Standard Due Diligence Document

A comprehensive due diligence document answers all the questions that someone making a major investment in – or even the purchase of – a company could reasonably ask before cutting a cheque.  The questions are invasive; they leave no room for privacy.  A company that knowingly answers these questions without candor commits fraud.  However, a thorough and current due diligence document can accelerate the timeline for the investment or purchase.

The owners or Boards of Directors of companies looking for large investments or a corporate sale would be well advised to prepare this document in advance.

Although there is no standard template for what a due diligence document should include, the company will generally be well prepared if it addresses the following issues:

  • Organization and Good Standing
  • Financial Information
  • Physical Assets
  • Real Estate
  • Intellectual Property
  • Employees and Employee Benefits
  • Licenses and Permits
  • Environmental Issues
  • Taxes
  • Material Contracts
  • Product or Service Lines
  • Customer Information
  • Litigation
  • Insurance Coverage
  • Professionals
  • Articles and Publicity

Check here to download an extensive Due Diligence Checklist

In-Depth Due Diligence

Some large investors or business purchasers may ask more in-depth questions.  It’s not unusual to see requests for the following types of information:

  • Bios for the members of the Board of Directors and the senior management team
  • Disclosures of the strengths, weaknesses, opportunities, and threats (SWOT) management considers important
  • Organizational audits conducted by external consultants during the last three years
  • Market research studies the company has conducted internally or contracted to external consultants during the past three years
  • Documents the Board or senior management has ratified during the past three years addressing management strategy, marketing strategy, and financial strategy
  • Ancillary business opportunities the company could easily and naturally expand into but are not addressing at the moment
  • Performance metrics the Board or senior management has ratified and the company’s performance relative to those metrics during the last three years
  • A definitive statement of the company’s preferred management style and any third party studies addressing the alignment between management’s actual style vs. its preferred style during the last three years
  • The compensation plan for the senior management team and the specific behaviours that plan is designed to incentivize
  • Contingency plans to protect the company in the event of natural disasters, financial collapse, ‘key man’ departures, as well as telecommunications and IT failures.
  • Idiosyncrasies or ‘unique selling points’ that serve to differentiate the company and have not been addressed elsewhere.

Maintaining the Due Diligence document is an Ongoing Activity

Owners who are actively engaged in selling their companies should update their due diligence documents every few months.  Since it is a key legal document representing the state of the company, errors and omissions in the document can have significant financial consequences for the owners after the sale of the company.

At the same time, this document is highly confidential.  It should be maintained by someone in a position of high trust.  The company should maintain a log of copies released to purchasers and investors.