Due Diligence

Due diligence (DD) is the systematic review a buyer conducts of a target company before an acquisition or investment is completed. The purpose is to verify that the company is what the seller claims it to be—financially, legally, tax-wise, and operationally—and to identify the risks that could affect the price, terms, or the decision to proceed with the transaction at all.

What types of due diligence are there?

A comprehensive due diligence process typically involves several parallel lines of inquiry, often under significant time pressure:

  • Financial Due Diligence: Review of historical results, revenue quality, cash flow, and working capital.
  • Legal Due Diligence: Review of agreements, disputes, intellectual property rights, and corporate law matters.
  • Tax-related due diligence: Identification of latent tax risks and historical tax positions.
  • Commercial and Operational Due Diligence: Assessment of the market, customer base, and the company's ability to deliver future forecasts.

Common Pitfalls in a Due Diligence Process

  • Internal resource shortages: The existing finance department is expected to handle day-to-day operations while also answering hundreds of questions in a data room—something has to give.
  • Poor data quality: Incomplete or poorly structured documentation delays the process and undermines the buyer's confidence.
  • Optimistic forecasts: The sales page's budget doesn't hold up to critical scrutiny, leading to price adjustments.
  • Missed synergies and risks: Without the right expertise, you’ll miss out on both value-driving synergies and hidden liabilities.

Here's How an Interim CFO Can Help You with Due Diligence

Whether you’re on the buy-side or the sell-side, a due diligence process creates an urgent and temporary need for in-depth financial expertise. This is a classic situation for an interim solution.

  • Relieves the regular organization: One interim CFO ...or the controller assumes full responsibility for the data room and handling inquiries so that line management can focus on operations.
  • Preparing the company for an audit (sell-side): An interim manager can clean up the financials and prepare a professional report that maximizes the company's valuation.
  • Experience with numerous transactions: They know what buyers are looking for and where the pitfalls lie.
  • Immediate availability: Interim Search's process ensures that you have the right talent in place within 48 hours—which is crucial when the transaction window is short.

Frequently Asked Questions About Due Diligence

How long does due diligence take?

For a medium-sized company, a structured due diligence process typically takes four to eight weeks from the time the data room opens until the review is complete. The timeline is often dictated by the momentum of the transaction rather than by how much time would be desirable.

What is the difference between due diligence and an audit?

An audit is a statutory, retrospective review that confirms that the financial statements present a true and fair view. Due diligence is a forward-looking, transaction-driven analysis that assesses risks, the quality of revenue, and the company’s ability to meet future forecasts.

Does the seller also need to conduct due diligence?

Yes. A so-called vendor due diligence—in which the seller proactively has its own company reviewed prior to a sale—shortens the process, strengthens the negotiating position, and reduces the risk of unpleasant surprises that could otherwise drive down the price late in the process.

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