Creating a Due Diligence Checklist

Note: Want to skip the guide and go straight to the free templates? No problem - scroll to the bottom.
Also note: This is not legal advice.

Introduction

When taking a business or investment risk, having an up-to-date due diligence checklist can be invaluable to individuals and organisations alike. This unique tool offers a framework and reference point for evaluating a potential venture, minimising risks, and helping make informed decisions.

The Genie AI team, makers of the world’s largest open source legal template library, recognise the value of such checklists. Providing free access to their dataset and community template library eliminates the need for expensive lawyers - allowing anyone to draft and customise high quality legal documents at their own pace.

A due diligence checklist can assist in assessing all the associated risks and rewards when making an investment decision. Key elements which could be included are researching the legal structure of a business; reviewing financial statements; investigating potential liabilities; identifying intellectual property rights; understanding contracts; taking into account regulations that may impact on a venture; examining market size in comparison to competitors - all with the objective of providing essential information to inform decisions.

Due diligence checklists also provide valuable resources for entrepreneurs who must consider all potential costs and benefits before committing to an endeavour. The same thorough approach can be applied whether looking at short or long term goals - helping to ensure success is maximised and mistakes are avoided.

In addition, such checklists offer useful insight from past experiences by highlighting what was done well as well as areas where improvement could have been made - offering renewed optimism when pursuing future opportunities or investments. All this without needing a Genie AI account!

In summary then, due diligence checklists represent powerful tools for investors, entrepreneurs and business owners alike. Decisions become more informed with an objective evaluation of risk versus reward while having peace of mind that future successes will be built upon existing experience rather than repeating previous mistakes. Read on below for our step-by-step guidance and information on how to access our template library today!

Definitions (feel free to skip)

Income statement: A financial document that displays a company’s revenue, expenses, and net income over a certain period of time.
Balance sheet: A financial document that lists a company’s assets, liabilities, and equity.
Cash flow statement: A financial document that displays a company’s cash inflows and outflows.
Red flags: Signs of potential problems or risks.
Qualifications: The skills, training, and experience required for a job or task.
Track record: A record of past performance.
Risks: Potential for loss or harm.
Contracts: Legally binding agreements between two or more parties.
Leases: Legally binding agreements between a property owner and a tenant.
Liability: Legal responsibility to pay a debt or otherwise compensate someone.
Tax Implications: Possible tax consequences of an action.

Contents

• Understand the Company and Its Goals
• Learn about the company’s history
• Identify the company’s current goals
• Research any potential future developments
• Analyze the Financials
• Examine the company’s income statement
• Review the balance sheet
• Analyze the cash flow statement
• Evaluate the Management Team
• Assess the qualifications of the team
• Analyze the team’s performance
• Analyze the Risk Factors
• Identify any potential risks associated with the investment
• Examine Legal Documents
• Review any contracts related to the investment
• Examine any leases related to the investment
• Analyze any other legal documents related to the investment
• Assess the Competition
• Research the company’s competitors
• Compare and contrast how the company stacks up against its competition
• Analyze the Market
• Study the overall market
• Investigate the industry in which the company operates
• Evaluate the Exit Strategy
• Consider the potential ways the investor may exit the investment
• Consider the Tax Implications
• Analyze the potential tax implications of the investment
• Investigate Other Factors
• Investigate any other factors that may affect the investment

Get started

Understand the Company and Its Goals

• Review the company’s mission statement and business plan
• Research the company’s products and services
• Analyze the company’s target market and customer base
• Determine the company’s competitive advantage
• Identify the goals and objectives of the company
• Understand the company’s culture and values

You can check this off your list when you have a comprehensive understanding of the company’s mission and goals.

Learn about the company’s history

• Research the company’s background, such as when and where it was founded, its mission statement and any major milestones or events
• Learn about the company’s founders, executives and board of directors
• Analyze the company’s financial statements, such as profit and loss statements
• Read the company’s latest news and press releases
• Research the company’s competitors

You can check this off your list and move on to the next step when you have a comprehensive understanding of the company’s history and background, including its past and current goals, founders, executives and board of directors, financial statements, press releases, and its competitors.

Identify the company’s current goals

• Review the company’s mission statement and strategic plan
• Identify the company’s short-term, mid-term, and long-term goals
• Identify any discrepancies between the company’s stated goals and their actual operations
• Analyze the company’s financial documents to assess the likelihood of achieving their goals
• Check the company’s public statements, press releases, and other public sources to assess their current goals
• When you have identified the company’s goals, check this step off your due diligence checklist and move on to researching any potential future developments.

Research any potential future developments

• Contact local government and research zoning laws in the area of the company
• Speak with the company’s management team to get a better understanding of any potential developments
• Research any potential competitors in the area
• Look for any potential changes in the company’s products or services
• When you have a thorough understanding of the company’s current and future goals and potential developments, you can check this off your list and move on to the next step.

Analyze the Financials

• Gather the financial information of the company, such as three to five years of income statements, balance sheets, and cash flow statements
• Review the financials to identify any potential red flags, such as high debt levels, negative cash flows, or high operating costs
• Analyze the financials to get an understanding of the company’s performance, such as profitability, liquidity, and cash flow
• Compare the financials to industry benchmarks to assess the company’s competitive position
• When complete, you will have a better understanding of the company’s financial health and performance.

Examine the company’s income statement

• Examine the company’s income statement for the past three years
• Review their income statements to determine their net income and revenue
• Analyze the company’s gross profit and operating expenses
• Compare income statements to spot any inconsistencies
• Evaluate the income statement to determine the company’s financial health

When you’ve completed this step, you will have an understanding of the company’s financial performance over the past three years and have a better idea of their current financial position.

Review the balance sheet

• Review the company’s balance sheet to determine its financial position, including assets, liabilities, and equity.
• Evaluate liquidity, leverage, and general financial health.
• Look for any discrepancies in the financial statement such as discrepancies in the amount of cash reported or any inconsistencies in the way assets and liabilities are reported.
• Make sure that the balance sheet is accurate and up-to-date.
• When you are done, you will have a better understanding of the company’s financial position.

Analyze the cash flow statement

• Obtain the company’s cash flow statement from the company’s financial reports.
• Review the cash flow statement to see where the cash is coming from and where it is going.
• Look for any signs of financial instability or mismanagement in the cash flow statement.
• Analyze the company’s ability to generate cash for operations and investments.
• Check if the cash flow statement is consistent with the balance sheet.
• Make sure the company’s cash flow statement is in accordance with Generally Accepted Accounting Principles (GAAP).
• Once you have completed your analysis of the cash flow statement, you can move on to the next step of evaluating the management team.

Evaluate the Management Team

• Identify the key players in the management team and assess their qualifications, experience, and track record in the industry
• Analyze the team’s ability to make decisions, lead the company, and execute on the long-term business strategy
• Review the team’s ability to manage financial resources and identify areas of risk
• Compare the team’s experience to the needs of the current business plan
• Understand the team’s incentives and how they are rewarded for success

When you can check this off your list and move on to the next step:

• When you have a clear understanding of the team’s qualifications, experience, and track record in the industry
• When you have identified areas of risk and compared the team’s experience to the needs of the current business plan
• When you have a clear understanding of the team’s incentives and how they are rewarded for success

Assess the qualifications of the team

• Review the resumes and credentials of each team member
• Identify areas of expertise and experience
• Determine whether the team has the right skills and qualifications for the job
• Ask the team for references if needed
• When you have a clear understanding of the qualifications of the team, you can move to the next step.

Analyze the team’s performance

• Review each team member’s performance against their job description
• Analyze their ability to complete assigned tasks and meet deadlines
• Compare the team’s performance to that of other teams or industry standards
• Consider the team’s overall effectiveness and efficiency in completing tasks
• Assess the team’s morale and motivation levels
• When you’ve completed an in-depth analysis of the team’s performance, you can check this off your list and move on to analyzing the risk factors.

Analyze the Risk Factors

• Research and assess any external factors that may increase the risk associated with the investment
• Research any regulatory and/or legal issues that may affect the investment
• Analyze any financial data related to the investment
• Assess the competitive landscape and any potential competitive threats
• Analyze the market and any potential market risks
• Evaluate any potential technological risks

Once you have reviewed and analyzed the risk factors, you can check off this step and move on to the next step - Identifying any potential risks associated with the investment.

Identify any potential risks associated with the investment

• Research industry trends, customer base, and competition
• Ask questions to stakeholders and management team
• Analyze financial statements and other documents
• Consult with legal and financial advisors
• Identify any potential risks, such as legal or environmental concerns
• Once all potential risks have been identified and evaluated, you can move on to the next step.

Examine Legal Documents

• Review the entity’s corporate documents such as its articles of incorporation, bylaws, and any amendments
• Ensure that the entity is in good standing and up to date with filing requirements
• Confirm that the entity has authority to enter into the proposed transaction
• Ensure that the entity has not entered into any contracts that may limit their ability to enter into the proposed transaction
• Review the governing documents to verify that the entity is authorized to enter into the proposed transaction
• Ensure that the entity has the necessary capacity to enter into the proposed transaction

Once you have reviewed the entity’s corporate documents and confirmed that the entity has the necessary authority, capacity, and is in good standing to enter into the proposed transaction, you can check this step off your list and move on to the next step.

Review any contracts related to the investment

• Obtain copies of all contracts related to the investment
• Read and understand the content of each contract
• Make a note of any deadlines, payment terms, and obligations
• Determine if the terms of the contracts are acceptable
• Check if the contracts are up-to-date and valid
• Identify any potential risks or liabilities
• When finished, make sure to keep copies of all contracts in a secure location
• Check this step off your list when all contracts have been reviewed and documented.

Examine any leases related to the investment

• Review all the leases related to the investment
• Check the lease terms to ensure they are up to date and in line with current regulations
• Check the expiration date of the lease and consider whether it needs to be renewed
• Ensure there are no outstanding legal disputes related to the lease
• Make sure all documents are properly executed, signed and dated
• Analyze the financial terms of each lease to determine if the investment makes sense

When you can check this off your list and move on to the next step:

• Once you have reviewed all the leases related to the investment, analyzed the financial terms and checked for any legal disputes, you can move on to the next step.

Analyze any other legal documents related to the investment

• Gather all other legal documents such as contracts, agreements, and documents related to the investment
• Read through each document and identify any clauses or terms that may be of concern
• Make note of any risks or liabilities that may be associated with the investment
• Seek legal advice if necessary
• Once you have thoroughly analyzed all legal documents related to the investment and have identified any potential risks or liabilities, you can check this off your list and move on to the next step.

Assess the Competition

• Collect information on the company’s competitors, such as their size, market share, and any recent news or developments
• Analyze the financials of the competitors, such as their revenue, profits, and debt levels
• Identify any threats from the competitors, such as new products or services, or strategic moves
• Assess the competitive landscape to determine how the company may be affected

When you can check this off your list:

• You will know you have completed this step when you have collected and analyzed the necessary information about the company’s competitors and assessed the competitive landscape.

Research the company’s competitors

• Gather public information about the company’s competitors, such as financials, product/service offerings, customer/client reviews, etc.
• Identify the different competitive advantages and disadvantages each competitor has.
• Identify any potential threats or opportunities each competitor may present.
• Analyze how the company’s competitors are marketing their products and services.
• Determine how the company’s competitors are pricing their products and services.
• When you have gathered all the relevant information about the company’s competitors, you can check this off your list and move on to the next step.

Compare and contrast how the company stacks up against its competition

• Compare the size, reach, market share, and customer base of the company with its competitors
• Analyze the quality of the products or services offered by the company versus its competitors
• Compare the pricing models and marketing strategies of the company with its competitors
• Identify the unique selling points of the company against its competition
• Look into the customer reviews and feedback of the company versus its competition
• When you have a comprehensive comparison of the company and its competitors, you can check this off your list and move on to the next step.

Analyze the Market

• Research the size and growth rate of the market
• Research the target audience and demographic
• Obtain information on the key players in the market
• Identify and analyze any trends in the market
• Gather data on the potential customers and their buying behavior
• Analyze the competitive landscape
• Find out any potential barriers to entry
• Understand the potential risks and rewards of entering the market

When you can check this off your list:
Once you have gathered and analyzed all the data for the market, you can check this step off your list and move on to the next step.

Study the overall market

• Gather industry data and analysis from reliable sources
• Read research reports on the industry and market
• Identify the major players in the market, including competitors
• Identify the current trends in the market
• Identify industry drivers, such as customer preferences, regulations, and economic factors
• Analyze the macroeconomic factors that affect the industry
• When you have a good understanding of the overall market, you can check this off your list and move on to the next step.

Investigate the industry in which the company operates

• Research the company’s industry and competitors to assess the competitive landscape
• Assess any potential risks or regulations specific to the industry that could affect the company
• Analyze the industry’s size, growth rate, and potential for future growth
• Identify the company’s competitive advantages and any potential challenges
• Once you’ve completed this research and analysis, you can check it off your list and move on to the next step: Evaluate the Exit Strategy.

Evaluate the Exit Strategy

• Research the company’s current and proposed exit strategies
• Assess the feasibility of each strategy
• Identify risks associated with each exit strategy
• Analyze what resources will be needed to implement each strategy
• Evaluate the timeline associated with each strategy
• Consider the potential market and financial impacts of each strategy
• Estimate the return on investment

You can check this off your list and move on to the next step when you have completed the research and analysis to assess the feasibility of the potential exit strategies and their associated risks, resources, timeline, market and financial impacts, and return on investment.

Consider the potential ways the investor may exit the investment

• Identify the potential exit options the investor may pursue, such as IPO, sale of the business, or a strategic partnership
• Analyze the advantages and disadvantages of each exit option
• Determine the likelihood of each exit option and if it is feasible
• Assess the investor’s timeline for exit
• Estimate the costs associated with each exit option
• Check off this step when you have identified and evaluated the potential exit options and determined which ones are feasible and likely given the investor’s timeline and costs.

Consider the Tax Implications

• Consult a tax specialist to determine the potential tax implications of the investment
• Ask the potential investor to provide a breakdown of the expected tax consequences
• Analyze the potential tax ramifications of the investment, including any applicable taxes and credits
• Assess the likelihood of any tax benefits or detriments associated with the investment
• When you have a full understanding of the potential tax implications of the investment, check this step off your list and move on to the next step.

Analyze the potential tax implications of the investment

• Research applicable tax laws, including any applicable tax credits
• Calculate potential tax liability associated with the investment
• Review past returns to determine any trends in tax liability
• Assess any potential tax efficiency strategies that can be used to reduce the overall tax liability
• Discuss the potential tax implications with your accountant
• Document all findings in a report

Once all the research, calculations, and discussions have been completed, you can check this item off your list and move on to the next step.

Investigate Other Factors

• Research any other factors that may affect the investment, such as labor laws, environmental regulations, employee benefits, and trade restrictions
• Research any existing contracts, leases, or other agreements that may affect the investment
• Review any existing insurance policies that may be relevant to the investment
• Research any applicable zoning laws and regulations
• Review any existing licenses, permits, or certifications that may be relevant to the investment
• Determine if there are any legal restrictions or liabilities associated with the investment
• When you have a complete understanding of all applicable legal, regulatory, and environmental issues that could affect the investment, you can check this off your list and move on to the next step.

Investigate any other factors that may affect the investment

• Check for any potential legal issues that may affect the investment, such as zoning or building permits.
• Analyze the company’s level of debt and its ability to service that debt.
• Determine the quality of the company’s management team and their ability to make sound business decisions.
• Consider the company’s competitive landscape and how changes in the market may affect the investment.
• Assess the company’s customer base and its potential for growth.
• Analyze the potential for any future changes in the industry that may affect the investment.

You can check this off your list and move on to the next step when you have gathered enough information to make a decision on the potential risks and benefits associated with the investment.

FAQ:

Q: What is the difference between a Due Diligence Checklist and a Legal Due Diligence Checklist?

Asked by Jessica on 18th April 2022.
A: A due diligence checklist is a tool used to review potential risks associated with an investment or business decision. It typically includes items such as financials, legal documents, background checks, and other compliance-related items. A legal due diligence checklist is a specialized tool used to review specific legal risks associated with the transaction or decision. This would include items such as reviewing applicable laws, regulations and contracts; researching relevant case law; and evaluating the enforceability of certain rights and obligations.

Q: How can I ensure my Due Diligence Checklist complies with UK legislation?

Asked by Michael on 4th June 2022.
A: The UK has a number of laws and regulations that govern due diligence and the use of due diligence checklists. Before creating or using a due diligence checklist, it is important to understand the applicable laws and regulations. This includes understanding the nature of the transaction, any relevant industry regulations, and any applicable contractual obligations. Additionally, it is important to be aware of any European Union (EU) legislation that may apply, as well as any international obligations that may be relevant to the transaction or decision in question. Once these laws and regulations have been identified, it is then necessary to ensure that all appropriate steps have been taken to comply with them in creating and using a due diligence checklist.

Q: What are some key elements of a Due Diligence Checklist for a SaaS company?

Asked by Emily on 7th January 2022.
A: A due diligence checklist for a SaaS company should include items such as reviewing pertinent agreements, reviewing customer data privacy policies, assessing the customer’s security procedures, assessing the customer’s financial health, evaluating customer’s intellectual property rights, assessing customer service levels, reviewing customer support systems and infrastructure, evaluating customer’s customer base, reviewing customer’s software licenses, assessing customer training and onboarding processes, evaluating customer’s marketing strategies, assessing customer’s competitive landscape, evaluating customer’s technology stack and platform architecture, assessing customer’s software development processes and procedures and evaluating customer’s regulatory compliance obligations.

Q: What should I consider when creating a Due Diligence Checklist for a Technology company?

Asked by Jacob on 3rd May 2022.
A: When creating a due diligence checklist for a technology company, it is important to consider the specific needs of the company in question. This includes considering the type of technology being used (e.g., software development processes), any applicable regulatory requirements (e.g., data privacy laws or intellectual property laws), any applicable industry standards (e.g., cyber security standards), any contractual obligations (e.g., service level agreements), any competitive dynamics (e.g., competitive landscape analysis), any potential risks (e.g., operational risks or litigation risks), any financial health considerations (e.g., debt-to-equity ratio analysis) and any other relevant elements (e.g., customer satisfaction surveys).

Q: How can I ensure my Due Diligence Checklist complies with EU legislation?

Asked by Katherine on 17th February 2022.
A: When creating or using a due diligence checklist in relation to an EU-based transaction or decision, it is important to understand applicable EU legislation relating to due diligence requirements and checklists. This includes understanding relevant directives such as the Markets in Financial Instruments Directive (MiFID II) which governs securities transactions; understanding relevant regulations such as GDPR which governs data privacy; understanding industry standards such as ISO 27001 which sets out cyber security requirements; understanding contractual obligations; understanding competition law; understanding consumer protection law; understanding corporate law; understanding intellectual property law; understanding money laundering law; understanding employment law; understanding tax law; understanding privacy law; understanding environmental law; and understanding anti-trust law amongst others. Once these laws have been identified it then necessary to ensure that all appropriate steps have been taken to comply with them in creating and using a due diligence checklist.

Q: How can I ensure my Due Diligence Checklist covers my particular needs?

Asked by Jennifer on 10th August 2022.
A: The first step in ensuring that your due diligence checklist covers your particular needs is to identify what those needs are likely to be in relation to the transaction or decision you are making or considering making. This can include considering factors such as your industry sector or business model (such as SaaS, Technology or B2B); your particular risk profile (such as operational risk or litigation risk); your financial health considerations (such as debt-to-equity ratio analysis); your applicable regulatory requirements (such as data privacy laws or intellectual property laws); your contractual obligations (such as service level agreements); your competitive dynamics (such as competitive landscape analysis); your potential risks (such as operational risks or litigation risks); your customer base; your software licenses; your training and onboarding processes; your marketing strategies; your technology stack and platform architecture; your software development processes; your regulatory compliance obligations; etc… Once you have identified what those needs are likely to be in relation to the transaction or decision you are making or considering making then you can create an appropriate due diligence checklist which covers those needs adequately - including items such as reviewing pertinent agreements; reviewing customer data privacy policies; assessing the customer’s security procedures; assessing the customer’s financial health; evaluating customer’s intellectual property rights; assessing customer service levels etc…

Example dispute

Potential Lawsuits Referencing Due Diligence Checklist:

• The plaintiff can argue that the defendant failed to complete their due diligence checklist, which may have led to damages, such as a breach of contract.
• The plaintiff can argue that the defendant failed to provide adequate disclosure of relevant information, or failed to disclose certain aspects of the contract which could have been discovered through due diligence.
• The plaintiff can argue that the defendant failed to follow the proper procedures outlined in the due diligence checklist, which may have caused damages or loss to the plaintiff.
• The plaintiff can argue that the defendant failed to adequately assess the risks associated with the transaction, which could have been discovered through due diligence.
• The plaintiff can argue that the defendant failed to obtain the necessary permits or approvals required for the transaction, which could have been discovered through due diligence.
• The plaintiff can argue that the defendant failed to investigate potential conflicts of interest, which could have been discovered through due diligence.
• The plaintiff can argue that the defendant failed to verify the accuracy of the information provided by the other party, which could have been discovered through due diligence.
• The plaintiff can argue that the defendant failed to obtain any warranties or guarantees from the other party, which could have been discovered through due diligence.
• The plaintiff can argue that the defendant failed to properly document the transaction, which could have been discovered through due diligence.
• The plaintiff can argue that the defendant failed to obtain the necessary legal advice, which could have been discovered through due diligence.
• The plaintiff can argue that the defendant failed to consider any potential legal liabilities, which could have been discovered through due diligence.
• The plaintiff can argue that the defendant failed to thoroughly research the financials of the other party, which could have been discovered through due diligence.
• The plaintiff can argue that the defendant failed to properly evaluate the potential risks associated with the transaction, which could have been discovered through due diligence.
• The plaintiff can argue that the defendant failed to take any necessary steps to protect their interests, which could have been discovered through due diligence.

If the plaintiff can prove that the defendant failed to complete their due diligence checklist and this failure caused the plaintiff to suffer damages, then the plaintiff may have a valid case and could win the lawsuit.

Templates available (free to use)

Checklist For Legal Due Diligence Information Request On Data Protection
Checklist Information To Request For Due Diligence Before Buying An Asset Employment
Loan Purchase Transaction Due Diligence Checklist Commercial Property
Purchaser S Due Diligence Closing Transaction Checklist For Hotel Acquisition

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