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What is due diligence?

Due diligence is the process whereby the proposed investor in, or the proposed buyer of, your company investigates the company’s business, people, records and key documents. The process is designed to make the investor or buyer aware of the inherent risks of your business, to support the value placed on the investment or acquisition price and to flush out any key issues that may need further investigation.

What can you expect to receive at the start of the process?

While each investor or buyer will have its own way of doing things, generally you can expect to see a preliminary request for documentation and information often known as pre-contract enquiries.  This will usually take the form of a list of documents being specifically requested, and a list of questions that the investor or buyer would like answered in relation to your company. For an example list, please see the Cooley GO Preliminary Request for Documents Template.

Which areas will the due diligence request list cover?

The content of the list will vary depending on the type of business that you are involved with. For example, if you are an IP rich company, you can expect detailed questions relating to your IP rights and associated agreements. However, there will generally always be requests and questions relating to the following areas:

  1. Corporate Information

This will cover the company structure (i.e. whether you have any subsidiaries etc.) and a list of the shareholders/option holders and directors of the company.

  1. The Business and its Assets

This will cover the business plan, key assets of the company, and copies of your material contracts with your customers and suppliers. The aim here is to understand where your company generates value.

  1. Human Resources

The list will request information on the employees and directors contracts of your company to get a better understanding of who the investor is investing in, or who the buyer is acquiring, and their terms.

  1. Pension Plans

Again, depending on the how advanced your company set up is, you may have pension plans in place for the directors and employees. The list will generally request details of any schemes that your company is involved with.

  1. Real Estate

This will cover any properties that are owned or, leased or occupied by the business.

  1. IP and Information Technology

Even if your company is not ‘IP rich’ the list will usually request you outline any material IP owned or used by the company. You will also be asked to provide particulars of any software or equipment that you use.

  1. Data Protection

Many companies hold customer data, collected in a multitude of ways. You will usually be asked for details on how that data is stored and safeguarded, and whether you comply with data protection laws.

  1. Litigation and Regulatory

A standard request will be to provide details of any litigation or similar dispute/ proceedings that the company is involved with or that are contemplated. You will also be asked to provide details of any licenses of regulatory consents that your company holds (particularly if you operate in a regulated services industry).

  1. Health and Safety

You may be asked for details of any health and safety policies that you have in place.

  1. Insurance

This will request details of all insurance policies held by the company and details of any recent or ongoing claims made on them.

  1. Finance/Tax and VAT

The investor or buyer will undoubtedly want to assess the financial status of your company and ensure all tax liabilities have been met. This will usually cover any borrowings of the company, and loan agreements that the company is a party to and confirmation that all tax payments and VAT returns have been filed and made.

How should you prepare for the due diligence process? 

The simple answer is to ensure your house is in order from day one and to keep on top of it! A good way of ensuring you have all the documentation in order is by setting up a secure cloud data site or use one provided by your lawyers. You can create folders for specific types of documents and then upload them each time a new document comes into being. That way, whenever you are faced with a fresh due diligence request on each round of investment, or ultimate exit of your company, you can rest assured knowing that all the documents are safely kept in one place.

Last reviewed: September 5, 2015
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