M&A Due Diligence Checklist: Workstream by Workstream

What due diligence is for

Due diligence is the investigation a buyer carries out between an accepted offer and a signed agreement. It has three jobs, and it helps to keep them apart. Verify: the offer was made on the seller's presentation of the business — the memorandum, the adjusted earnings, the customer list — and diligence tests whether that presentation holds. Price: some of what diligence finds changes the value of the business, and the buyer needs to know by how much before the agreement fixes the number. Protect: some of what it finds cannot be resolved before completion, and those matters have to be dealt with in the contract rather than in the price.

Every request should serve one of the three. One that serves none is a cost to both sides and a reason for the seller to take the whole list less seriously.

Where it sits in the process

Diligence begins once the parties have agreed the outline of a deal — heads of terms or a letter of intent, see LOI vs IOI — and usually once the seller has granted exclusivity. It ends when the buyer has enough to sign a share purchase agreement, or decides not to. The stage before it is where the questions come from: a good first pass on the CIM produces the first tranche of the request list, because the adjustments you could not evidence and the figures the memorandum did not state are exactly what you now need to see.

Between those two points the seller opens a data room, the buyer's advisers issue requests by workstream, the seller responds, and the buyer's team turns what comes back into findings while the share purchase agreement is negotiated in parallel. M&A deal pipeline stages covers where the stage sits on each side.

The workstreams, and what each one is for

The free due diligence checklist lists the individual request items by workstream. This guide is the layer above it: the question each workstream exists to answer, the requests that do most of the work, and what a satisfactory answer looks like.

Financial

The question: what has the business earned, what does it own and owe, what cash does it produce, and do the figures the price was struck on hold?

• Statutory and management accounts, reconciled to each other — the reconciliation is where the presentation and the record diverge
• The bridge from reported to adjusted EBITDA with support for every line, because the price is a multiple of the adjusted figure
• Revenue and gross margin by customer, product and month, to see the shape behind the annual total
• Monthly working capital over at least two years, to set the completion target the price mechanism will use
• Debt, debt-like items and off-balance-sheet obligations, because each one moves from enterprise value to equity value

Legal and corporate

The question: does the seller own what they are selling, can they sell it, and what obligations come with it?

• Constitutional documents, statutory registers and share capital, to confirm title to the shares being bought
• Material contracts read for change-of-control, termination and exclusivity terms — the clauses that decide what survives completion
• Property: leases, licences and title, and who has to consent to an assignment
• Litigation, regulatory correspondence and licences to trade, for the liabilities that arrive with the company
• Intellectual property and data protection, for whether the company owns what it uses and has handled what it holds lawfully

Commercial

The question: are the customer relationships the earnings depend on as durable as the memorandum says, and is the market position real?

• Revenue by customer for three years with contract status and renewal dates, which is the concentration analysis — see customer concentration risk
• Churn, retention and the order book, with conversion history to test the forecast
• Pricing history and the ability to pass on cost increases, which is what margin resilience means in practice
• Customer reference calls, timed and scoped with the seller's agreement
• Competitors, and the basis of any market-size claim in the memorandum

Operational

The question: can the business deliver what it sells, at the volume forecast, without investment the model does not carry?

• Capacity and utilisation, and the capital expenditure needed to grow
• Supplier concentration and single-source inputs, which are customer concentration seen from the other side
• Quality systems, certifications and audit results, where the licence to trade depends on them
• Health and safety, environmental and insurance records, for the liabilities that do not appear in the accounts

People

The question: who makes the business work, will they stay, and what does the company owe them?

• Organisation chart with tenure, cost and notice periods, to see how much of the business sits with a few people
• Directors' and key employees' contracts, restrictive covenants and incentive schemes
• Pension arrangements and auto-enrolment compliance, and any defined-benefit exposure
• Contractors and consultants, and their employment-status risk
• Grievances, disciplinaries and tribunal claims

Tax

The question: is the company's tax position what it appears to be, and what could HMRC still ask for?

• Corporation tax computations and returns, and any open enquiry or correspondence
• VAT, PAYE and NIC compliance, including benefits in kind and off-payroll working assessments
• Reliefs claimed and losses carried forward, and whether the transaction affects them
• The seller's own planning around the sale, where it touches the company

IT and data

The question: does the company own and control the systems it runs on, and can it keep running after the seller leaves?

• Systems inventory, licences and support arrangements
• Ownership and documentation of any bespoke software
• Security controls, backup and recovery, and incident history
• Dependence on the seller's personal accounts, devices or domains — common in owner-managed companies and easy to miss

How to prioritise and sequence requests

A request list sent as a hundred undifferentiated items gets a hundred late answers. Sort the list into three tranches before it goes out.

1. Before exclusivity, or in its first days: the items that could end the deal — the EBITDA bridge, revenue by customer, material contracts with change-of-control terms, litigation, and anything the first pass flagged. If one of these fails, you want to know before the legal costs mount.
2. Before the agreement is drafted: the items that shape the price mechanism and the protections — working capital history, net debt and debt-like items, employment terms, the tax position, property.
3. Before completion: the items that confirm rather than decide — insurance, registers, licences, the remaining data-room content.

Tie each request to the question it answers. A seller who understands why an item matters answers it better, and your own reviewer knows what a satisfactory answer looks like. Tie it also to a workstream owner: the financial adviser, the lawyer, the commercial team, the buyer's own operators. A request nobody owns is a request nobody reads the answer to.

Managing the process

Diligence is mostly a record-keeping problem under time pressure. The moving parts are the same on every deal.

• The request list is the single source of what has been asked, of whom, when and why. Number the items; the seller will refer to them by number.
• Responses land against the item they answer, not in an inbox. An answer attached to a reply to a reply is an answer nobody will find in three weeks.
• Chasing is routine, not an escalation. Outstanding items are chased on a cadence, and the record shows what has been chased and when, so nobody chases twice and nothing waits silently.
• Evidence is linked to the item. A finding that cannot point at the document it was read from is an opinion.
• Findings are written down with a consequence: no impact, a price adjustment, a structural change, a contract protection, or a walk-away.
• Red flags are findings with a severity. Critical means the deal does not proceed as priced until the matter is resolved; lower severities carry into the price or the contract.

The data room is where the seller's documents live; the request list is where the buyer's questions live. They are different records, and the process fails when one is used for the other.

How findings feed price, structure and the SPA

Findings act through three channels, and choosing the right channel for each is much of the skill.

Price. A finding that changes what the business earns — an adjustment that does not survive, a customer whose contract ends at completion — changes the earnings the multiple is applied to, and therefore the headline price. A finding that changes what the buyer gets for it — debt-like items, a working capital shortfall against the target — acts through the bridge from enterprise value to equity value and through the completion-accounts or locked-box mechanism.

Structure. A finding that is a risk rather than a fact — a renewal that falls after completion, a forecast that depends on a contract not yet won — is better handled by making part of the price conditional: deferred consideration, an earn-out, a retention or an escrow. The seller keeps the upside if the risk does not materialise; the buyer does not pay for it if it does.

The contract. A finding that cannot be resolved or priced is dealt with in the share purchase agreement. In concept: warranties are statements of fact the seller makes about the business, and a breach gives rise to a claim; a specific indemnity covers a known risk pound for pound; the disclosure letter is where the seller qualifies the warranties with what they have told you. What diligence found and what the seller disclosed together determine what is left to claim on. How they are drafted, capped and limited is legal work, and a buyer should take advice on it.

Common failures

• Treating the list as the process. A complete list with nothing chased, filed or read is worse than a short one worked properly.
• Running workstreams in silos, so the lawyer's change-of-control finding never reaches the person modelling that customer's revenue.
• Confirmation diligence: reading to support the offer already made rather than to test it.
• Findings discussed on calls and never written down, so they cannot be priced or drafted against.
• Chasing by escalation only, so items sit silent for weeks and then arrive together in the last fortnight.
• Losing the distinction between information the seller has not provided and work the buyer has not done. Only the first can be requested.

How TrueValue runs diligence

In TrueValue the request list is a checklist on the deal, started from a template for a share purchase, an asset purchase or a management buy-out and edited for the transaction. The findings from a CIM analysis become items when the deal is promoted, so the first tranche is already written. The list is sent to the seller, who answers and uploads on a page with no account to create; responses land against the item they answer and the team is told as they arrive. Outstanding items are chased automatically every five days, up to three reminders, and a manual chase shares the same counters so nobody is chased twice. Evidence links to each item, findings are recorded on it, and red flags carry a severity and the document they were read from. Accounts dropped into the deal's received-documents room are read into an income statement, balance sheet, cash flow and working capital, so the financial workstream's figures feed the valuation and the returns model.