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Due Diligence Checklists

Comprehensive checklists for your due diligence review. From financial due diligence to legal aspects as well as operational and strategic examinations.

The Importance of Structured Due Diligence

Due diligence is the process of systematically examining and evaluating a company prior to a purchase or investment. Thorough due diligence is crucial for the success of a business transaction and can protect against costly misjudgments. Studies show that approximately 70% of all failed acquisitions are attributable to deficiencies in the due diligence process. Either significant risks are overlooked, or synergies and potentials are misjudged. The key to successful due diligence lies in a structured and systematic approach that covers all relevant aspects of the target company. Comprehensive checklists form the backbone of the review process and ensure that no critical areas are missed. They serve not only as a guide for information requests and analysis but also as a documentation basis for later decision-making. Well-designed checklists also help make the due diligence process more efficient and focus resources on critical areas.

Financial Due Diligence Checklist

The Financial Due Diligence is the core of every company review and focuses on the financial aspects of the target company. A comprehensive checklist for this area should cover the following main points:

Annual Financial Statements and Reports

  • Audited financial statements from the last 3-5 years (balance sheet, income statement, cash flow statement)
  • Quarterly and monthly reports for the current fiscal year
  • Comparison of planned versus actual figures over recent years
  • Audit reports and management letters from auditors
  • Internal controlling reports and management information systems

Revenue and Earnings Analysis

  • Breakdown of revenues by products, customer groups, and regions
  • Analysis of gross margins and contribution margins
  • Development of recurring versus one-time revenues
  • Seasonality and business cycle fluctuations
  • Dependence on key customers (customer concentration)

Cost and Expense Structure

  • Fixed versus variable cost structure
  • Personnel costs and their development
  • Review of executive salaries and owner withdrawals
  • One-time or extraordinary expenses
  • Comparison of cost items with industry benchmarks

Assets and Liabilities

  • Detailed fixed assets and depreciation schedules
  • Valuation of inventories and receivables
  • Completeness of reported liabilities
  • Contingent liabilities and guarantees
  • Pension obligations and other long-term liabilities

Forecasts and Business Plan

  • Detailed financial forecasts for the next 3-5 years
  • Assumptions and basis of forecasts
  • Sensitivity analyses and stress test scenarios
  • Historical forecast accuracy
  • Planned investments and their financing

Financial due diligence should not only focus on historical data but also assess the sustainability of earnings and the plausibility of future expectations. In this context, financial metrics such as EBITDA margin and revenue growth are particularly critical, as they often serve as the basis for purchase price determination. Thorough financial due diligence can also uncover typical valuation errors such as incomplete financial data, contributing to a more realistic assessment of the company’s value.

Tax Due Diligence Checklist

The Tax Due Diligence is a specialized area that is often underestimated. Tax risks can have significant financial consequences after the purchase. A comprehensive checklist includes:

Tax Compliance

  • Tax returns and assessments from the last 5-7 years
  • Status of ongoing and completed tax audits
  • Open disputes with tax authorities
  • Completeness and timeliness of tax filings
  • Tax risk areas and tax provisions

Tax Structures

  • Group tax structures and transfer pricing
  • Tax treatment of shareholder loans
  • Use of tax incentives and investment allowances
  • Tax loss carryforwards and their usability post-acquisition
  • Real estate transfer tax aspects related to property ownership

International Tax Aspects

Value-Added Tax and Other Indirect Taxes

  • VAT treatment of main business transactions
  • Compliance with intra-community supplies and services
  • Treatment of export deliveries and services
  • Customs duties and import taxes
  • Energy tax, insurance tax, and other special levies

Tax due diligence typically requires specialized expertise and should be conducted by experienced tax advisors. Particularly important is the analysis of the tax implications of the transaction structure itself (asset deal vs. share deal) as well as possible holding structures before the sale. Thorough tax due diligence can reveal significant tax risks and simultaneously identify opportunities for tax optimization after the acquisition.

The Legal Due Diligence examines all legal aspects of the target company and is critical for identifying legal risks. A comprehensive checklist includes:

Corporate Law Aspects

  • Articles of association, bylaws, and commercial register excerpt
  • Shareholder resolutions and minutes of shareholder meetings
  • Rules of procedure for management and supervisory bodies
  • Shareholder or partnership agreements
  • Capitalization and ownership structure

Contractual Relationships

  • Material customer and supplier contracts
  • Loan and financing agreements
  • Lease and rental contracts
  • License and IP agreements
  • Cooperation and joint venture agreements

Labor and Social Law

  • Employment contracts, especially with executives
  • Works agreements and collective bargaining agreements
  • Employee stock option plans and bonus schemes
  • Works council minutes and agreements
  • Labor law issues in business transfers

Intellectual Property Rights

  • Patents, trademarks, designs, and copyrights
  • Protection of IP and trademark rights
  • License agreements and IP protection strategies
  • Possible infringements of third-party rights
  • Open-source software and its licensing

Litigation and Regulatory Proceedings

  • Ongoing and threatened litigation
  • Warranty claims and product liability issues
  • Regulatory investigations and proceedings
  • Compliance with data protection and other regulatory requirements
  • Environmental law obligations and risks

Legal due diligence should pay particular attention to change-of-control clauses in key contracts, which may trigger termination rights or other consequences upon ownership change. Also, adjustments to corporate documents after acquisition should be planned early. Another critical point is the review of the transferability of licenses and permits essential for business operations. Legal due diligence should always consider industry-specific particularities, as different legal risks apply to an IT company compared to a mechanical engineering company or a specialized craft business.

Operational Due Diligence Checklist

Operational due diligence examines the operational aspects of the target company and is especially important for assessing future performance capability. A comprehensive checklist includes:

Business Model and Processes

  • Detailed description of the business model and value chain
  • Documentation of core processes and workflow analyses
  • Effectiveness and efficiency of operational procedures
  • Quality management systems and certifications
  • Process standardization and optimization potential

Production and Supply Chain

  • Production facilities and their condition, age, utilization
  • Maintenance status and intervals
  • Inventory levels and inventory management
  • Supplier structure and dependencies
  • Procurement strategies and purchasing terms

IT Infrastructure and Data

  • IT systems and their integration
  • Age and update status of systems
  • IT security and data protection
  • Degree of digitization and digital strategy
  • Data quality and data management

Personnel and Organization

  • Organizational structure and management levels
  • Qualifications and experience of employees
  • Employee turnover and absenteeism
  • Personnel costs and compensation structures
  • Building a second management level

Customers and Sales

  • Customer structure and relationships
  • Sales channels and their effectiveness
  • Pricing strategies and margin development
  • CRM systems and customer data
  • Customer satisfaction and complaint management

Operational due diligence should always consider industry specifics and focus on factors critical to the respective business model. Identifying dependencies on key personnel and knowledge management is particularly important to ensure that essential know-how remains in the company after acquisition. The documentation and processes should be carefully reviewed, as they are essential for a smooth transition. Strategic buyers should pay special attention to integration potential and possible synergies, while financial investors tend to focus more on optimization potential and scalability of the business model.

Commercial and Market Due Diligence Checklist

The Commercial Due Diligence and market analysis focus on the industry, competition, and market position of the target company. A comprehensive checklist includes:

Market Analysis

  • Market size and growth in the relevant segment
  • Market drivers and trends
  • Seasonality and cyclicality
  • Regulatory developments
  • Market environment and its impact on company valuation

Competitive Analysis

  • Identification of main competitors
  • Market shares and competitive position
  • Strengths and weaknesses compared to competitors
  • Entry barriers for new market participants
  • Ignoring market comparisons as a source of valuation errors

Product and Service Portfolio

  • Market positioning
  • USPs and differentiation factors
  • Product life cycle and innovation pipeline
  • Price-performance ratio compared to competitors
  • Customer benefits and solution competence

Customer Segments and Relationships

  • Customer base segmentation
  • Customer loyalty and retention
  • Customer acquisition costs and customer lifetime value
  • Customer satisfaction and Net Promoter Score
  • Dependence on key customers

Sales Channels and Marketing Strategy

  • Effectiveness of sales channels
  • Marketing strategies and their success
  • Customer acquisition costs
  • Brand awareness and perception
  • Digital presence and online marketing

Commercial due diligence should be based on both historical data and forward-looking analyses. Critical review of market forecasts and growth assumptions is especially important, as these often form the basis for company valuation. Industry experts and market research institutes can provide valuable external perspectives. The results of commercial due diligence are crucial for validating the business model and assessing the plausibility of future earnings expectations. In a buyer’s valuation method, insights from commercial due diligence should be particularly considered in the DCF method and the projection of future cash flows.

ESG and Sustainability Due Diligence Checklist

ESG due diligence (Environmental, Social, Governance) is gaining increasing importance as sustainability-related risks and opportunities come more into focus for investors and stakeholders. A comprehensive checklist includes:

Environmental Factors

Social Factors

  • Working conditions and occupational safety
  • Diversity and inclusion within the company
  • Human rights in the supply chain
  • Engagement with local communities
  • Product responsibility and customer safety

Corporate Governance

  • Compliance management systems
  • Code of ethics and corporate values
  • Transparency and reporting
  • Risk management and internal controls
  • Anti-corruption measures

Sustainability Strategy and Reporting

Regulatory Compliance

  • Compliance with current and future environmental regulations
  • Supply chain laws and their adherence
  • ESG reporting obligations and fulfillment
  • Carbon tax and other environmental levies
  • CO2 certificates as an earn-out component

ESG due diligence should not only identify risks but also highlight opportunities for value enhancement through improved sustainability performance. In some industries, ESG factors can have significant financial impacts, for example through regulatory requirements, changing customer expectations, or access to favorable financing conditions. Thorough ESG due diligence is especially important for companies in emission- or resource-intensive sectors but is increasingly relevant across all sectors as investors, customers, and regulators demand higher sustainability standards. The use of ethics audits for AI-supported company valuations demonstrates that ESG aspects are increasingly integrated into valuation methodologies themselves.

IT and Digitalization Due Diligence Checklist

IT due diligence examines the technological infrastructure, systems, and digital maturity of the target company. This review is becoming increasingly important as company value and future viability strongly depend on digital capabilities. A comprehensive checklist includes:

IT Infrastructure and Systems

  • Servers, networks, and hardware inventory
  • Age and update status of IT systems
  • Licensing and software compliance
  • Cloud usage and strategy
  • IT documentation and processes

Data Management and Security

  • Data protection and GDPR compliance
  • IT security measures and certifications
  • Data backup and disaster recovery plans
  • Handling of sensitive data
  • Information security management

Digital Business Processes

Technology Strategy and Investments

  • IT strategy and roadmap
  • Planned IT investments and budgeting
  • Innovation and R&D in the digital domain
  • Consideration of technological trends
  • IT governance and management

IT Organization and Personnel

  • IT team and their competencies
  • Dependencies on key personnel
  • IT service management
  • Outsourcing and external IT service providers
  • Employee know-how and digital skills

IT due diligence should be comprehensive, especially for IT companies, software companies, or IT service providers, but it is also increasingly important for traditional companies. Identifying technical debt and outdated systems that may require significant post-acquisition investments is critical. Evaluating IT infrastructure is also essential for later integration and realizing synergies. Given the growing importance of digital transformation for nearly all business models, IT due diligence should not be viewed in isolation but closely linked with other review areas such as operational and commercial due diligence. Thorough IT due diligence can also provide valuable insights for post-merger integration and the design of the future IT landscape.

Integration of Due Diligence into the Purchase Process

Systematic execution of due diligence is a key component of the purchase process that should be carefully planned and managed. The following aspects are particularly important:

Scheduling and Coordination

  • Integration of due diligence into the overall transaction process
  • Coordination with other process steps such as company valuation and contract negotiations
  • Prioritization of review areas based on risk and relevance
  • Parallel versus sequential execution of different review areas
  • Timeline with milestones and dependencies

Team Composition and Resource Planning

Information Management and Documentation

  • Use of virtual data rooms for information provision
  • Documentation and tracking of information requests
  • Structured recording and evaluation of review results
  • Regular status updates and team communication
  • Confidentiality agreements and information access rights

Handling of Review Results

  • Structured recording and assessment of findings and red flags
  • Quantification of identified risks and their impact
  • Development of mitigation strategies for critical risks
  • Influence of review results on purchase price and contract design
  • Managing differing price expectations

From Due Diligence to Post-Merger Integration

  • Transfer of due diligence insights into the

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