Competitive businesses prioritize due diligence for successful transactions. Global M&A stats indicate that larger deals pulled the market values up by 9% at the end of 2024.
Beyond a legal formality, due diligence helps stakeholders negotiate favorable terms, make informed decisions, ensure risk management, and finalize investments.
Downplaying a due diligence report entails adverse consequences that may affect the transaction’s success. Without precise valuation, buyers risk acquiring a company at an inflated purchase price. Other major risks involve:
- Hidden operational aspects
- Legal disputes
- Long-term financial repercussions.
- Operational inefficiencies
- Outstanding tax liabilities liabilities
- Veiled financial standing
- Post-transaction uncertainty.
Our article highlights the vitals, core components, and strategic importance of due diligence reports. You’ll learn how to prepare one and overcome the main challenges. The blog post also explains the virtual data room for enhanced due diligence reporting.
What is a due diligence report?
A due diligence report appraises buyers and sellers and provides comprehensive insights into potential investments. The document summarizes the due diligence process and serves as a recommendation on how to proceed with the target company.
A due diligence report is sent as an internal memo to the executive team that evaluates the transaction, summarizes the process, and ensures informed decision-making. A thorough due diligence report provides insights to make a strategic decision on the target company.
Due diligence reports in mergers and acquisitions
Competitive landscape analysis puts the due diligence principle at the heart of the merger and acquisition (M&A) practice.
M&A due diligence involves a comprehensive assessment to determine strong and weak spots, potential financial risks, and wider opportunities regarding a target company. Best due diligence practices in M&As leverage experienced professionals and tech-savvy solutions to enhance the quality of assessment.
Due diligence reports entail all the critical questions private equity investors and buyers may ask before entering M&As, ranging from the target company’s debts and liabilities to litigation and intellectual property risks.
In 2024, record amounts of undeployed capital fuelled investors’ appetite for corporate M&As.
M&A due diligence reports help stakeholders to:
- Assess the governance and regulatory compliance records of the targetted company.
- Describe how the target company manages internal risks and deals with third-party suppliers.
- Analyze the company’s track records, corruption, and sustainability issues.
It is vital that the target company you want to acquire or merge with lives up to the following principles:
- Anti-corruption requirements entail business integrity and ethical standards
- Corporate compliance assumes rigorous adherence to the applicable legislation and regulations
- Financial security saves your business from unexpected risks.
- Reputation is critical to maintaining a good name for your company and preventing it from having severe repercussions.
Main types of due diligence reports
The information provided in reports depends on the due diligence type. A financial due diligence report substantially differs from due diligence written for M&As. The following types assume unique contents and diligence report formats:
- Administrative due diligence report
- Commercial due diligence report
- Due diligence report in M&A
- Financial due diligence report
- Hedge fund due diligence report
- Human Resources due diligence report
- Legal due diligence report
- Operational due diligence report
- Vendor due diligence report
Why is a due diligence report important?
The benefits of a thorough due diligence report
Due diligence reports examine a target company’s financial health, business operations, regulatory compliance, and legal standings. Before a transaction is completed, due diligence reports help buyers and investors to:
- Assess a company’s real value
- Examine key financial metrics and cash flow statements
- Spot revenue streams
- Estimate asset quality
- Verify data accuracy
- Detect potential legal risks and liabilities
- Appraise investment and growth prospects
- Estimate the company’s sales and marketing strategies, financial position, and competition.
Examples of successful deals facilitated by proper due diligence
Due diligence is among the core pillars of an effective M&A strategy. By investigating the target companies, businesses value the deals and uncover potential risks.
Microsoft’s LinkedIn acquisition (2016): Microsoft’s acquisition of LinkedIn showcases the power of due diligence in practice. Accurate assessment revealed LinkedIn’s potential to align with Microsoft’s products and services.
AOL-Time Warner merger (2000): AOL thoroughly assessed market trends and all possible disruptions that would potentially impact Time Warner’s success.
Cases where poor due diligence led to failures
The Daimler-Benz and Chrysler deal (1998) highlights insufficient due diligence focus on culture. While Daimler acted aggressively during the merger, Chrysler did not want to accept commands from above. Culturally clashed, both companies got at odds and ran operations separately. Eventually, Daimler-Benz sold Chrysler to Cerberus Capital Management.
The Sprint and Nextel Communications deal (2005) – A lack of integration planning caused havoc in the Sprint and Nextel Communications deal (2005). The merger constituted the third-largest telecommunications provider of the time. Both entities aimed to leverage each other’s customer bases to cross-sell their product lines. Insufficient integration planning revealed different technologies operated by each company, which disabled a proper integration process. Eventually, both lost a considerable market share and customers who passed to the rivals.
Key components of a due diligence report
As defined, the due diligence report provides an appraisal of the target company to ensure a win-win investment. The executive team presents information as a thorough due diligence report in the C-suite mode.
Executive summary
The executive summary outlines the investigated company, the due diligence process, and key findings.
Findings and analysis
SWOT analysis critically assesses the target company. Statistical data is often part of due diligence reports, including primary surveys and market analysis.
Recommendations
The due diligence findings provide actionable suggestions to mitigate risks and leverage opportunities. It is also vital to adapt the due diligence report to specific industry requirements to better cope with regulatory and operational challenges. Due diligence customization ensures that the checklist includes full information about the target company.
Supporting documentation
The following data is crucial to critically evaluating the target company’s records.
| Data type | Description |
| Legal information | Critical legal issues involving the target company. |
| Financial information | Financial records, accounting documents, and tax returns. |
| Employee information | Employee profiles and vendor contacts. |
| Asset information | Tangibles, like property and machinery, and intangibles, like intellectual property. |
| Partner information | Data on vendors and third-party suppliers with an in-depth analysis of supply chains and supply chain management schemes that may harm your business. |
| Risk assessment | Evaluation of potential risks and their consequences. |
Leverage The Best M&A Practices With Our Due Diligence Checklist.
Steps to prepare a due diligence report
Step-by-step process
The due diligence report preparation starts with data mining and collecting the documentation from the due diligence process:
- Write an executive summary to describe the target company, the due diligence process, and key findings.
- Provide documentation like legal documents, corporate reports, annual reports, and financial statements to support due diligence investigations.
- Conduct a SWOT analysis using quantitative and qualitative methods to identify key features of the target company that are critical for business partners.
- Highlight legal information to detect all the issues that may affect the partnership, like the partner’s indebtedness, current liabilities, or financial charges.
- Include statistics and key data points to snapshot the due diligence process and help stakeholders make an informed decision.
In 2025, mind for AI limits, risks, and opportunities in conducting due diligence reports.
Best practices for compiling and organizing data
- Transparency, trust, and strategic decision-making depend on the executive team’s ability to compile and report due diligence findings to stakeholders.
- Outline the scope and objectives of the due diligence investigation, including all the specific information, the purpose of due diligence, and focal areas.
- Assign the multidisciplinary due diligence team to analyze and investigate the target company.
- Gather accurate and up-to-date information by applying secure data collection and storage to ensure confidentiality and maintain data integrity.
- Analyze the obtained data to detect potential risks and liabilities associated with the target company. Thorough data analysis will help to open wider partnership opportunities.
- Document due diligence findings to report them comprehensively to stakeholders.
- Communicate with stakeholders to comprehensively present due diligence findings and recommendations and address all the issues, questions, or concerns underway.
- Ensure follow-up support to answer all additional questions stakeholders may have and help them implement the suggested recommendations.
- Secure confidential information by storing the due diligence data from unauthorized access. Encrypt communication channels to maintain data integrity.
- Review the due diligence process to identify areas for improvement after its completion. Feedback from the due diligence team and stakeholders will provide actionable insights to understand what worked best and fill the gaps.
Tools to ease due diligence report preparation
Tried and tested due diligence tools and software to help businesses:
- Organize data
- Automate workflow
- Manage documents
- Archive due diligence report templates and checklists
- Secure data
- Manage tasks
- Analyze data
- Communicate and coordinate the process
- Report due diligence.
Our top due diligence software choice for 2025 features the following selection:
2025 will further intensify holistic due diligence processes.
Using a virtual data room for due diligence reporting
To ensure M&A success, the counterparts should access a virtual data room to leverage extended options ranging from searching, bookmarking, and printing relevant documents to cross-referencing and reviewing the due diligence checklists.
As part of the due diligence reporting, businesses cope with vast amounts of sensitive information that requires security and confidentiality. Virtual data rooms (VDRs), or deal rooms, provide secure spaces to store and share sensitive information. These virtual data storages enhance accessibility, security, and overall efficiency of the due diligence process.
Beyond serving as virtual storage rooms, VDRs can serve complex business transactions and maintain due diligence data integrity.
VDRs are also useful for project management, ranging from activity dashboards to real-time tracking. These virtual spaces hold integrated communication tools to provide due diligence teams with comprehensive insights into document flows and due diligence progress.
Most importantly, dynamic virtual data rooms help due diligence counterparts manage and secure sensitive transactions.
Virtual data rooms for M&As
VDRs provide M&A counterparts with advanced security, efficiency, and collaboration. Sensitive data is protected with access controls and encryption, and all authorized parties may access and review documents simultaneously.
Data centralization:
- Excludes physical meetings
- Propels the transaction process
- Saves costs
- Ensures detailed tracking and reporting
- Enhances transparency and accountability.
Core VDR benefits for the due diligence reporting:
| Feature | Description |
| Admin controls | Allow precise permissions and access options to facilitate secure collaboration during the due diligence process. |
| Audit trails | Allow due diligence counterparts to continuously record access and activity logs to ensure complete visibility and accountability. Enhanced auditing helps companies monitor user activities, identify security gaps, and comply with legal and regulatory requirements. |
| Advanced sharing | Allows only authorized key management personnel to access the due diligence data. |
| File sharing | Enables various file access options and monitoring of complete activity logs. |
| Version control | Enables real-time document tracking and revising previous versions. |
| Intuitive interface | Ensures seamless navigation and document management. |
| Encryption | Protects data during transfers and storage to ensure maximum due diligence security and privacy. |
| Integration | Aligns with established business tools and platforms like Microsoft 365, SSO, and SIEM for the most convenient correspondence. |
| Compliance | Adheres to GDPR, HIPAA, and industry standards like FINRA. |
| Workflow customization | Assumes tailoring to specific due diligence needs. |
| Customer support | Ensures smooth management of due diligence reporting. |
Common issues and challenges in due diligence reporting
Incomplete data and poor analysis are the tip of the due diligence iceberg. There is much more to consider to ensure smooth due diligence reporting.
Foremost, the business about to acquire or merge with the target company should approach due diligence as a thorough investigation to be conducted before a business transaction.
Proper comprehension of the due diligence will help to assemble a team of multidisciplinary experts to identify potential risks and opportunities.
The most common due diligence flaws regarding the target company are as follows:
- Failure to provide a preliminary assessment
- Failure to conduct financial data analysis
- Failure to account for legal liabilities
- Failure to consider operational efficiencies
- Preparing the due diligence report without a structured checklist
Best due diligence practices
Set clear objectives to focus on key due diligence aspects.
- Assemble the expert team to rely on diverse expertise and achieve a complete due diligence evaluation.
- Avoid subjectivity and biases to ensure the most objective due diligence reporting and informed decisions.
- Conduct on-site visits to use firsthand information and dig deeper into the operations of the target company’s operations.
- Make intellectual property reviews to examine the target company’s assets and liabilities and avoid legal post-acquisition issues.
- Arrange a virtual data room to access and manage due diligence reporting.
- Utilize due diligence software to manage large data volumes and streamline the process.
Conclusion
Given its complexity, comprehensive due diligence reporting seems challenging to most businesses. In today’s article, we attempted to outline major challenges and best-fit solutions to soothe due diligence reporting.
Take due diligence as a priority measure to make informed decisions, mitigate potential risks, and spot wider opportunities for your investment and M&A partnerships.
FAQ
What is included in a due diligence report?
Overall, there are 4 main parts:
- Executive summary
- Findings and analysis
- Recommendations
- Supporting documentation
How long does it take to prepare a due diligence report?
Depending on the target company and the nuances of the M&A deal, the due diligence report may take from 30 days to six months on average.
What are the risks of inadequate due diligence?
Improper due diligence causes serious financial and reputational losses, as well as legal implications. Simplified due diligence and skipping essential due diligence steps is a lose-lose strategy.
Can a virtual data room be used for all types of due diligence reports?
Yes, virtual data rooms are tech-savvy and fit for multiple purposes of due diligence reporting.