Due diligence is the process during which documents are thoroughly reviewed before a financial transaction proceeds. Due diligence can be conducted by investors considering a private equity fund or by a company interested in purchasing another company or in any other large, complex financial transaction in which any detail related to assessing the risk or future performance of an asset is evaluated.


Transactions incur huge risks, and due diligence helps buyers and sellers better understand the dimensions of a transaction.


Top Due Diligence Questions

The most common due diligence questions relate to the current financial health of the company, including both assets and liabilities. Current and future assets can help provide some predictive validity to a purchase, while liabilities can help parties better understand the risks that are involved and what must be done to minimize them moving forward.


Company Information

Below are some general questions regarding company information:


  • Who owns the company? 
  • Is it an individual, family or group?
  • What is each owner’s percentage of ownership?
  • How is the company organized (i.e., S-Corporation, LLC)?
  • What are the company’s articles of incorporation?
  • What are the company’s bylaws?
  • Where are the company’s most recent annual reports?
  • Where are the company’s quarterly reports?
  • Who are the company’s senior leaders?
  • What are their job titles, compensation and experience?


Financial Information

Financial information is often the most critical component of due diligence. Below are some questions to ask and documents to request:


  • Where are the financial statements for the last five years, including the following documents:
    • Income statements
    • Cash flow statements
    • Balance sheets 
    • Accounts payable 
    • Accounts receivable
    • Tax returns 
    • Statements from outside auditing firms
    • Credit reports (i.e., Duff and Phelps, Dun and Bradstreet)
    • Fixed and variable expenses 
    • Insurance contracts and coverage
    • Debts and liabilities, including outstanding loans and credit facilities


Customer Information

It might seem counterintuitive for bankers, attorneys and accountants to evaluate customer information during due diligence, but for M&A or private equity deals, this is critical. Customers are the lifeblood of a business, representing sales, income and ultimately profits. Acquiring companies or investors seeking to purchase ownership in a company should be well aware of the potential for income and profit of that target company.


The following questions should be asked while performing customer due diligence:


  • Who are your customers and where is all of their information stored?
  • Where are they located and how do they receive products or services from your company?
  • How much does each customer typically spend with your company?
  • What is the lifetime value of each customer?
  • What are your sales and marketing strategies to continue or increase sales?
  • What is the typical sales contract?
  • Does your company issue refunds? What is the typical refund size and how frequently do they occur?


Employee Information

Documents pertaining to employee performance, compensation and contracts are also essential, as employees are both an asset and a liability to any business.


Here are some questions that should be asked during employee investigation and due diligence:


  • Where is the list of all employees?
  • What is the total compensation, including salary and benefits, for each?
  • Is there an employee stock ownership or profit-sharing plan?
  • What percent of your workforce is contracted labor?
  • Where are those contracts? How often are they renewed?
  • Do you have performance reviews for your employees?
  • Where can you demonstrate tying employee performance to corporate performance?
  • How much does your company spend on employee training and development?


Product or Services Information

Due diligence should also include a thorough investigation of a company’s products and services, as these are the vehicles for attracting revenue and ultimately profit. As with customer information above, documents outlining products and services should help acquiring companies or investors better understand the potential for income.


Some questions related to products and services include the following:


  • What are your company’s products and services?
  • What are their price points?
  • How are they delivered to customers?
  • How many employees are involved in both the production and delivery of your products and services?
  • How much does it cost the company to develop or acquire your products and services?
  • What are the profit margins?
  • Do you build them in-house or do you outsource any or all of it?


Intellectual Property Assets

Intellectual property (IP) has come into its own as a separate component of due diligence. In some technology sectors, like software development or biotech/life sciences, the value of a company is largely tied to its IP, especially for early-stage or pre-revenue startups.  As such, in an M&A or private equity transaction, the thorough evaluation of a company’s IP assets can essentially reveal to the buyer the most accurate valuation of the company. 


Questions related to IP can include the following:


  • How many patents does the company own?
  • Were any developed by employees?
  • Who owns the company’s IP?
  • Have there been any independent valuations of the IP performed in the past?
  • How does the company generate revenue from the IP at the present time?
  • Are there plans to generate more revenue from the company’s existing IP?
  • What IP is currently in development by the company and when is it expected to be patented or copyrighted?
  • Does the company license any of this IP for use by other companies?


Digital Assets

Digital assets are related to IP but can extend to property that isn’t patented, copyrighted or trademarked. These can include the company’s owned or licensed hardware, software, networks and other assets. Reviews of digital assets are a part of due diligence because in today’s application-driven world, oftentimes a company’s revenues are tied to the digital assets that they have in place.


Questions related to digital assets might include the following:


  • What technology — devices, software and networks — does the company own?
  • What technology does the company license or contract out?
  • Are these digital assets critical for the development and delivery of the company’s products and services?
  • Who owns these digital assets? Are some owned by employees? 
  • What are your policies related to digital assets?
  • Do any of these digital assets pose a cybersecurity risk, for either employees or customers? What are your cyber risk mitigation strategies?


The legal environment in which a company operates is also important to review during due diligence. In regulated industries, a company is only able to operate while abiding by particular restrictions put in place by the government, and investors should be able to uncover this during due diligence. 


  • Does the company operate under particular laws in certain jurisdictions (i.e., local or international)? 
  • Are the company’s products or services priced in a certain way to abide by certain laws?
  • Do the company’s products or services pose any environmental hazards?
  • If the legal environment in these jurisdictions changed, would the company be at risk?
  • Does the company have an in-house legal team?
  • Does the company maintain outside legal counsel?


Possible Lawsuits

Further to the discussion of legalities, questions about past, current or pending lawsuits and legal liabilities are also critical:


  • Is the company currently in litigation or facing any lawsuits?
  • Are these lawsuits from employees, customers, competitors or the government?
  • Has the company been held legally liable in the past?
  • How much has the company had to pay in damages or fees in the past?
  • Does the company have insurance to cover any damages?


Learn More about Due Diligence Best Practices

Due diligence does include hundreds, sometimes thousands, of documents that need to be reviewed. The questions presented above might actually be only a start, as each company in each industry presents its financial and legal picture differently


Rather than wait for a financial buyer or liquidity event to prepare and queue up their documents, companies can prepare months in advance for a transaction by ensuring that their documents are accessible. 


Get More Out of Your Due Diligence Process with CapLinked

The due diligence process needs a document hosting and digital access management service to support the transaction. With a trusted virtual data room (VDR) partner like CapLinked, transaction participants can have the right access to the right documents at the right time — ensuring that the deal closes on time. 


Start your free trial today to see how CapLinked can help streamline all aspects of an M&A or private equity transaction.


Jake Wengroff writes about technology and financial services. A former technology reporter for CBS Radio, he covers such topics as security, mobility, e-commerce and the Internet of Things.



EY  – Ask these M&A due diligence questions before signing a deal