How to write a due diligence report and what to include in it

due diligence

Conducting due-diligence is no longer an option for business; instead, it has become a necessity. Whether you are acquiring a new business or working with a third party, conducting due diligence has become paramount. By conducting due diligence, you will not only reduce the risk associated with third parties and companies that you are going to acquire, but you will be able to stay away from any type of financial or reputational loss. 

But do you know what to include in due diligence and how to write a due diligence report?

What is due diligence report?

A due diligence report is the final report of the review conducted by the company in which the summary of the research done by the company is included. Due diligence report is one of the most important records of conducting due diligence as it will be the final report that you will send to members of the executive team who will evaluate it. Without proper due diligence reporting, all the effort that you have put in conducting the due diligence will go astray.

The essential elements of a due diligence report

A due diligence report is always written before taking any action like signing a contract with a third party or acquiring a small business. There will be no use of due diligence report if the company has already taken action. Although different companies may use different due diligence report formats, they all have these essential elements:

The first element of a due diligence report is the statement of what is being researched.

Then, the next feature is the supporting documentation of the proposal like financial statements and legal documents.

In addition to this, due diligence reporting also includes findings and statistics that will support the evidence. Using surveys, market analysis, and public input is part of supporting the evidence found in a due diligence report.

SWOT analysis is another common element in a due-diligence report. Knowing the strength, weakness, opportunity, and threat of the action being taken by the company is crucial, and that’s why it is included in the due diligence reporting.

Detailed explanation of the financial status and obligations related to the other party on which the due diligence is being conducted.

Things to keep in mind while writing due diligence report

Format of the due diligence

As mentioned above, you will need to follow a proper structure of the due diligence report. You can’t scribble down your findings in a piece of paper and call it a due diligence report. The basic flow of due diligence reports starts with an objective, summary, key findings, recommendations, and ends with one or more than one appendices. It is the purpose of the report, which makes due diligence report different from other types of reports.

Never lose the focus

You should know that preparing due diligence report is a thorough process, and therefore, sometimes, you may lose the focus. While writing a due diligence report, you may delve into things which are not necessary for writing the report. For example, if you are writing a due diligence report for an asset acquisition, then there is no need to need to dwell about the liabilities of the seller. This is because; researching the obligations of the seller will have no use in assets acquisition. So, if something is not pertinent, then never dwell into it.

Go for the checklist first

The due diligence reports are dependent upon a list of processes that need to be reviewed like finance, legality, operation, technology, product, etc. The main problem starts in due diligence report when the checklist is not followed. Ideally, the company should investigate all the items mentioned in a checklist first and then move on to other secondary things which are less important than those that are mentioned in the checklist. Following a checklist will keep your process of making a due diligence report on track, ensuring accuracy and you will not have to go through any hassle.

Never rely on the third party for due diligence report

You should know that building on third-party for disclosing all the discrepancies and inadequacies is not a good idea, especially while writing a due diligence report. It is your responsibility to divulge into the details of the company and know about its current status. If you think that your third party will help make a due diligence report, then you are highly mistaken. 

There is no use of conducting due diligence if you are not able to summarize your efforts clearly in a due diligence report. Just by reading what is mentioned in a due diligence report, one should know about the risks and potentials associated with a transaction. This is why due diligence reporting is so essential.

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