Due diligence checklist for VC, PE and M&A investors
Proper due diligence gives you the perspective you need before deciding to act.
What exactly is due diligence?
At its simplest, due diligence is an investigation to collect critical financial information—and it’s one of the most important workflows for any investment professional. The due diligence process will explore and confirm details of a company in an effort to uncover and mitigate potential risks in an investment decision.
Not only will the due diligence process lead an investor or buyer to pursue or drop a deal, it will lay the foundation for structuring the deal if you decide to move forward.
Making an investment decision, whether it’s committing capital to a fund or company, and assessing the potential risks of that investment rely heavily on having accurate information. Good due diligence will evaluate the many risk factors that pertain to an investment. Proper due diligence includes investigating the previous and current performance of an entity, as well as the market, to gauge future growth and potential returns.
What are the types of due diligence for investments?
Due diligence is more than just a financial audit—it is an investigation into the many different parts of a company. From adhering to environmental regulations to evaluating a company’s entire IT infrastructure, good due diligence will uncover any risks that need to be addressed.
| Financial due diligence: Assessment of financial health where financial statements, assets, debts, cash flows and projections are looked at |
| Regulatory due diligence: Assessment of legal and regulatory risks, especially important for heavily-regulated industries |
| Tax due diligence: Assessment of a company’s compliance with tax laws where tax returns, audits and agreements are looked at |
| Legal due diligence: Assessment of a company’s legal liabilities, including partnerships and licensing agreements |
| Intellectual property due diligence: Assessment of a company’s intellectual property including patents, copyrights, trademarks and brand |
| Information technology due diligence: Assessment of a company’s IT infrastructure and cybersecurity risks |
| Human resources due diligence: Assessment of a company’s workforce, including the overall benefits, salaries and bonuses |
| Operational due diligence: Assessment of a company’s operational risks and opportunities |
| Market due diligence: Assessment of the market size, share and potential trajectory to ensure deal makes strategic and financial sense |
Financial due diligence checklist for venture capital, private equity and M&A transactions
Completing due diligence is an essential but exhaustive process that can be overwhelming to track and manage. It also differs based on what you’re trying to accomplish. If you’re doing buy-side due diligence and looking to acquire another company, you would evaluate certain aspects of a business differently than a venture capital firm that’s making a minority investment. Investing in a company is also a different process than committing capital to a fund, but should still be thoroughly vetted.
Ultimately, the benefits of a proper due diligence investigation are avoiding risk and making a prosperous business decision. Even though every process will be different, our due diligence checklist can be plugged into existing workflows, ensuring that you capture key pieces of information.
To understand the big picture, here’s a few details you’ll need to know:
| A summary of the target’s financial history, series terms, cap tables, revenue figures and cash flow |
| A summary of debt obligations, agreements or arrangements that are expected to result in a loss to the target |
| A report on the target’s credit, performance bonds or performance guarantees |
| A summary of the target’s inventory costing system and other procedures and policies |
| A copy of recent bank reconciliations and bank statements |
| A comps analysis of similar companies and industry trends |
| A description of the target’s internal control procedures |
| A list of the target’s account receivable and accounts payable |
Where to find information for your due diligence investigation
Uncovering all of this information is time-consuming, made even more strained by the fact that sensitive financial information is hard to find for private companies. PitchBook tracks financial data on more than 3.1M+ companies across the globe, including cash flow statements, balance sheets, income statements, financial ratios and multiples, consensus estimates and fundamentals.
Access to comprehensive company data enables you to do deeper due diligence for any business decision. Plus, as told by one of our clients, better information leads to better negotiating.
“PitchBook’s database and the friendly account manager helped us in gathering data about very niche segments, which was very helpful in our due diligence process. This made our due diligence process more effective than earlier and also helped us with the negotiations.” —Nelaka Haturusinha, Business Director, Striders
Timing is also a crucial element to dealmaking, whether it’s for deciding when to make your move or completing the due diligence process faster to beat out the competition.
“In order to sell to high-growth startups, we needed to understand what stage in their maturity these companies are at in order to understand what type of tech is important to them,” said Teague Goddard, Startup Strategist at CDW Corporation. “PitchBook has helped us understand timing to be relevant and valuable to startups who need to make smart purchasing decisions at critical times in their development.”
More on due diligence and dealmaking
Hear more from our clients on how they use PitchBook for due diligence and why our platform is one of the most important tools for discovering financial information and validating business decisions. Beyond sizing up potential investments, our clients also use PitchBook’s valuation and comps tools to revisit the valuations of existing portfolio companies on a regular basis.
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