How to create a due diligence report?

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Creating a due diligence report is an essential aspect to consider while evaluating deals and investments. 

In this comprehensive guide, you will explore the details of creating effective due diligence reports and find a solution that streamlines the process more than you can expect.

What is a due diligence report?

A due diligence report is a summary of the due diligence. Specifically, when companies consider partnering with a new business, their risk and compliance teams complete a due diligence process to research and uncover information. 

All their findings are then detailed in a due diligence report, including recommendations for proceeding with the business transaction (e.g., adjusting the deal structure, negotiating terms, or even canceling). 

To put it simply, every time you complete due diligence, you should also complete a report.

What is the purpose of due diligence reports?

In essence, a due diligence report is a pivotal step for investors and businesses to do the following:

  • Secure more favorable terms and pricing for a transaction
  • Detect and mitigate potential risks and liabilities
  • Comply with legal and regulatory requirements and industry standards
  • Minimize the chance  of potential disputes and litigation
  • Improve their reputation and trustworthiness among stakeholders and other key players

Before moving to a due diligence report structure, we invite you to learn more about this report to help you understand how the process works.

What does a due diligence report look like?

There is no universally accepted standard for a due diligence report format and contents. Moreover, it can vary depending on the type of due diligence you are conducting (whether it is for a merger or acquisition, a third party , or data privacy). 

However, it is advisable to review a due diligence report template examples to understand the structure and content of due diligence reports. Furthermore, analyzing a sample due diligence report may help recognize risks and opportunities associated with an investment opportunity. This way, you can target due diligence efforts toward the areas that are most likely to impact the investment success.

You can check a due diligence report example here.

Who is responsible for compiling a due diligence report?

Typically, it is a company’s internal due diligence team or a paid third-party group that is responsible for writing a due diligence report. However, other internal teams should also lend their expertise to the process. 

For example, if you work on commercial due diligence, be sure to involve your marketing managers. They know better than others what to look for and how to identify potential risks.

👁️‍🗨️Pro tip: If you outsource due diligence to a third-party group, ensure that subject matter experts, legal advisors, attorneys, and company stakeholders collaborate with the outsourcing party. A balanced approach incorporating internal collaboration makes the process thorough, targeted, and aligned with the organization’s objectives of due diligence.

What is a due diligence questionnaire? 

A due diligence questionnaire, just like the due diligence report, is a way to gather information during an investigation. When you are involved in a deal, you share this questionnaire with the other party so they can answer questions that will help you write your thorough report. Based on the type of your transaction, you might also send the questionnaire to partners, potential buyers, or suppliers, with specific questions for each group.

You can find an example of a due diligence questionnaire here.

What is the best structure for a due diligence report? Follow our due diligence checklist 

The report typically covers a range of areas, including operational, strategic, legal, and financial aspects of a business. Here is a detailed breakdown of what a due diligence report should include:

Executive summaryThis section briefly summarizes the main findings. A particular focus is on red flags, including potential legal issues, competitive landscape, and revenue inconsistencies. Keep the summary short and easy to understand for readers who may not have the time or expertise to read the full report. Remember to consider your target audience and their specific needs when organizing and writing the summary. 
Company overviewIt is a brief description of a company. Typically, a due diligence report should cover its history, missions, services or product descriptions, target markets, milestones, etc.
Due diligence purposeDefine the purpose of the report (for an M&A due diligence, investment opportunity, etc.). This way, all parties can ensure that the report is comprehensive and meets the required standards.
Financial due diligenceuncheckedPresent your company’s financial performance. It typically includes an income statement, balance sheets, a cash flow statement, and other financial metrics important for a financial due diligence report.
uncheckedComprehensively analyze financial information, highlighting trends, patterns, and anomalies.
uncheckedProvide information on financial health and stability, as well as tax returns, compliance status, and outstanding tax liabilities.
Legal due diligenceuncheckedExamine the company’s adherence to relevant laws and regulations, including labor, environmental, and tax laws. 
uncheckedIdentify potential legal issues that could impact the transaction and suggest measures the company can adopt to decrease them.
Operational due diligenceuncheckedEvaluate company operations, including production, supply chain, logistics, and distribution.
uncheckedProvide details on company structure, key personnel, and employee demographics. Assess the effectiveness of management practices, including employee training, performance monitoring, and succession planning.
uncheckedAnalyze IT infrastructure, including technology, software, and cybersecurity.
uncheckedGive insights into key customer relationships, supplier agreements, and customer concentration.
Market due diligenceuncheckedAssess how the company positions its products, sets prices, advertises, and acquires customers. 
uncheckedExamine the present competitive landscape, emerging market trends, and potential growth opportunities.
uncheckedConduct a detailed analysis of the customer segmentation, satisfaction data, and retention rates.
Regulatory and environmental due diligenceuncheckedAssess the organization’s dedication to environmental sustainability and social accountability.
uncheckedReview the company’s policies and practices related to energy consumption, equity, and inclusion.
Insurance and risk managementuncheckedAnalyze and identify all potential operational, financial, reputational, and strategic risks the company may face.
uncheckedProvide a clear explanation of the policies and procedures related to risk management. 
uncheckedDescribe insurance coverage details, including property, liability, and key person insurance.
Potential growth prospectsuncheckedIdentify potential opportunities for organic growth, collaborations, partnerships, and acquisitions.
uncheckedProvide suggestions on ways to optimize growth potential.
Key findings and recommendationsuncheckedOutline the main conclusions and recommendations from the due diligence process.
uncheckedDiscuss the risks that have been identified and their potential impact on investments, partnerships, or mergers and acquisitions.
uncheckedProvide a comprehensive plan of actionable steps for the company to address the identified issues and leverage the available opportunities.
AppendixEnsure that all relevant documentation that supports the findings of the report is included. For example, these are contracts, market research reports, legal documents, financial models, and any other relevant data.

As you can see, you need some effort and time to perform due diligence effectively. Therefore, we have divided it into key stages for you to use as a starting point.

Additional insights: Importance of a full technical due diligence on networks and data centers | Capacity Media 

A due diligence report in 8 easy steps

Stages may vary depending on the types of due diligence reports. So, we highlight the main traditional steps and some potential challenges parties may face. Later, we will tell you how to overcome them and prepare a due diligence report that helps you make winning decisions.

1. Preliminary assessment

In the initial stage, a buyer or investor defines the objectives and aspects of due diligence. They need to review the target company’s publicly available information, such as its website, news articles, annual reports, financial statements, etc. This way, they assess its attractiveness and identify potential concerns.

Potential challenge: Identifying relevant and reliable data sources.

2. Confidentiality agreement

Parties usually sign a non-disclosure agreement to protect the confidential information of a target company. The NDA also guarantees confidentiality security for any other sensitive information that may be shared during the process.

Potential challenge: Ensuring enforcement of confidentiality provisions across all parties involved in the due diligence process.

3. Due diligence planning

An investor forms a due diligence team comprising legal professionals, financial advisors, operational specialists, and industry experts. They create a due diligence request list outlining the information they need for a due diligence review. This due diligence checklist may include contracts, financial statements, employee records, and intellectual property documents.

👁️‍🗨️Tip: You can download a free due diligence checklist template online and see what to include in a due diligence report.

Potential challenge: Coordinating schedules and availability of diverse experts and stakeholders for the due diligence team.

4. Document reviews

When the company being evaluated provides the requested documents, the buyer’s team will review each due diligence document in detail. This team may also visit the target company’s facilities to examine its operations, manufacturing processes, and other activities. Thus, the buyer can better understand the target’s inventory, assets, and operations. 

The buyer’s team may also talk with key employees, management, clients, and stakeholders. It is a way to learn about the company’s reputation, strategies, culture, relationships, and challenges.

Depending on the nature of the business, this process may be essential for the buyer to make an informed decision.

Potential challenge: Managing the volume of documents effectively and verifying the authenticity and completeness of provided data.

5. Analysis, validation, and risk assessment

This step involves evaluating various aspects of the target company, validating the accuracy and reliability of the obtained information, analyzing the company’s valuation, and identifying potential risks associated with the acquisition. It is an iterative process that involves cross-referencing data from different sources to comprehensively and precisely understand the target company operation.

Potential challenge: Overcoming potential resistance or reluctance from the target company to provide access to sensitive information.

6. Documentation and report preparation

After assessing risks, a due diligence team creates a report highlighting key risks, opportunities, and recommendations. The report also includes contracts, financial records, and all other evidence supporting the findings.

Potential challenge: Ensuring accuracy and reliability of data obtained from various sources.

7. Decision-making and negotiation

A buyer or investor carefully evaluates the due diligence report to make an informed decision about the deal. Sometimes, they may opt to negotiate the purchase price or other terms. If due diligence uncovers issues, they withdraw from the deal.

Potential challenge: Compiling and organizing findings from various sources into a coherent report.

8. Deal closing

When both parties agree on the terms, they finalize the legal agreements and close the transaction.

Now that you know the main steps of creating a comprehensive due diligence report, you are ready to explore a dedicated online solution that streamlines the procedure. But first, a few helpful recommendations from our experts!

✔️Bonus content!

Five quick tips for creating effective due diligence reports suitable for different types of due diligence!

Remember the following points while creating your report:

  1. Consistent format. Use a uniform format in the report to aid readability and enable easy data comparison. A standardized structure helps the reader navigate seamlessly and focus on the content instead of being distracted by changing layouts.
  2. Clear language. Good reports use clear and straightforward language to make the content accessible to all readers, regardless of their expertise.
  3. Visual aids. Visual aids like graphs, charts, and tables can improve data presentation by making it easier to understand large amounts of information quickly.
  4. Explanations. Not everyone may be familiar with industry-specific language. To make your report accessible to a broader audience, including those without technical backgrounds, it’s a good idea to explain unfamiliar terms in simple language. This way, nobody feels excluded.
  5. Well-organized executive summary. An executive summary is usually the first part of a report that readers engage with. Therefore, it should be well-structured and accurately summarize findings.

Finally, we are moving to a solution that makes a data-heavy and time-consuming process a breeze!

How can the due diligence software help with reports?

Due diligence software is a specialized online platform that automates workflows throughout the due diligence procedure for all parties. In particular, the solution offers secure data storage, protected file sharing, collaboration tools, and reporting features.

Now, we will focus only on the software features related to creating a due diligence report. As platforms may vary, we have selected iDeals, one of the best due diligence software providers, to show you the tool’s benefits.

1. Data storage

Intuitive document organization features allow users to categorize, tag, and index documents according to the structure of the due diligence report.

Key features

  • Drag and drop bulk upload. Upload data with one click from your device into the upload window without additional plugins.
  • Multiple file format support. Upload documents in any format without preparing files. 
  • Labeling. Use labels as a search item and categorize documents to meet your due diligence needs.
  • Full-text search. Find data instantly by applying multiple search filters or entering keywords.
  • Automatic index numbering. Upload as many files and folders as you need, and the software will automatically number them when you upload, move, or delete them. 
  • Windows Explorer integration. Sync data automatically between your desktop, FTP, shared folder, or corporate file storage with your iDeals workspaces. 

Even with hundreds of files, creating a due diligence report with iDeals is hassle-free. 

2. Data security

iDeals provides protected document storage with advanced encryption and access controls to protect sensitive information.

Key features

  • Physical data protection. All data centers implement strict physical security measures, access policies, secure vaults, and uninterruptible power sources.
  • Real-time data backup. No documents you upload to the storage can be lost or destroyed.
  • Multi-layered data encryption. Data is encrypted with 256-bit AES keys and transferred with TLS protocol. Encryption keys and key vaults are stored separately from the encrypted data.
  • Granular user permissions. As an admin, you define user roles and access rights to certain document storage sections and revoke them when necessary.
  • Time and IP-address restriction. Restrict login from particular IP addresses and set up policies for session duration and file access expiration date.
  • Remote wipe and shred. Lock and wipe encrypted data from a stolen or lost device and revoke access rights to documents even after the download.

Note: iDeals is one of the most secure due diligence software solutions. So, if data security is a priority for you, visit the official website and explore other data protection mechanisms the provider employs.

iDeals ensures data security regardless of the number of participants.

3. Q&A module

This dedicated space facilitates communication between parties. Specifically, they can ask due diligence questions, receive answers, and track all discussions related to specific documents or topics.

Key features

  • Refined answer process. Users can comment on answers, reference files, and attach documents to enhance response accuracy.
  • Question auto-assignment. Answers are automatically assigned to experts. Coordinators can reassign experts and modify workflow as needed. Experts receive questions without seeing the submitters’ PII, and their responses are routed to the answers coordinators.
  • Question import and export. Import and export questions in bulk from Excel to and from the iDeals due diligence platform.
iDeals Q&A

iDeals Q&A

There is no need for additional applications to communicate with participants. The solution provides a secure dedicated space with all the features you may need.

4. Reporting

iDeals allows users to generate customizable reports on user activity, document access, and other metrics. Thus, they get valuable insights into the due diligence process’s progress and status.

Key features

  • Full audit trails. Use audit trails with every user action recorder for internal compliance.
  • Insightful activity dashboards. Keep tabs on your project and make informed decisions with insights from user-friendly dashboards.
  • Color-coded reports. Identify the most active user groups and documents they are most interested in at a glance.
Color-coded reports

iDeals color-coded reports

iDeals enables you to effortlessly oversee each step of data accumulation, ensure secure data usage, and track task completion by all parties your due diligence involves.

5. Other helpful features 

Below are some useful tools that can make the process easier for everyone involved.

  • Single sign-on. Access all projects with a single login and password.
  • IOS and Android apps. Access your workspace from all devices and all platforms, even on the go.
  • Multilingual access. Access the platform in 14 languages, including English, Spanish, German, French, Italian, and Japanese.
  • Real-time notifications. Set the frequency for users to receive notifications about uploaded and deleted documents via email.
  • Branding. Customize workspaces, watermarks, headers, and footers for enhanced due diligence. Specify terms of use, NDA, and confidentiality agreement.
iDeals branding

iDeals branding

We have outlined only a small part of the platform’s functionality. Therefore, we recommend learning more about it on the iDeals website and from user reviews to see what it offers and how it satisfies business needs.

Conclusion

Due diligence is a process of effort and time. Due diligence reporting, in turn, is critical for any business planning to conduct due diligence investigations. However, managing the sheer volume of information and multiple teams can be challenging. 

That’s where due diligence software comes in. It offers all the necessary tools to streamline each process step, including due diligence reporting.

Author

Ronald Hernandez

Founder, CEO at dataroom-providers.org

Data room selection & optimization expert with 10+ years of helping companies collaborate more securely on sensitive documents.

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