What is diligence report

Statement of what is being studied, research or proposed Background and supporting documentation on the proposal corporate reports, financial statements, legal documents, copies of transaction history, market research Studies or findings, stats and supporting information such as surveys, valuation reports, inspections, market analysis and occasionally, public input SWOT analysis -- an overview of the strengths, weaknesses, opportunities and threats associated with the proposal Details about debt or financial obligations that might impact the terms of any business dealing.

Sample Due Diligence Checklist. Assemble all documents in your due diligence book, which presents the reference material supporting your written overview of the company. For this, use a three-ring binder with dividers indicating the type of information in each section.

Take photographs of all facilities, equipment and other assets such as art and include them in your due diligence book. If you interview key employees, record those interviews and download the audio files to your computer for inclusion on a disc. A common way to make the due diligence book available is to scan every page and assemble the information on disc for distribution to investors, attorneys, accountants and analysts who need to access the full due-diligence findings.

The information collected during this process is crucial for decision making and hence needs to be reported. The Due Diligence report helps one understand how the company plans to generate additional earnings monetary as well as non-monetary.

The ultimate purpose is to get a clear picture of how the business will perform in the future. The due diligence report should provide the desired level of comfort about the potential investment and also the inherent risks involved.

The report should be able to provide the acquiring company with information such that no onerous contracts are signed which could potentially harm the existing return on investment.

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Follow us:. Following a due diligence checklist can ensure your due diligence report: Conveys all the information necessary for educated business decisions Is easy to follow Is factually accurate Supports all financial data with background materials or supporting documentation Reasons To Use a Due Diligence Report The format of a due diligence report, as well as what is included, may vary depending on the industry and the purpose of the report.

Real Estate Real estate investors and developers use due diligence reports to determine the potential profitability of a property, the CAP ratio, expected vacancy rates and capital improvements that may be needed.

The due diligence checklist for a real estate professional should also cover: Property taxes Comps Inspection reports Potential zoning issues Opportunities for further development Business Valuation If a company is considering expansion, going public, or undergoing a merger or acquisition, a business valuation is necessary for better decisions. A due diligence report for business valuation will focus primarily on: Financial statements Financial projections Capital structure Strengths, weaknesses, opportunities and potential threats in the marketplace SWOT analysis A business valuation due diligence report may be necessary when seeking funding from outside investors or when applying for a business loan.

Sales, Acquisitions, or Mergers Like a due diligence report for business valuation, a company that is for sale or considering a merger or the acquisition of another organization will also require a due diligence report. This type of due diligence report will include: Corporate records Financial information Debt Employment and labor Information on real estate owned or leased Legal documents Supplier and customer information Joint venture, marketing and licensing agreements What To Include in a Comprehensive Due Diligence Report In broad terms, your due diligence report should begin with an introductory statement describing the purpose of the report: Is it to find investors or secure funding?

Is it to initiate a sale, merger, or acquisition? Is it to invest in a property? Investors should find out what the consensus of Wall Street analysts is for earnings growth, revenue, and profit estimates for the next two to three years. Investors should also look for discussions of long-term trends affecting the industry and company-specific news about partnerships, joint ventures , intellectual property , and new products or services.

Be sure to understand both the industry-wide risks and company-specific risks. Are there outstanding legal or regulatory matters? Is there unsteady management? Investors should play devil's advocate at all times, picturing worst-case scenarios and their potential outcomes on the stock. If a new product fails or a competitor brings a new and better product forward, how would this affect the company? How would a jump in interest rates affect the company?

Once you've completed the steps outlined above, you'll have a better sense of the company's performance and how it stacks up to the competition. You will be better informed to make a sound decision. When considering investing in a startup , some of the 10 steps above are appropriate while others just aren't possible because the company doesn't have the track record. Here are some startup-specific moves.

That's known colloquially as hard due diligence. That's known as soft due diligence. Hard due diligence, which is driven by mathematics and legalities, is susceptible to rosy interpretations by eager salespeople.

Soft due diligence acts as a counterbalance when the numbers are being manipulated or overemphasized. There are many drivers of business success that numbers cannot fully capture, such as employee relationships, corporate culture, and leadership. The contemporary business analysis calls this element human capital. The corporate world started taking notice of its significance in the mids.

In , the Harvard Business Review dedicated part of its April issue to what it called "human capital due diligence," warning that companies ignore it at their peril. Typically, hard due diligence focuses on earnings before interest, taxes, depreciation and amortization EBITDA , the aging of receivables, and payables, cash flow, and capital expenditures. In sectors such as technology or manufacturing, additional focus is placed on intellectual property and physical capital.

Other examples of hard due diligence activities include:. Conducting soft due diligence is not an exact science. It should focus on how well a targeted workforce will mesh with the acquiring corporation's culture. Hard and soft due diligence intertwine when it comes to compensation and incentive programs. These programs are not only based on real numbers, making them easy to incorporate into post-acquisition planning, but they can also be discussed with employees and used to gauge cultural impact.

Soft due diligence is concerned with employee motivation, and compensation packages are specifically constructed to boost those motivations. It is not a panacea or a cure-all, but soft due diligence can help the acquiring firm predict whether a compensation program can be implemented to improve the success of a deal. Soft due diligence can also concern itself with the target company's customers. Even if the target employees accept the cultural and operational shifts from the takeover, the target customers and clients may well resent a change in service, products, or procedures.

Due diligence is a process or effort to collect and analyze information before making a decision. It is a process often used by investors to assess risk. It involves examining a company's numbers, comparing the numbers over time, and benchmarking them against competitors to assess an investment's potential in terms of growth.

Due diligence is primarily a way to reduce exposure to risk. The process ensures that a party is aware of all the details of a transaction before they agree to it. For example, a broker-dealer will give an investor the results of a due diligence report so that the investor is fully informed and cannot hold the broker-dealer responsible for any losses. Depending on its purpose, due diligence takes different forms. The due diligence might also include an analysis of future growth.

The acquirer may ask questions that address the structuring of the acquisition. The acquirer is also likely to look at the current practices and policies of the target company and perform a shareholder value analysis.