due diligence report and data rooms

Due Diligence Report: What Is It?

Aug 27, 2021

Due diligence is an integral part of M&A, and virtually every deal involves more than one business entity. It involves investigating and evaluating every aspect of a business before investing, which gives the buyer comprehensive information on what they are getting into. Both buyers and sellers are involved in the due diligence process, what follows is a due diligence report. 

What is a due diligence report, and how is it used? 

A due diligence report is a formal document summarizing the details gathered during vetting a business entity. The document will also show how the investigation was conducted and the processes involved.

Generally, the buy-side or investing company prepares a due diligence report. However, it can also be compiled by an impartial third party who has the expertise to carry out due diligence and compile the report and present both parties with its unbiased findings.

The information in a due diligence report can be used to make informed investment decisions prior to forming a partnership.

According to the Corporate Finance Institute, “A due diligence report is sent as an internal memo to members of the executive team who are evaluating the transaction and is a requirement for closing the deal.”

With that said, a due diligence report is also a prerequisite for closing corporate deals.

The connection between due diligence and data rooms 

In the course of carrying out due diligence, information will be shared between both parties involved. Because much of this information is private or extremely sensitive, a data room is an ideal, secure, cloud-based platform for storing and sharing the data. Additionally, a data room makes it possible to conduct due diligence remotely at the user’s convenience. 

All files can be uploaded securely into the data room for due diligence, where only authorized users can access files. With the Q&A feature, data room users can interact seamlessly. Admins can also restrict access to specific files or individual documents when and where necessary. 

A data room vendor can also perform due diligence on an investment and present the due diligence report if requested by the client. According to Ansarada, a foremost data room provider, vendor due diligence reports are:

“Independent analysis and evaluation of a company’s performance, risks, and opportunities for potential investors.”

Main points of a due diligence report

A due diligence report contains virtually all the processes of the investigation. All the information dredged up is revealed in the report and summarized for easy comprehension.

The main points of a due diligence report include:

  • Company’s employees. The report should have adequate information on the employees of the company being acquired. It should include information about their work history, experience, biodata, length of employment, and current position. The report may also include information on retired staff.

  • Financial information. This part of the due diligence report contains financial information, including bank statements, tax returns, account receivables. The company’s detailed financial information is the equivalent of being stripped bare to expose any particulars to the buyer.

  • Indebtedness. This includes the company’s debt profile, loan agreements, security agreements, mortgages, and any other document relating to the company’s outstanding financial transactions with partners or suppliers. This is an important factor because a company may have outstanding debt or owe its staff back-pay.

  • Legal information. This houses information about the company’s legal matters, including lawsuits, contracts, licenses, permits, or other legal matters. It can also include information on the company’s team of legal counsel or solicitors if it has one.

  • Assets information. This part includes all the company’s assets, including recently acquired, redundant, or moribund, and assets stored in other locations. Assets can be material assets like machinery, equipment, facilities (and their locations if they are not together), or intangible assets like intellectual properties, patents, and copyrights.

  • Agreements. This should include all agreements the company has made with other companies, partners, suppliers, and clients. Some of the agreements include; real estate leases, licenses and subscriptions, joint venture and partnership agreements, franchise agreements, and the like.

  • Partners, clients, and supplier information. Companies rely on the cooperation and collaboration of others to succeed — partners and clients are pivotal to a company’s day-to-day operations. Therefore, the information gained from these partners, customers, and suppliers needs to be evaluated to understand the nature of the relationship between them and the company — to avoid inheriting a soiled relationship.