A due diligence example is a structured investigation carried out before a business acquisition, funding round, or major financial transaction. In a typical M&A scenario, a buyer reviews the target company’s financial statements, legal contracts, tax filings, and operational data to verify what they are buying and uncover any hidden risks before committing capital.
Due diligence applies across many contexts, from a private equity firm evaluating a potential portfolio company to a scale-up preparing for its Series B. The process looks different depending on the transaction type, but the core goal is always the same: replace assumptions with facts before making a high-stakes decision.
Below, we answer the most common questions about due diligence so you know exactly what to expect and how to prepare.
What happens during a due diligence process?
During a due diligence process, the acquiring party or investor systematically reviews all material information about a target company across financial, legal, tax, commercial, technical, and HR dimensions. The process typically runs over several weeks and is coordinated through a secure virtual data room where documents are shared, reviewed, and questioned.
The process usually follows this sequence:
- Preparation: The target company organises its documentation into a structured data room, categorised by due diligence workstream.
- Information request: The buyer or investor submits a due diligence request list covering all areas they want to examine.
- Document review: Advisors and specialists review the uploaded materials and flag gaps or inconsistencies.
- Q&A sessions: Follow-up questions are submitted to management, often including interviews with the CEO, CFO, and department heads.
- Reporting: Findings are compiled into a due diligence report that informs the final deal decision, valuation, and any conditions attached to the transaction.
The speed of this process depends heavily on how prepared the target company is. A company that maintains an up-to-date data room can move through due diligence in a matter of weeks. A company scrambling to produce documents for the first time can delay a deal by months, or lose investor confidence entirely.
What are common due diligence examples in M&A?
Common due diligence examples in M&A include financial statement analysis, contract reviews, tax compliance checks, and customer concentration assessments. Each workstream is designed to verify a specific dimension of the business and identify risks that could affect the deal price or structure.
Here are concrete examples across the main workstreams:
- Financial due diligence: Reviewing three to five years of audited accounts, management reports, and cash flow forecasts to assess earnings quality and financial sustainability.
- Legal due diligence: Examining incorporation documents, shareholder agreements, pending litigation, and key commercial contracts to identify legal exposure.
- Tax due diligence: Checking VAT filings, corporate income tax returns, payroll tax compliance, and any special arrangements such as innovation box rulings or tax authority agreements.
- Commercial due diligence: Analysing the customer base, revenue concentration, supplier dependencies, and competitive positioning to validate the business model.
- Technical due diligence: Reviewing software architecture, patents, intellectual property ownership, and technology scalability, particularly relevant for tech and SaaS companies.
- HR due diligence: Examining employment contracts, key person dependencies, pension obligations, and any outstanding HR disputes.
In a typical M&A transaction, all of these workstreams run in parallel, with different specialist advisors responsible for each area. The results feed into a consolidated report that informs the buyer’s final offer and any deal conditions.
What does a due diligence checklist typically include?
A due diligence checklist for M&A transactions typically includes documentation across six core categories: financial, legal, tax, commercial, technical, and HR. The checklist serves as the master request list that defines exactly what the target company needs to provide before the investigation can be completed.
A standard checklist covers the following:
- Financial: Annual accounts, management reports, budgets, cash flow forecasts, accounts receivable and payable ageing, and details of any outstanding debt or financing arrangements.
- Legal: Articles of association, shareholders’ register, UBO (Ultimate Beneficial Owner) documentation, board resolutions, and all material contracts.
- Tax: Corporate income tax filings, VAT returns, payroll tax records, and any correspondence with tax authorities, including rulings or audits.
- Commercial: Top customer contracts, supplier agreements, pricing models, and market analysis or competitive benchmarking.
- Technical: Software documentation, IP registrations, patents, licences, and any third-party technology dependencies.
- HR: Organisational chart, employment contracts for key staff, pension scheme details, and any outstanding employment disputes.
One practical recommendation: store all of this documentation in one central location, such as Microsoft SharePoint or Google Drive, organised by category and consistently dated. This makes it straightforward to respond to any request list quickly and in a controlled way, which signals to investors that the company is well managed.
What’s the difference between financial and commercial due diligence?
Financial due diligence examines the historical and projected numbers, revenue, costs, cash flow, debt, and earnings quality. Commercial due diligence examines whether the business model is sustainable going forward, focusing on customers, market dynamics, competitive position, and revenue predictability. Both are essential, but they answer different questions.
Financial due diligence looks backwards and forwards through numbers. It answers questions like: Are the reported profits real? Is the cash position healthy? How reliable are the forecasts? It is primarily an accounting and finance exercise, often led by the buyer’s CFO or a specialist financial advisory firm.
Commercial due diligence looks at the market context behind those numbers. It answers questions like: Are the top customers likely to renew? Is the market growing or contracting? Does the company have a defensible competitive position? It is often led by strategy consultants or sector specialists who understand the industry landscape.
In practice, the two workstreams complement each other. Strong financials mean little if the commercial foundation is eroding, and a compelling commercial story needs solid numbers to back it up. Buyers who skip one in favour of the other often discover the gap too late.
What are the most common red flags found during due diligence?
The most common red flags found during due diligence include revenue concentration in a small number of customers, inconsistencies between management accounts and audited financials, undisclosed liabilities, and missing or poorly maintained documentation. Any of these can slow a deal, reduce the valuation, or cause a buyer to walk away.
Here are the red flags that come up most frequently:
- Customer concentration: When more than 20 to 30 percent of revenue comes from a single customer, the business carries significant dependency risk.
- Earnings quality issues: One-off items inflating reported profit, aggressive revenue recognition, or deferred costs that mask the true cost base.
- Cash flow versus profit mismatches: A company showing strong profits but consistently negative operating cash flow is a serious warning sign.
- Incomplete or inconsistent documentation: Missing contracts, unsigned agreements, or documents that contradict each other signal poor internal controls.
- Tax compliance gaps: Outstanding tax filings, unresolved disputes with tax authorities, or undisclosed liabilities can create significant post-acquisition exposure.
- Key person dependency: If the business relies heavily on one or two individuals with no succession plan, that represents a continuity risk.
- Unclear ownership structure: Ambiguity around UBO registration, shareholder agreements, or outstanding equity promises creates legal complexity.
The presence of a red flag does not automatically kill a deal, but it will affect the terms. Buyers may reduce the offer price, require escrow arrangements, or attach specific conditions to the transaction. The best way to manage this is to identify and address these issues before the due diligence process begins.
When should a company start preparing for due diligence?
A company should start preparing for due diligence well before any transaction is on the horizon. The most resilient approach is to be “always due diligence ready”, maintaining an up-to-date, structured data room at all times so that when a funding round, acquisition, or refinancing opportunity arises, the company can respond quickly and confidently.
This matters for two reasons. First, it dramatically shortens the timeline of any future transaction. A company that can respond to a due diligence request list within days, rather than weeks, signals to investors and buyers that it is in control of its business. That confidence translates directly into better deal terms and a stronger negotiating position.
Second, maintaining due diligence readiness is simply good financial management. When your cash position, KPIs, shareholder structure, and key contracts are always current and accessible, you make better decisions day to day, not just when a deal is on the table.
In practice, this means setting up a structured virtual data room with fixed categories for financial, legal, tax, technical, commercial, and HR documentation, and keeping every document consistently dated and updated. The CFO or finance manager typically owns this process, ensuring that the data room reflects the company’s current state at all times.
How Greyt supports your due diligence process
Due diligence is one of the highest-stakes moments in a company’s financial life. Getting it right requires more than a checklist, it requires experienced financial leadership that understands what investors and buyers are actually looking for, and how to present your business in the strongest possible light.
We support companies through due diligence from a CFO perspective, combining financial expertise with practical deal experience. Depending on where you are in the process, we offer three distinct approaches through our expert financial advisory services:
- Finance Maturity Assessment (FMA): A thorough review of your financial organisation, processes, systems, and reporting, to determine whether your finance function is aligned with your growth ambitions. This is the factual baseline we recommend completing before any M&A or funding process begins.
- Refinancing due diligence: A focused assessment of your financial health, cash flow, and debt structure to help you negotiate better terms with your bank or new lenders.
- Acquisition due diligence: A full review of a target company’s financials, operations, and risks, uncovering hidden liabilities, testing the valuation, and confirming strategic fit before you commit.
Our team of experienced (interim) CFOs guides you through the entire process and delivers clear, action-oriented reporting, so you can make decisions based on facts, not assumptions. Ready to strengthen your financial position before the next opportunity arrives? Explore our due diligence services or get in touch to discuss your situation.
Frequently Asked Questions
How long does a typical due diligence process take from start to finish?
The timeline varies significantly depending on the complexity of the transaction and how prepared the target company is. A well-organised company with an up-to-date data room can complete due diligence in four to six weeks, while a company that needs to gather documentation from scratch may take three to six months. Running workstreams in parallel rather than sequentially, and assigning a dedicated internal owner to coordinate responses, are the most effective ways to keep the process on track.
What's the difference between buy-side and sell-side due diligence?
Buy-side due diligence is conducted by the acquirer or investor to investigate the target company before committing to a deal. Sell-side due diligence, sometimes called a vendor due diligence (VDD), is commissioned by the seller on their own business ahead of a transaction to identify and resolve issues proactively. Sell-side due diligence is increasingly common because it shortens the overall deal timeline, reduces surprises during buyer scrutiny, and gives sellers greater control over how their business is presented to the market.
Can a small or early-stage company be expected to pass due diligence?
Yes, but the standards are calibrated to the company's stage. Investors conducting due diligence on a Series A company do not expect the same level of financial infrastructure as they would from a pre-IPO business. What they do expect is transparency, consistency, and a clear growth narrative supported by whatever data is available. Early-stage companies should focus on clean cap table documentation, accurate management accounts, and well-documented key contracts, as these are the areas most likely to be scrutinised.
What are the most common mistakes companies make when responding to a due diligence request list?
The most frequent mistakes are uploading disorganised or mislabelled documents, providing outdated versions of financial statements, and failing to flag known issues proactively. Attempting to conceal problems is particularly damaging as experienced advisors will usually find them anyway, and the loss of trust can be deal-ending. A far better approach is to surface known risks early, alongside a clear explanation of how they are being managed, which demonstrates maturity and builds credibility with the buyer or investor.
How does due diligence affect the final deal valuation?
Due diligence findings directly influence both the price and the structure of a deal. Identified risks such as customer concentration, earnings quality issues, or tax liabilities may lead the buyer to apply a valuation discount, introduce an earn-out mechanism, or place a portion of the purchase price in escrow pending resolution. Conversely, a clean due diligence process with no material findings strengthens the seller's negotiating position and can support a higher or cleaner offer without protective conditions attached.
Do I need external advisors for due diligence, or can we handle it internally?
For straightforward transactions at an early funding stage, an experienced internal CFO may be able to coordinate the process effectively. However, for M&A transactions, refinancings, or any deal above a certain complexity threshold, external advisors bring significant value: they know exactly what buyers look for, can identify blind spots management may have overlooked, and lend credibility to the findings. Legal and tax workstreams in particular almost always require specialist external input given the liability implications involved.
What should we do immediately after due diligence uncovers a problem?
The first step is to assess whether the issue is material, meaning whether it could realistically affect the deal price, structure, or viability. If it is material, disclose it proactively to the other party and come prepared with context and, where possible, a remediation plan. Attempting to minimise or conceal findings at this stage almost always backfires. If the issue is resolvable before closing, such as an unsigned contract or a missing tax filing, prioritise fixing it immediately and confirm the resolution in writing to give the buyer confidence.