Companies and organizations use due diligence reports for a variety of reasons. A due diligence report is a comprehensive exploration and explanation of a property, a company’s financial records, or a company’s overall standing in the marketplace. It can help determine a company’s valuation and enable investors, business partners and other stakeholders to make educated decisions regarding the company’s future.
Following a due diligence checklist can ensure your due diligence report:
- Conveys all the information necessary for educated business decisions
- Is easy to follow
- Is factually accurate
- Supports all financial data with background materials or supporting documentation
Reasons To Use a Due Diligence Report
The format of a due diligence report, as well as what is included, may vary depending on the industry and the purpose of the report. For instance, a due diligence report for a real estate investor may be extremely different from that of a software developer considering a merger. But many of the key points, along with the best ways to present data, look the same.
Real estate investors and developers use due diligence reports to determine the potential profitability of a property, the CAP ratio, expected vacancy rates and capital improvements that may be needed. The due diligence checklist for a real estate professional should also cover:
- Property taxes
- Inspection reports
- Potential zoning issues
- Opportunities for further development
If a company is considering expansion, going public, or undergoing a merger or acquisition, a business valuation is necessary for better decisions. A due diligence report for business valuation will focus primarily on:
- Financial statements
- Financial projections
- Capital structure
- Strengths, weaknesses, opportunities and potential threats in the marketplace (SWOT analysis)
A business valuation due diligence report may be necessary when seeking funding from outside investors or when applying for a business loan.
Sales, Acquisitions, or Mergers
Like a due diligence report for business valuation, a company that is for sale or considering a merger or the acquisition of another organization will also require a due diligence report. The report should focus on financial statements, business opportunities and challenges in the near future.
This type of due diligence report will include:
- Corporate records
- Financial information
- Employment and labor
- Information on real estate owned or leased
- Legal documents
- Supplier and customer information
- Joint venture, marketing and licensing agreements
What To Include in a Comprehensive Due Diligence Report
In broad terms, your due diligence report should begin with an introductory statement describing the purpose of the report:
- Is it to find investors or secure funding?
- Is it to initiate a sale, merger, or acquisition?
- Is it to invest in a property?
- Is it to go public with a company?
Whether the due diligence report takes the form of a research report or a proposal, readers will want to know certain facts about the company, as well as any relevant information that puts the data into context. After all, companies do not exist in a vacuum and everything from market trends to economic data can affect the findings in the report.
The purpose of the report drives its structure and the research and data presented. Across most industries, a comprehensive due diligence report should include the company’s financial data, information about business operations and procurement, and a market analysis. It may also include data about employees and payroll, taxes, intellectual property and the board of directors.
Your Complete Due Diligence Checklist
When you first begin putting together your due diligence report, review the following due diligence checklist to ensure you’re including all the necessary elements:
- Financial statements, including balance sheets, cash flow statements and profit & loss reports
- Company valuation
- Capital structure
- Financial projections
- Products or services
- Capital assets
- Real estate
- Company structure
- Listing of officers/Board of Directors
- Intellectual property (patents and trademarks)
- Legal documents
- Tax information
- Employees and payroll
- Procurement data
- List of suppliers
- Agreements (including licensing, distribution, or franchise agreements)
- SWOT analysis
- Relevant market research and data
- Policies and procedures
How To Present Information in a Due Diligence Report
Due diligence reports may be a combination of financial statements, spreadsheets, written reports, pie charts and bar graphs. It’s most important to present the information in a clear and compelling way — with illustrations that can help readers more readily grasp the relevance of your data. In addition, the information should be comprehensive. For instance, financial reports should be accompanied by background information and in-depth analysis that will help parties better understand the data presented.
While a due diligence report can get unwieldy with so many must-have items, it’s also important to keep it concise so that people remain engaged while reviewing it. Otherwise, they might miss the most relevant aspects of the report.
Tracking and managing documents that belong in your due diligence report through a cloud-based virtual data room can help readers absorb the information more easily, keep track of what they’ve already reviewed, and make comments and questions for follow-up within the files.
How a Virtual Data Room Makes It Easy to Compile and Share a Due Diligence Report
CapLinked makes it easier to compile your due diligence report by enabling your staff to track changes in files, manage file permissions, and even revoke access after download. Each department can focus on the aspects of the report they need to contribute, while collaborating in real-time across departmental silos.
Dawn Allcot is a full-time freelance writer specializing in business, finance and technology, and owner of the boutique content marketing agency Allcot Media.