A proper due diligence report is key to finalizing an investment, merger, acquisition, or legal agreement. It offers a comprehensive exploration and explanation of a property, a company’s financial records, or a target company’s overall standing in the marketplace.
The information in the report varies depending on the industry and the purpose. If two companies are partnering, both parties will provide an M&A due diligence report. On the other hand, a financial institution may create a customer due diligence report to determine any potential risk a customer may pose to the bank.
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Who Writes a Due Diligence Report?
The people who participate in the due diligence process, likewise, vary based on the type of due diligence report. In general, stakeholders in the deal will contribute their knowledge, as well as subject matter experts within the organization.
Often, a company will have a due diligence team that will spearhead the research, organize the financial information, and write the report. A company’s attorneys will also play a role.
Sometimes, companies will bring in a third-party organization to assist with conducting the due diligence process. If you choose this option, it’s important for your own attorneys, company stakeholders, and subject matter experts to collaborate. Due diligence shouldn’t be fully outsourced.
What Is a Due Diligence Questionnaire?
A due diligence questionnaire helps guide the investigation process, where parties gather information to compile the report. You will present the due diligence questionnaire to the other party in the deal, so they can answer questions that will help you complete your report.
The questionnaire may also go out to potential buyers, customers, partners, or suppliers, depending on the investment or deal in question. In each case, it will present different questions.
You can download due diligence questionnaire templates and then customize them for your particular needs, whether you are doing M&A transactions, due diligence for real estate, or due diligence if you’re purchasing a business.
What To Include in a Comprehensive Due Diligence Report
In broad terms, your report should begin with an introductory statement describing the purpose of the report:
- Is it to find private equity investors or secure funding?
- Is it to initiate a sale, merger, or acquisition?
- Is it to invest in property?
- Is it to go public with a company?
The purpose of the report will drive its structure, the research needed, and the data presented. 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.
Your Complete Due Diligence Checklist
Your due diligence report can help determine a company’s valuation and enable private equity investors, business partners, and other stakeholders to make a more informed decision regarding the target business’s future.
Following a due diligence checklist can ensure your due diligence report:
- Conveys all the information necessary for educated business decisions
- Is easy to follow
- Is factually accurate
- Supports all financial data with background materials or supporting documentation
When you first begin putting together your report, review the following due diligence checklist to ensure you’re including all the necessary elements:
- Financial statements, including balance sheets, cash flow statements and profit & loss reports
- Company valuation
- Capital structure
- Financial projections
- Products or services
- Capital assets
- Real estate assets
- Company structure
- Listing of officers/Board of Directors
- Intellectual property (patents and trademarks)
- Legal documents
- Tax information
- Regulation
- Inspections
- Employees and payroll
- Procurement data
- List of suppliers
- Agreements (including licensing, distribution, or franchise agreements)
- SWOT analysis
- Relevant market research and data
- Policies and procedures
How To Write a Due Diligence Report
Due diligence reports may be a combination of financial statements, spreadsheets, written reports, pie charts and bar graphs. So, how do you write a due diligence report? Make sure to present the information in a clear and compelling way — with illustrations that can help readers more readily grasp the relevance of your data.
In addition, the information should be comprehensive. For instance, financial reports should be accompanied by background information and in-depth analysis that will help parties better understand the data presented.
While a report can get unwieldy with so many must-have items, it’s also important to keep it concise and engaging. When you’re writing the report, stay on target. That means keeping the information most important to your audience at the forefront.
At the same time, you don’t have to include everything you found during the investigative process. Focus on the relevant information that can help stakeholders make the best decision for the company’s future.
Finally, remember to re-read and revise as needed. You don’t want to wait until the last minute to put your due diligence report together. Leave plenty of time to review your work for errors, revisions, and improvements — as making a mistake at this stage can be detrimental to closing a deal. When you can share information in fewer words, or even with a chart or illustration, do so.
How To Write a Due Diligence Report Summary
Your due diligence report summary is the final stage — before sharing your report, of course — in the due diligence process.
A due diligence report summary shares the highlights of the report and lets readers know what to expect. It also outlines the due diligence process and how the information in the report was uncovered. If there are any areas of concern or exceptional details, your summary should highlight these.
Types of Due Diligence Reports
Many industries and professionals use different types of due diligence reports to assess investment opportunities or improve operations, processes, and results within the organization. Below are a few industries that regularly rely on due diligence reports, along with other types of due diligence reports useful in various businesses.
M&A Due Diligence Report
If a company is undergoing a merger or acquisition, planning an IPO, or considering an expansion, a business valuation is necessary for better decisions. An M&A due diligence report should cover financial statements and projections, capital structure, and a SWOT analysis, or an exploration of the company’s strengths, weaknesses, opportunities, and threats in the marketplace.
Real Estate Due Diligence Report
Real estate investors and developers use due diligence reports to determine the environmental impact of a project, the potential profitability of a property, the CAP ratio, expected vacancy rates, and capital improvements that may be needed.
Other Situations Requiring a Due Diligence Report
Other professionals, industries, and situations also rely on due diligence reports. Some examples of other types of due diligence reports include
- M&A Due Diligence Report (all encompassing; most comprehensive)
- Human Resources Due Diligence Report
- Vendor Due Diligence Report
- Commercial Due Diligence Report
- Administrative Due Diligence Report
- Customer Due Diligence Report
- Financial Due Diligence Report
- Technical Due Diligence Report
- IP Due Diligence Report
- Legal Due Diligence Report
- Environmental Due Diligence Report
- Asset Due Diligence Report
- Operational Due Diligence Report
How a Virtual Data Room Makes It Easy to Compile and Share a Due Diligence Report
CapLinked makes it easier to compile your due diligence report by enabling your staff to securely share and organize all of the data needed to create the report. They can also track changes in files, manage file permissions, and even revoke access after download. Each department can focus on the aspects of the report they need to contribute while collaborating in real-time across departmental silos.
Tracking and managing documents that belong in your due diligence report through a cloud-based virtual data room can help readers absorb the information more easily, keep track of what they’ve already reviewed, and make comments and questions for follow-up within the files.
When it comes time to share your report, CapLinked makes it easy and intuitive. Start your free trial today!
Dawn Allcot is a full-time freelance writer specializing in business, finance and technology.
