Due Diligence Report – What Questions Need To Be Answered

Due Diligence Report

Due diligence questions to be answered when completing M&A

What is a due diligence report?

This article outlines what a due diligence report should cover and what questions need to be answered with mergers and acquisitionsMergers Acquisitions M&A ProcessThis guide takes you through all the steps in the M&A process. Learn how mergers and acquisitions and deals are completed. In this guide, we’ll outline the acquisition process from start to finish, the various types of acquirers (strategic vs. financial buys), the importance of synergies, and transaction costs.  A due diligence report is sent as an internal memo to members of the executive team who are evaluating the transaction and is a requirement for closing the dealDeals & TransactionsResources and guide to understanding deals and transactions in investment banking, corporate development, and other areas of corporate finance. Download templates, read examples and learn about how deals are structured. Non-disclosure agreements, share purchase agreements, asset purchases, and more M&A resources.

What are the sections of a due diligence report?

#1 Corporate Records

  • State of incorporation and in good standing with the state
  • Capitalization and authorized and issued shares of stock and seller of each subsidiary
  • Articles of incorporation and bylaws
  • Copies of all correspondence with shareholders and obtain a shareholder list
  • Existence of any warrants, options, or other potentially dilutive securities

#2 Financial information

  • Copies of financial statements for the past five years that have been audited, including all notes and management’s discussion and analysis
  • Copies of correspondence between management and auditors
  • List of federal and state jurisdictions where the seller has filed taxes for the past 5 years
  • Federal, state and local tax returns for the past 5 years
  • All board of directors’ presentations
  • All internally generated financial models and forecasts

#3 Indebtedness

  • Investigate indebtedness or seller and subsidiaries, including loan agreements, notes, mortgages, and security agreements
  • Review correspondence with lenders demonstrating compliance with financial covenants
  • Order uniform commercial code searches with each subsidiary

#4 Employment and Labor

  • List and biographies of officers, directors, and employees of a certain level
  • List of all employees, their job function, department, location and compensation
  • Documents detailed any profit sharing, pensions, deferred compensation, stock plans, and other non-salary compensation or benefits
  • Copies of all employee handbooks, codes of conducts, and policies
  • Copies of employment, consulting, termination, parachute and indemnity agreements
  • Pending litigation related to labor and employment law

#5 Real Estate

  • Address and legal description for all real property
  • Copies of title issuance policies with respect to real property
  • Copies of all appraisals
  • Copies of all studies, site evaluations, and government filings and reports prepared by consultants

#6 Agreements

  • All agreements entered into by the company and its subsidiaries
  • All real estate leases
  • All partnership or joint venture agreements
  • All marketing, sales, commission, distributor, franchise agreements
  • All brokerage or investment bankerInvestment BankingInvestment banking is the division of a bank or financial institution that serves governments, corporations, and institutions by providing underwriting (capital raising) and mergers and acquisitions (M&A) advisory services. Investment banks act as intermediaries agreements
  • All customer or client agreements
  • All licenses and subscriptions
  • All material contracts not otherwise obtained from this list

#7 Supplier and Customer Information

  • List of all material customers including dollar and volume of sales
  • List of all material suppliers including dollar and volume of purchases
  • Correspondence with customers or suppliers related to complains or disputes

#8 Legal

  • Copies of each report or document filed with government agencies
  • Descriptions of all litigation, administrative proceeding, governmental investigations
  • Copies of all government licenses
  • Environmental liability assessments and environmental compliance audits

Who creates a due diligence report?

There can often be many groups involved in preparing the due diligence document.  Companies may carry out the analysis internally with their corporate development teamCorporate Development Career PathCorporate Development jobs include executing mergers, acquisitions, divestitures & capital raising in-house for a corporation. Corporate development (“corp dev”) is responsible for executing mergers, acquisitions, divestitures and capital raising in-house for a corporation. Explore the career path., or they may hire external advisers like investment bankersInvestment Banking Career PathInvestment banking career guide – plan your IB career path. Learn about investment banking salaries, how to get hired, and what to do after a career in IB. The investment banking division (IBD) helps governments, corporations, and institutions raise capital and complete mergers and acquisitions (M&A). or the Due Diligence Team at an accounting firmDue Diligence Career ProfileThese groups perform “financial due diligence” on behalf of acquirers of companies to analyze the target companies’ financial statements and overall financial health. A career in the financial due diligence team can require long hours when on a transaction and requires forensic level accounting and analysis..

Additional resources

Thank you for reading this guide to due diligence reports, what’s included in them, and who makes them.  CFI is a global provider of the Financial Modeling & Valuation Analyst (FMVA)™FMVA® CertificationThe Financial Modeling & Valuation Analyst (FMVA)® accreditation is a global standard for financial analysts that covers finance, accounting, financial modeling, valuation, budgeting, forecasting, presentations, and strategy. certification program and several other courses for finance professionals. To help you advance your career, check out the additional resources below:

  • Due diligence checklistDue Diligence ChecklistThis example due diligence checklist for corporate transactions should be completed for real deals and is an example checklist from an investment bank
  • Investment banking internshipsInvestment Banking Internship ProgramsMost investment banks offer an investment banking internship program each year, hiring a number of Summer Analysts and Associates to work for 9-12 weeks in their offices.  These programs are great for both parties: the interns get phenomenal experience and get to see what its like
  • Types of financial modelsTypes of Financial ModelsThe most common types of financial models include: 3 statement model, DCF model, M&A model, LBO model, budget model. Discover the top 10 types of Excel models in this detailed guide, including images and examples of each. Financial modeling is performed for many reasons including to value a business, raise money
  • Financial modeling guideFree Financial Modeling GuideThis financial modeling guide covers Excel tips and best practices on assumptions, drivers, forecasting, linking the three statements, DCF analysis, Excel modeling and much more. Designed to be the best free modeling guide for analysts by using examples and step by step instructions. Investment banking, FP&A, research