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Thorough due diligence is the foundation of informed decision-making in corporate transactions. 

However, conducting due diligence can can be complex, time-consuming, and filled with challenges. The sheer volume of data you need to review can be overwhelming, making it difficult to analyze and assess each piece of information efficiently. 

A company due diligence checklist solves just that. 

This checklist is a comprehensive compilation of key areas to investigate, crucial documents to examine, and vital questions to ask. With each item checked off, you'll be able to piece together a clearer picture of the risks and opportunities that lie ahead.

Challenges in conducting company due-diligence

Challenges in conducting company due-diligence

Conducting company due diligence presents a myriad of challenges for in-house legal counsel. As the gatekeepers of legal compliance and risk management, you navigate a complex landscape where hidden liabilities, regulatory hurdles, and incomplete information lurk. 

In this ever-evolving business environment, the ability to identify, assess, and mitigate these challenges is paramount to safeguarding the interests of the company and ensuring informed decision-making.

#1 Adhering to the compliance guidelines

One of the biggest responsibilities of the legal counsel team is to stay compliant with the federal laws, state laws, special acts, etc., to minimize the risk of non-compliance. But it can be challenging to remain compliant since the laws are constantly changing and evolving.

Also read: What is Contract Compliance? The Ultimate Guide

#2 Too labor-intensive

Going through every document takes time and involves the entire legal counsel team interviewing and scrutinizing all the documents thoroughly. The legacy tools and manual methods are no longer relevant, especially when the organization grows.

#3 Data can be unreliable

Data can be outdated, especially when there is no real-time data update . And when data is inconsistent, it's evident that it will minimize the accuracy and slower the company's due diligence process. 

How to conduct due-diligence effectively?

How to conduct due-diligence effectively?

When it comes to conducting due diligence, effectiveness is key. You need to shoulder the responsibility of ensuring a thorough and meticulous examination of a target company's legal, financial, and operational aspects. 

#1 Leverage AI for due diligence

AI can have a big impact on how legal teams conduct due diligence.

“Due diligence reviews for a corporate transaction typically involve a bunch of lawyers going through documents (hard copy or in an e-room) looking for litigation issues, key contract clauses (e.g., change of control, assignment, etc.), corporate governance, intellectual property, etc.  Generally it takes many hands (usually outside counsel) and many hours/days to complete.  AI can do this in a fraction of the time.” 

~ Sterling Miller, CEO and Senior Counsel, Hilgers Graben PLLC

Ten Things: Artificial Intelligence – What Every Legal Department Really Needs to Know

SpotDraft is one such contract management tool that effectively uses machine learning and artificial intelligence to automate the contract workflow, identify gaps, and uncover insights hidden within contracts.

Also read: How AI Is Changing Contract Management for Legal Teams

#2 Try the ‘scoping’ method

Due diligence is one of the most complex and elaborate processes to ensure that the legal team gets the deepest knowledge about the other company. A small miss here or there can significantly impact the deal or the valuation. 

“Scoping process is a great way to determine ‘what’ needs to be reviewed, by ‘whom,’ ‘where,’ ‘when,’ and for ‘what’ purpose. A helpful tool is to map out due diligence on an ‘x/y’ axis with ‘x’ being the jurisdictions and ‘y’ being the subject areas.”

~ Sterling Miller, CEO and Senior Counsel, Hilgers Graben PLLC

Ten Things: The Essentials of a Successful Trans-Border Transaction

#3 Keep a company due-diligence checklist

A company due diligence checklist helps you to stay organized with all the documents and interviews while running corporate due diligence. It helps learn about the company’s assets, liabilities, contracts, benefits, and potential risks in an organized manner. The biggest advantage of having a checklist is nothing gets overlooked while conducting a due diligence process. 

The importance of a company due-diligence checklist

The importance of a company due-diligence checklist

#1 Risk identification

The main purpose of a due diligence checklist is to identify potential risks and legal issues with a company's operations, contracts, intellectual property, compliance, and regulatory matters. It ensures that the in-house counsel doesn't overlook anything critical that can have any negative impact later on.

#2 Compliance verification

In-house counsel must verify if the company adheres to relevant laws, regulations, and industry standards. The checklist assists in evaluating the company's compliance program, policies, and procedures to identify gaps or areas requiring improvement.

#3 Contract assessment

Contracts are an integral part of any business. In-house counsel can utilize the checklist to review contracts and agreements, ensuring that the terms and conditions are favorable and protect the company's interests. They can identify any contractual risks or obligations that need to be addressed.

#4 Intellectual property (IP) assessment

Protecting intellectual property is crucial for many companies. The checklist helps in evaluating the company's IP portfolio, identifying any potential infringements, and verifying the ownership and registration status of patents, trademarks, copyrights, and trade secrets.

#5 Financial and tax considerations

In-house counsel can review financial statements, tax returns, and other financial documents to assess the company's financial health and identify potential risks or liabilities, such as outstanding litigation, tax obligations, or regulatory issues.

#6 Litigation and regulatory history

A due diligence checklist enables the in-house counsel to investigate past or ongoing litigation, disputes, or regulatory actions involving the company. This helps in assessing potential liabilities, reputational risks, and the need for appropriate risk mitigation strategies.

#7 Corporate governance

The checklist helps practice good ethical practices and outlines the role of boards in it, thus ensuring good governance is practiced within the organization. This helps the board oversee the entire due diligence process and ensures the company sticks to all the ethical standards during a merger and acquisition. 

Key components of a company due diligence checklist

The importance of a company due-diligence checklist

Corporate due diligence checklist checks all the crucial company information, including the company's financial health, legalities, operational information, etc. Here are the key components of a company due diligence checklist. 

#1 Company information

Check for all the basic company information like:

  • Company registration details
  • Stakeholder details
  • Partnerships
  • Trade license 

#2 Financial information

It focuses on the company's financial performance, reviews all financial statements, and checks if they are accurate. Some of the key documents that are reviewed include: 

  • Tax return documents
  • Financial documents audited for at least three years
  • Company investment details
  • Capital structure
  • Projections and capital allotments

#3 Legal documents

The goal here is to look for all documents related to the legal aspect of the company. This include contracts, licenses, and various other legal liabilities. During the legal due diligence, documents that are reviewed include:

  • Different licenses
  • Power of attorney documents
  • Tax registration documents 
  • Shareholder documents
  • Different work permits
  • Occupational license

#4 Operational information

This covers all the information related to the operational status of the company. Some of the documents that are checked include:

  • Annual reports
  • Profit/loss records
  • Balance sheets
  • Staffing and payroll related documents
  • Equipment inspection reports

#5 Intellectual property

During intellectual property due diligence, you assess the risks and value associated with the company's intellectual properties.  Documents that are scrutinized in this include:

  • Copyrights documents
  • Trademark documents
  • Patent portfolio

#6 Market analysis

During a market analysis due diligence, you review the market proposition of the business you buy or sell. It analyzes the company’s market performance, share, positioning, and strategy. Documents that are reviewed include:

  • Document related to market strategy 
  • Market positioning document
  • Market share and market performance documents
Also read: The Perfect Contract Risk Assessment Checklist

Company due diligence checklist: Free Template

Company information

Documents Yes/No
All subsisting shareholder and share subscription agreements in respect of the Company
Agreements with all personnel having an interest in the equity of the Company
Copies of all returns, forms and statements filed with the Registrar of Companies
Minutes book of shareholders' and debenture holders' meetings
Minutes book of Board of Directors and Committee of Directors meetings
Agreements relating to terms of employment of managerial personnel, managing directors/whole-time directors or any other directors
Statutory Annual Reports since incorporation including audited annual accounts and Board's reports

Financial documents checklist

Documents Yes/No
Details of contracts
Tax return documents
Details of loans availed by the company
Details of financial lease
Minutes of meetings of the board of directors, shareholders and audit / operational committees since incorporation
Confirmation from the lawyers about the list of legal issues and current status of the same
Significant contracts, correspondence with legal counsel, tax offices, shareholders register
Transactions/agreements with affiliates and related parties
Details regarding accounting policies
Details on all Expense Items, including Administrative, Selling, Marketing, etc
Audited and un-audited financial statements of the Company

Legal document checklist

Documents Yes/No
A list of all company subsidiaries, direct or indirect
Certificate of incorporation
Company by-laws
Limited liability agreement
Stockholder agreement
Company capital
Occupational license
Tax registration documents
Documents for equity issuances
Stockholder agreements

Operational document checklist

Documents Yes/No
Franchise document
Environmental documents and inspections
License and permits
Equipment inspection reports
Insurance related documents
Annual reports
Staffing and payroll documents
Existing contracts
Income statements
Partnership agreement

IP documents checklist

Documents Yes/No
Patent portfolio
Patent claims
Pending litigations documents

Market analysis checklist

Documents Yes/No
Market share document
Market performance document
Market positioning document
Market strategy document
Market future forecasting dcoument
Document related to the target company’s industry assessment

Best practices to conduct the due diligence process

Best practices to conduct the due diligence process

Different companies have different scenarios and hence different levels of due diligence processes during a sell-off, fundraising, or merger and acquisition. 

#1 Define your goals

Like any business operation, start with defining your goals. This will help you to decide the key areas of focus, like what kind of resources you will need, the timeline for the completion of the process, and how your due diligence will align with the ultimate goal. Once you set your goals, gather the right people to conduct your due diligence. These can be:

  • Fund managers
  • Equity research firms
  • Business owners and directors
  • Risk and compliance analysts

#2 Requesting and reviewing relevant documents

Once you have defined your goals and identified the resources, it's time to gather relevant documents. If you're going for a merger and acquisition, some key documents you will need are contracts and agreements, licenses, financial transaction documents, etc. Use the checklist provided above for each of the categories. 

#3 Conducting interviews with key stakeholders

In addition to analyzing the documents, you should also conduct interviews with stakeholders, including employees, customers, and management. Prepare a list of questions to ask during the interview to avoid missing essential points. 

#4 Performing site visits and inspections

Visit the sites to gather first-hand data from the inspections. Evaluate its supply chain, warehouse, production unit, etc. 

#5 Analyzing and synthesizing the gathered information

Now that you have all the insights, it's time to analyze the data and derive inferences. Is this deal worth doing, or you're missing out on something crucial? While doing this manually can take you a month, with Spotdraft, you can reduce the time significantly. 

When a new contract is imported into the system, SpotDraft's powerful machine-learning model extracts key phrases from contracts. This speeds up the due diligence process. You can also run complex contracts through SpotDraft to create custom reports that you need to produce during due diligence. 

Conducting company due diligence with SpotDraft

Due diligence is one of the most critical steps during a company merger and acquisition. It’s often overwhelming to manually scrutinize all the documents and interview the concerned people. 

That’s where SpotDraft comes in. SpotDraft is a contract automation and management software meant for businesses of all size. Want to learn more about Spotdraft and how it can help your contract management process? Schedule a demo today. 

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