Co-workers discussing a due diligence checklist as they prepare for a business opportunity.

Great CEOs always look to the future, and sometimes, this leads to the realization that you must prepare for desirable opportunities because these events will undoubtedly lead to a due diligence process. Although it may sound daunting, by getting a jumpstart on the process, you can lay the necessary groundwork to improve your outcomes significantly. Our CFOs have helped countless clients navigate this exercise, so below, I provide insight into what it entails and a sample due diligence checklist you can tailor to your situation.

What is Due Diligence, and Why is It Important?

Due diligence involves carefully investigating a company, contract, or complex asset to validate and understand its strengths, weaknesses, and viability. Organizations perform due diligence when exploring potential financial transactions, such as debt or equity investments, partnerships or joint ventures, mergers and acquisitions, or real estate purchases.

Companies undergo due diligence to determine whether the transaction makes sense, given what each party wishes to achieve. In other words, it is vitally important because it helps you develop confidence in the other party’s ability to uphold their end of the bargain before pressing forward.

How to Prepare for Due Diligence

For this post, we assume that you expect to be the subject of due diligence and must get your internal story straight to impress a potential investor or acquirer. In other words, you expect to be on the “sell side” of the financial transaction.

Preparing for due diligence is a significant undertaking that takes time and resources, and although you could finish it in a month or so, I recommend you plan on 3 to 6 months. With that in mind, here are the basic steps.

1. Clarify what you wish to accomplish.

For instance, to raise capital, you must determine how much you need, how you plan to use the funds, and whether you prefer debt or equity financing. Due diligence is a requirement regardless, but whereas a lender (debt investor) will primarily be interested in your historical financials, equity investors will require much more information.

Also, remember that we undergo this exercise to prepare for a deal that will benefit both parties. So, think through exactly what you hope to get, what you can offer the other party in return, and the concessions you are willing to make. What is negotiable, and what is not?

2. Determine who will do what and where you will capture the information.

In small-to-mid-size companies, the CFO typically leads this process, regardless of whether you are preparing and cooperating with another company’s due diligence or looking at other organizations you wish to acquire. But they don’t do it alone.

You can expect them to set up a “data room,” like a Dropbox folder with clearly labeled folders. Then, they will collaborate with other team members to determine who will provide the necessary information. For example, the Chief Technology Officer (CTO) will likely be responsible for any documentation needed for a technology audit. In contrast, your Chief Human Resources Officer (CHRO) will gather all personnel and payroll records in preparation for a discussion about your people, culture, etc.

3. Develop your due diligence checklist.

Refer back to your decisions in step 1 and think through the entire due diligence process from the investor’s perspective. What information will they need to see? What questions are they likely to ask? How can you tell your story concisely and truthfully yet positively? Due diligence checklists can differ depending on your goals, company, industry, growth stage, etc., and they can grow in scope, with lenders typically requiring the least information and prospective buyers the most.

For example, lenders will focus most of their due diligence on the details of your financial records. They will perform a financial audit, scrutinize every asset, and verify how cash flows through your business – asking for purchase orders, quotes, contracts, invoices, and bank statements. In contrast, those seeking an exit and the eventual sale of their company must consider who might be interested in buying a business and what they will need to know. Spoiler alert: they will want to see everything – financial and legal documents, strategic plans, details of how your business operates, etc.

4. Gather the necessary information, analyze it, and adjust.

Once you have every scrap of information necessary, please review it carefully. Remember, this is a sales process, so you must take the perspective of your target audience and poke holes in your due diligence materials. Look for and address any red flags, then decide how to answer questions to improve your chances of a successful deal.

An experienced CFO can tremendously help in this process. They can give you an unbiased perspective and help you prepare for important meetings.

The Due Diligence Checklist

With this context in mind, below is a list of potential items for your due diligence checklist. Since every due diligence exercise requires insight into your financials, we share that information first. You are also welcome to download our sample due diligence checklist that we use as a starting point when working with clients who ask for guidance. It contains more detail, but every situation differs, so please modify it to fit yours.

Financial Due Diligence

  • Historic Financials: Audited financial statements for the last three fiscal years (income statements, balance sheets, cash flow statements, and corresponding monthly management reports).
  • An analysis of fixed and variable expenses, revenue streams, assets, and liabilities, including any justifications and accounts receivable and payable aging reports.
  • A detailed monthly cash flow analysis (budget vs. actual).
  • Working capital trends quarter-by-quarter.
  • Tax returns, including any necessary reconciliation guidance to financials.
  • Any other historical documents that provide insight into your company’s financial health.

Business and Financial Models

  • Financial projections for the next three to five years (month-by-month) in spreadsheet form.
  • A copy of your business plan and any relevant expansion or marketing plans.

Legal, Corporate, and Compliance

  • Legal structure or Articles of Incorporation documents – such as Memorandum and Articles of Association, Certificate of Incorporation, applicable charter documents and company by-laws, and any amendments.
  • Company structure chart – including details on subsidiaries, equity investments, branches, agencies, etc.
  • Management and Operations Organizational Chart – business divisions and key employees.
  • Names and addresses of each director, secretary, and company auditor.
  • Details on the share capital of the company.
  • Shareholder agreements, arrangements, understandings, or communications, like your annual report. These can be legally binding, such as formalized stock purchase agreements, or not.
  • Certificates of Good Standing for every foreign country and state where the company operates.
  • Details of all licenses, consents, permits, and authorities the company holds to conduct business.
  • Details on any significant claims or litigation made by or against the company.
Businessperson creating a checklist.

Overview of Assets & Liabilities

  • Details of all owned or leased properties, including mortgages, liens, tenancy, valuation, etc.
  • A list of any material financial or physical assets and relevant details, such as factoring arrangements, conditional sales, credit sale agreements, or management or maintenance agreements.
  • Copies of any material equipment leases or rental agreements.
  • A list of all existing loans or similar arrangements, including relevant documents.
  • Details on any guarantees, indemnifications, suretyship, or comfort given by the company for the benefit of another company.

Material Contracts, Negotiations, and Agreements

  • Agreements with key customers, suppliers, or service providers – existing or in progress.
  • Joint venture, partnership, or consortium agreements – existing or in progress.
  • Details of all company insurance, including claims made by or against the company.


  • Lists of all company employees – existing or incoming, including their relevant details such as name, position, employment date, salary, benefits, CVs, references, and employment contracts.
  • Information on employee turnover rates, engagement, participation in labor unions, etc.

 Intellectual Property

  • Details of all intellectual property (owned or belonging to third parties), including trade secrets such as special techniques or formulas used to manufacture your products.
  • Form of Proprietary Information and Invention Agreements signed by current and past employees and consultants.
  • Copies of any patents, copyrights, and trademarks.

Technology & Techniques

  • Details on the company’s core technology, including areas that might be eligible for IP protection, competing technologies, and what makes the technology unique.
  • An explanation of company software or technology development frameworks and methodologies, including how it protects itself from security breaches.
  • Information on the company’s supply chain and any relevant advantages, potential risks, or vulnerabilities.

Preparing for Due Diligence, the Bottom Line

A last-minute scramble to prepare for due diligence is stressful and unlikely to produce positive results. So, if you believe you might undergo a significant financial transaction in the coming year or want to be ready for any opportunities, set aside some time to prepare. You will be glad you did, and, as always, we welcome you to reach out if we can help.