Oct 27 ‘23 14 min read
M&A success largely depends on quality due diligence (DD). Thus, poor due diligence is among the top contributors to 60% of mismatched M&A expectations and unrealized synergies. While diligence is critical, it’s meaningless unless it encapsulates the findings in an actionable due diligence report.
This article contains 13 elements of the due diligence report, five steps to write one, and three best practices for delivering the findings.
What is a due diligence report?
A due diligence report outlines and summarizes critical findings of the due diligence process.
|What is a due diligence process? Check our definitive due diligence process guide from preparation to negotiation.|
The due diligence report meaning is critical to the transaction. It communicates DD findings to the executive team and lays the foundation for informed deal closing and successful post-merger integration. A due diligence report has the following functions:
- Business assessment. It collects, digests, and delivers business data to confirm (or dismiss) a strategic fit.
- Synergy assessment. It identifies, validates, and communicates M&A synergies and recommendations for post-merger integration.
- Risk assessment. It describes existing and potential risks and opportunities within business functions and facilitates risk management processes.
- Financial analysis. It summarizes the target company’s financial health data, reviews financial projections, and gives the executive team a big picture of the deal’s value.
Who writes the M&A due diligence report?
A quality due diligence report results from a collective effort of the company’s due diligence team.
Based on our experience, quality reports are written by contributors who conduct due diligence within specific functions — financial analysts, legal, HR, technology experts, project managers, and subject-matter experts.
A successful business may also hire a diligence report vendor or several external advisors with experience in the target company’s industry. They provide invaluable insights into specific business functions, like cybersecurity and financials. Thus, up to 85% of non-financial companies take additional diligence costs and hire financial advisors during M&A. Meanwhile, only 14% of businesses retain in-house advisors.
13 critical elements of an acquisition due diligence report
A due diligence report must reflect the due diligence requirements. It refers to the target’s core business functions, such as financials, commerce, operations, IT technology, taxes, human resources, legal information, and risk management. It also relies on the due diligence questionnaire.
While there is no set-in-stone due diligence report format, a typical piece may have the following structure:
- Executive summary
- Corporate structure and ownership
- Business model
- Sales and marketing
- Human resources
- Information technology
- Corporate culture
- Risks and issues
- Recommendations and observations
Below, you can read the diligence checklist of content analyzed and summarized in the report.
1. Executive summary
An executive summary is a high-level overview of the target company. It concisely highlights the key findings from the entire report.
|Provide decision-makers with key transaction insights without diving deep into the details of the entire piece.||
– Business data on the target company, including foundation date, address, revenue, employee count, and industry.
– Key findings from each report section, including the transaction structure, synergies, risks, and crucial observations.
– Key metrics, including financials, operations, sales, HR, and legal compliance matters.
– Key recommendations on risk mitigation, synergies, and post-merger integration.
2. Corporate structure and ownership
The corporate structure and ownership section provides insights into the target’s leadership framework and organizational structure.
|Explain the target’s governance structure and leadership style.||
– Legal structure, organizational chart, ownership distribution, and ownership history.
– Key shareholders, investors, business partners, subsidiaries, and affiliates.
– Shareholder agreements and related data, including voting rights, dispute resolution, and ownership transfer.
– Board governance, including structure, composition, and succession planning.
3. Financial information
The financial section outlines the target’s financial records and performance, providing key financial metrics and observations. It evaluates the deal’s overall viability and projects post-transaction financial performance.
|Summarize the target company’s financial health and understand the deal’s viability.||
– The target company’s budgets, financial trends, and investment strategies.
– Financial statements (cash flows, balance sheets, income statements, operating costs).
– Physical assets, such as real estate, intangible assets, liabilities, asset valuation, and debt structure.
– Financial margins (EBITDA, earnings per share, return on sales, price-earnings ratio, and others).
– Tax returns, statements, policies, audits, liabilities, and filings.
– Financial projections and analyses, including risks and synergies.
– Financial policies, systems, and procedures.
4. Business model
The business model evaluation outlines the target company’s strategic development and evaluates its risk-based approach. It breaks down the target company’s short-term objectives and long-term goals.
|Understand the target company’s business direction and alignment with the acquirer’s strategic goals.||
– The target company’s mission, business model, and growth strategy.
– The company’s risk management frameworks and ESG practices.
– The target company’s market analysis and SWOT analysis.
– Revenue streams, products, services, plans for service improvement and product scaling.
– The target company’s research and development (R&D) strategies.
– Business alignment and related synergies.
5. Sales and marketing
The sales and marketing section of the due diligence report describes the target company’s approach to revenue generation. It gives the bigger picture of the target’s business model.
|Evaluate the efficiency of the target’s marketing efforts and their alignment with its business model.||
– Marketing strategies, including types, efficiency, and key metrics.
– Sales channels by type and efficiency.
– Customer base, including segmentation, retention, and feedback mechanisms, and key customers.
– Marketing risks and synergies.
6. Human resources
The human resources section of the DD report analyzes and summarizes findings about the target’s human capital. It focuses on HR integration and optimization opportunities in the post-deal phase.
|Understand further actions regarding the target company’s HR.||
– Complete workforce overview, including employee count, demographics, employment type, engagement, and turnover.
– HR management aspects, including talent management, compensation and benefits, retirement planning, diversity and inclusion, health and safety.
– Performance management, including goal setting and rewards.
– Workforce synergies, including optimization opportunities and performance projections in various scenarios.
The operations section evaluates the target’s production processes and researches potential operations synergies. The operational review emphasizes improvement opportunities, including cost reduction, supply-chain consolidation, and scaling.
|Understand how to merge and optimize operations in the post-deal phase.||
– Core operations, including production, operational excellence, sustainability, and waste management.
– Supply chains, including sourcing, procurement, inventory management, and key suppliers.
– Quality control management, including standardization and testing frameworks.
– Asset management and maintenance practices, including asset tracking, preventive measures, and longevity practices.
– Operational risks, including production bottlenecks, supply chain disruptions, processing errors, and quality issues.
– Operational optimizations and synergies.
8. Information technology
The IT section reviews the target company’s digital capabilities, technology value drivers, integration opportunities, and risks. It often emphasizes the results of cybersecurity due diligence in M&A transactions.
|Discover cost-reduction opportunities in technologies and understand how to merge IT systems.||
– IT governance, including frameworks used, policies, and procedures.
– The target company’s hardware and cloud IT infrastructure.
– Software applications and systems, including types, business involvement, efficiency, and business impact.
– Data governance, including storage, accessibility, and integrity, and migration specifics.
– Cybersecurity, including frameworks, measures, and risks.
– Technology synergies, including cost-reduction and consolidation opportunities within the infrastructure and software systems.
9. Corporate culture
The corporate culture section summarizes respective diligence investigations and provides insights into the core beliefs and values of the target company. It emphasizes culture compatibility and points out potential integration issues.
|Understand the corporate culture and maximize successful collaboration in the post-deal phase.||
– Key values and beliefs of the target company.
– Core leadership principles and decision-making approaches, including leaders’ impact on corporate culture.
– Communication channels, including types, frequency, and degree of formality.
– Employee relationships, including teamwork, work-life balance, employee engagement, and social responsibility approaches.
– Company’s approach to risk-taking and response to failure.
– Company’s willingness to change in the upcoming merger or acquisition.
– The target company’s cultural match and potential issues.
The legal due diligence section investigates the deal’s regulatory landscape and reviews legal risks, including intellectual property infringements, breaches of warranties, contract violations, and money laundering or tax evasion litigations.
|Understand the merger’s legal specifications and reveal legal risks.||
– Legal documents, including contracts and agreements within all business functions, including HR, supply chains, and technology.
– Legal status of intellectual property assets and franchise agreements.
– Compliance with federal and local laws and industry standards.
– Legal issues and risks, including contracts, litigations, regulations, and policies.
– Legal compliance checklist.
The synergies section of the due diligence report summarizes potential synergies and calculates the cost benefits.
|Understand the merger’s benefits and map post-merger integration directions.||
– Cost-saving opportunities, including financials, operations, HR, and technology.
– Revenue synergies, such as cross-selling, upselling, and combined distribution.
– Financial synergies, including debt restructuring, tax optimization, and improved cash flows.
– Cultural synergies, including shared values, similar decision-making approaches, and willingness to change.
12. Key issues and risks
The risks and issues section summarizes key transaction risks and reviews risks within each business function of the target company. It also communicates existing and potential issues at different M&A stages.
|Address and prevent M&A risks and issues.||
– Risks under each business function, including financial technology, cybersecurity, operational, HR, commercial, and legal.
– M&A issues within due diligence, communication, governance, and culture.
– Risk and issue management recommendations.
13. Recommendations and observations
The recommendations and observations section provides key post-merger directions and observations.
|To provide in-depth insights into post-merger integration and business improvement.||
– Post-merger integration recommendations on each business function.
– Post-deal business continuity recommendations.
– Risk management and risk prevention recommendations.
– Important observations affecting the business relationship.
How to write a due diligence report in 5 steps
Here are the five steps to write a due diligence report:
- Decide on the report structure. Draft the report’s sections based on the due diligence scope. A financial due diligence report may focus on financial matters, whereas a full report may cover all business functions within 80–100 pages.
- Collect due diligence findings. Have instant access to necessary due diligence findings, metrics, statistics, and analyses. It will help you reference materials while drafting the report.
- Draft the report. Process the main findings from each due diligence area and summarize key points. Collaborate with contributors, DD experts, and external advisors on the findings to ensure data clarity and accuracy.
- Review the draft. Check the report for accuracy, clarity, and conflict of interest. It’s a massive, time-consuming work that requires several reviews before final submission.
- Approve and submit the final draft. Make final edits, approve the report, and submit it to the acquisition team. Prepare for a series of Q&As regarding due diligence findings.
3 best practices for due diligence report writing
Based on our observations, the following industry practices help to refine due diligence reports, improving information delivery, consistency, and clarity:
- Ensure data traceability
- Maintain communication
- Use M&A technology
Let’s provide more detail on what each practice entails.
1. Ensure data traceability
Data availability and quality have always been limiting factors in the due diligence process. The inability to check source materials for accuracy may lead to miscalculations, over and underestimations, and unrealized M&A benefits. It’s advisable to ensure that data points are easily traceable within your report and readily available for review and validation.
|✅ Best practice: Specify the investigation process methodology and include key metrics, projections, analyses, and reference materials in dedicated pages. Connect numerical data to reference materials, online sources, and databases to ensure data verification and traceability.|
2. Maintain communication
As much as 50% of transactions point out unclear reporting lines as the main pain point during the M&A, while about 30% mention a lack of general communication, according to a PwC survey. It’s crucial to establish and maintain effective communication during due diligence reporting.
|✅ Best practice: Establish Q&A workflows between executives and due diligence teams with due diligence software. Maintain continuous communication for instant feedback, fast issue tracking, and informed decision-making.|
3. Use M&A technology
About 63% of dealmakers use tools other than email and spreadsheets for various M&A activities, while the rest plan to enhance digital capabilities to hold a competitive edge. Secure workspaces, such as virtual data rooms (VDRs), have become inseparable from M&A success. A virtual data room improves due diligence reporting with the following capabilities:
- 24/7 communication. Data rooms allow dealmakers to establish uninterrupted Q&A workflows with subject-matter experts and approvers. It helps DD teams maintain 24/7 communications and manage real-time feedback from executives.
- Easy data referencing. DD teams can collect, store, and share due diligence documentation in one secure system with role-based access, digital rights management, and advanced data encryption. Encrypted links and version control simplify data referencing in due diligence reports.
- Enhanced data accuracy. The full audit trail that records document edits, logins, page views, and other detailed stats complements data reviews, data referencing, and issue tracking. It improves the quality and accuracy of due diligence reports.
|✅ Best practice: Use the leading due diligence data room to secure the process, enhance data accuracy, and improve reporting.|
- A business due diligence report is the critical link between the due diligence process and the final M&A decision. It is a detailed summary of the target company that communicates due diligence findings to the executive team.
- The report’s sections vary based on its scope and the deal’s nature. A thorough report always communicates the risks and opportunities of the transaction and gives actionable insights into post-merger integration.
- Due diligence best practices include data traceability, continuous communication, and the use of virtual data rooms.