are also valuable in investment scenarios. For instance, typical projects that benefit from this process include the following:
- Hedge fund due diligence
- IPO due diligence
- Institutional investment due diligence
- Venture capital due diligence
Investment DDQs usually cover company founders, customer and supplier details, intellectual property, and competitive analysis.
- Vendor due diligence
Vendor due diligence questionnaires encompass a vendor’s business practices, financial stability, adherence to laws and regulations, security measures, protection of data, and other relevant aspects that ensure the vendor’s ability to meet the company’s requirements reliably and ethically.
Vendor due diligence may encompass proactive sell-side and third-party risk assessments.
- Proactive sell-side due diligence occurs when a company intends to sell its business and anticipates interest from multiple potential buyers. In this scenario, the company would conduct proactive vendor due diligence and assess internal risks. When the business is ready to sell, it shares all the information with potential buyers. That streamlines the sale process and promotes a quicker acquisition.
- A third-party risk assessment helps manage the risks associated with supplier partnerships. Regardless of the vendor, there is always a risk in doing business with another organization, including operational, financial, and reputational risks. Since vendors may have access to the business network, the company team should thoroughly evaluate all aspects before granting them data access and permissions.
The vendor due diligence questionnaire assesses risk by gathering data on security practices, HR policies, financials, and references.
A DDQ is also crucial in several other business scenarios. For example, it ensures adherence to legal requirements and industry standards during regulatory compliance assessments, especially in highly regulated industries like finance and healthcare.
In strategic planning and business development, a due diligence questionnaire gathers insights and data that leaders need to make informed decisions and identify growth opportunities.
What companies use due diligence questionnaires most often?
Various businesses across industries issue DDQs depending on their specific needs and the nature of their activities. However, the most common are as follows:
- Hedge funds — Assess and manage risks associated with investments, including market volatility, liquidity risks, and regulatory compliance.
- Private equity companies — Evaluate financial performance, operational efficiencies, and strategic fit before acquisition.
- Financial organizations — Comply with regulatory requirements and assess credit, market, and operational risks associated with investments.
- Tech companies — Protect intellectual property rights and demonstrate compliance with data privacy laws and cybersecurity regulations.
- Governmental organizations — Assess the financial viability, economic impact, and regulatory compliance of investments and projects.
Specialists involved in the DDQ process come from various levels and fields, including legal, financial, IT, compliance, and procurement experts.
What are the goals of due diligence questionnaires?
Due diligence questionnaires are typically issued for the following reasons:
- Risk mitigation
A thorough assessment of potential vendors, partners, or acquisition targets can uncover financial, operational, legal, and compliance risks early on. This proactive approach helps prevent future issues and ensures more secure and stable business dealings.
- Compliance assurance
A DDQ guarantees that potential partners or acquisition targets comply with applicable laws and regulations at the state, federal, and local levels. Additionally, it verifies adherence to the issuing company’s internal standards and legal requirements.
- Efficient data collection
The procedure provides an organized and systematic approach to gathering large volumes of essential information for due diligence or any other disclosure process. Furthermore, involving specialists from various fields allows for collecting more data compared to smaller teams. This broad participation ensures that all relevant aspects are covered, promoting better-informed decision-making.
- Transaction acceleration
Due diligence questionnaires are not directly part of the sales process. However, they are crucial in streamlining and accelerating deal closures. By narrowing down the selection of vendors or potential partners through detailed evaluation, due diligence questionnaires help companies focus on the most viable options. It simplifies negotiations and facilitates smoother transaction completion.
A due diligence questionnaire builds a strong foundation for conducting a deal, identifying risks, ensuring compliance, collecting important data, and speeding up transactions. This way, investors can proceed with the transaction more confidently.
A summary of key points
The following table outlines the key points we have covered about a due diligence questionnaire.
| DDQ business cases | Companies that issue DDQ | DDQ goals |
| M&A due diligence Investment due diligence Vendor due diligence | Hedge funds Private equity companies Financial organizations Tech companies Governmental organizations | Risk mitigation Compliance assurance Efficient data collection Transaction acceleration |
Now, let’s move on to explore areas that due diligence questionnaires cover, successful DDQ examples, and practices for process improvement.
What areas does a due diligence questionnaire cover?
A DDQ gathers information across the following areas:
- Company profile and history. This section verifies essential background details such as the company’s legal name, founding year, and core products. It ensures the issuing organization partners with a reliable entity.
- Ownership and employees. This investigation explores management, ownership, and employees to assess risks associated with key individuals and mitigate corruption risks.
- Financial history. Another DDQ’s essential focus is reviewing financial data to reduce financial risks related to potential business partnerships.
- Cybersecurity measures. Assessing how a company manages cybersecurity is crucial to prevent data breaches that lead to substantial financial losses and reputation damage.
Statistics! According to Gartner, 45% of organizations worldwide are expected to have experienced attacks on their software supply chains by 2025, a threefold increase from 2021.
- Business continuity. This area evaluates whether an organization has an effective disaster recovery plan since its absence can lead to great financial losses.
- Regulatory compliance. Ensuring compliance with relevant laws and regulations helps to avoid legal issues and financial liabilities that could harm the issuing company’s reputation.
- Data security management. This focuses on how vendors handle sensitive data, including client information and intellectual property, to protect their business against unauthorized access and breaches.
- Network security management. As part of cybersecurity, this investigation ensures issuing organizations that third-party service providers or potential partners follow industry standards and greatly reduces the chances of unauthorized network access.
Source: Quality Assurance Solutions
Next, we outline example questions for each DDQ area.
Due diligence questions examples
A DDQ varies since they are tailored to an industry, the nature of the deal, and specific risks. We provide the basic framework, but it can be customized for the due diligence process.
| Area | Questions |
| Company profile and history | How long has the company been in operation? What is the company’s annual revenue? What is the company’s organizational structure? Are there bylaws governing the company? |
| Ownership and employees | Who are the company owners? Who are the key executives and board members? How many company employees are there? Have any owners or employees been involved in legal proceedings (fraud, bribery, or corruption)? |
| Financial history | Does the company carry any debt? What are the primary factors driving the company’s growth? Are the balance sheets and income statements from the past three years available? |
| Cybersecurity measures | Are there established cybersecurity policies within the company? What specific cybersecurity measures does the company employ? Who oversees the development and implementation of security requirements? Has the company experienced any cybersecurity issues in the past? If so, how were they addressed? |
| Business continuity | Who holds responsibility for decision-making during disasters or crises? Are there established disaster recovery plans? Does the company conduct regular recovery testing? If so, when was the last test performed? What’s covered in the company’s disaster recovery plans? |
| Regulatory compliance | In which countries and states does the company operate? Are there any ongoing or past legal proceedings? Is the company certified and compliant with SOC 2, ISO 27001, and GDPR? Does the company have an SEC communications plan? |
| Data security management | What types of data does the company collect and store? Who has access to third-party data? What steps are implemented to ensure secure data storage? Who oversees the secure storage of data? |
| Network security management | What network access controls does the company employ? Which tools does the company use to monitor its network? What antivirus solutions does the company employ? Who oversees the management of network access security? |
Next, we explore how DDQs vary depending on the industry and the specific risk areas.
10 due diligence questionnaire examples
Review the following examples and click the links to see a specific due diligence questionnaire template.
- Hedge fund due diligence questionnaire. The Principles for Responsible Investment (PRI), a UN-supported network of investors that promotes responsible investing, offers its own due diligence questionnaire containing policy, governance, investment process, and monitoring categories.
- ESG due diligence questionnaire. Invest Europe’s DDQ focuses on assessing investment risks in relation to environmental, social, and governance responsibilities.
- Business partner due diligence questionnaire. This checklist from the Association of Corporate Counsel provides a set of questions for potential business partners.
- Due diligence questionnaire for institutional investors. Institutional Limited Partners Association (ILPA) delivers a comprehensive DDQ for risk identification when engaging with limited partners.
- Investor and consultant due diligence questionnaire. Designed by Investors in Non-Listed Real Estate Vehicles (INREV), this due diligence questionnaire helps investors and consultants throughout the due diligence process.
- Due diligence questionnaire for organizations that handle client money. The Association for Financial Markets in Europe (AFME) created a template for organizations starting business relationships with businesses dealing with client money.
- IPO due diligence. Organizations preparing to go public can utilize Find Law’s extensive due diligence checklist.
- Due diligence questionnaire for software development outsourcing. This due diligence questionnaire created by Future Processing best serves IT companies seeking to evaluate potential partnerships and minimize risks.
- Supplier due diligence questionnaire. Created by Tasiast Mauritanie Limited S.A. (TMLSA), this template assists in identifying risks in a business relationship with new or existing suppliers.
- Correspondent banking due diligence questionnaire. The Wolfsberg Group offers a DDQ sample containing questions about compliance in anti-bribery, sanctions policies, and risk management.
A well-structured and detailed due diligence questionnaire DDQ ensures due diligence flows smoothly. However, there are additional ways to enhance the procedure, which we share below.
Top practices for improving the DDQ process
Here are the most effective tips for enhancing a DDQ:
- Define the strategy
- Establish a clear procedure that outlines responsibilities, data collection methods, data storage locations, and the individuals responsible for answering questions. This helps maintain focus and ensures that the due diligence process adheres to its core objectives.
- Develop a timeline with milestones and deadlines to keep the process on track.
- Determine key risk areas
- Identify risks that a third-party provider might pose, considering the specific services they offer and the level of access they need.
- Use a risk matrix to categorize and prioritize these risks from high to low (check the matrix example below). Allocate more resources and attention to areas with higher risk levels.
- Continuously monitor and update the risk assessment as new information emerges or circumstances change.
Source: SteveBizBlog
- Standardize questions
- Develop a comprehensive bank of standardized questions tailored to various industries and risks to reduce redundancy and ensure consistency.
- Regularly review and update the question bank to reflect changes in industry standards, regulations, and business practices.
- Use these questions to quickly assemble customized DDQs for specific vendors or partners, saving time and ensuring thoroughness.
- Opt for a due diligence questionnaire template
- Utilize ready-to-use DDQ samples to reduce preparation time and ensure formatting and structural consistency.
- Ensure that the templates are user-friendly and easily understandable by all parties involved.
- Create a single data source
- Implement a centralized database or digital platform to store all DDQ information. This way, every team member has access to the same information at all times.
- Regularly back up data and maintain robust security measures to protect sensitive information.
- Employ technology
- Incorporate modern technology tools such as virtual data rooms (check the software example below), which provide secure data storage, easy document sharing, and efficient collaboration.
- Consider integrating artificial intelligence and machine learning solutions that help analyze large volumes of data, identify patterns, and highlight risks.
Follow these best practices to improve the due diligence questionnaire process, mitigate risks, and enhance decision-making.