What is Due Diligence?
Due diligence is the comprehensive investigation and analysis of a target company before completing a merger, acquisition, or investment. It encompasses financial due diligence (verifying numbers), commercial due diligence (assessing market position), operational due diligence (evaluating processes), and legal due diligence (reviewing contracts and compliance). Consulting firms specialize in commercial DD, making it a common case interview topic.
| Definition | Investigation of a target company before M&A transaction |
| Typical duration | 4-12 weeks |
| Main types | Financial, Commercial, Operational, Legal |
| Consulting focus | Commercial due diligence (CDD), Operational DD |
| Common clients | Private equity firms, corporate acquirers, investment banks |
Definition
Due diligence - Latin for "required care" - is the process of verifying information about a target company before committing to a transaction. It answers the fundamental question: "Is this deal what it appears to be, and should we proceed?"
The process typically begins after a buyer signs a letter of intent (LOI), which grants exclusive access to the target's confidential information for a limited period. Teams of specialists - accountants, consultants, lawyers - work simultaneously to evaluate different aspects of the business under time pressure.
The outputs of due diligence inform three critical decisions: (1) whether to proceed with the transaction, (2) what price to pay (often adjusted from the initial offer based on findings), and (3) what terms and protections to include in the final agreement.
Types of Due Diligence
Financial Due Diligence
Verifies the accuracy of financial statements and quality of earnings. Performed by accounting firms.
- • Revenue recognition policies and sustainability
- • Working capital analysis and normalization
- • Quality of earnings (EBITDA adjustments)
- • Historical and projected cash flows
- • Debt and contingent liabilities
Commercial Due Diligence
Assesses market dynamics and competitive positioning. Primary focus of consulting firms.
- • Market size, growth, and trends
- • Competitive landscape and market share
- • Customer concentration and relationships
- • Growth drivers and risks
- • Management plan credibility
Operational Due Diligence
Evaluates operational efficiency and integration complexity.
- • Manufacturing and supply chain efficiency
- • IT systems and integration requirements
- • Organizational structure and key personnel
- • Synergy opportunities and risks
- • Post-merger integration complexity
Legal Due Diligence
Reviews legal structure, contracts, and compliance. Performed by law firms.
- • Corporate structure and ownership
- • Material contracts (customers, suppliers)
- • Intellectual property rights
- • Litigation and regulatory issues
- • Employment and environmental compliance
The Due Diligence Process
| Phase | Duration | Key Activities |
|---|---|---|
| 1. Planning | Week 1 | Define scope, assemble team, create information request list |
| 2. Data Room Review | Weeks 2-4 | Review documents in virtual data room, identify gaps |
| 3. Management Sessions | Weeks 3-5 | Interview management, site visits, expert calls |
| 4. Analysis | Weeks 4-6 | Deep dives on key issues, customer/competitor research |
| 5. Reporting | Weeks 5-8 | Draft report, present findings, final recommendations |
Due Diligence in Case Interviews
DD cases typically frame as: "A private equity firm is considering acquiring Company X. Should they proceed?" Your job is to evaluate the investment through a commercial due diligence lens.
Framework: Market → Company → Financials → Deal Decision
- Market Assessment - Is this an attractive market? What's the size, growth rate, and competitive intensity? What trends affect the industry?
- Company Position - How does the target compete? What's its market share, differentiation, and customer relationships? Is the position defensible?
- Financial Review - Are the numbers believable? Is growth sustainable? What are the margin trends? Are there any red flags?
- Deal Decision - Based on the analysis, should they proceed? At what valuation? What risks need to be mitigated?
Example: PE Fund Evaluating a SaaS Company
Prompt: "Our PE client is evaluating a $200M acquisition of a B2B SaaS company in the HR tech space. Should they proceed?"
Due diligence analysis:
- • Market: HR tech market growing 12% annually, fragmented with no dominant player
- • Position: Target has 5% market share, strong NPS (65), but limited differentiation
- • Financials: 25% revenue growth, but customer acquisition cost (CAC) rising 20% YoY
- • Risk: Top 3 customers = 40% of revenue; 2 are on annual contracts expiring soon
Recommendation: Proceed with caution. Negotiate price down 10-15% to account for customer concentration risk. Include earnout provisions tied to renewal of top accounts. Develop customer diversification strategy for post-acquisition.
Related Concepts
- Value Chain Analysis - Used in operational due diligence to assess efficiency
- Market Sizing - Key skill for commercial due diligence market assessment
- Profitability Cases - Framework for analyzing target financials
Frequently Asked Questions
What is due diligence?
Due diligence is the comprehensive investigation of a target company before an M&A transaction. It verifies the target's financial health, market position, operational efficiency, and legal standing. The goal is to confirm the investment thesis and identify risks before committing.
What do consultants do in due diligence?
Consultants primarily handle commercial due diligence: analyzing market size and trends, competitive dynamics, customer relationships, and growth prospects. They assess whether management's business plan is realistic and identify risks to the investment thesis.
How do I prepare for DD cases in interviews?
Master the Market → Company → Financials → Decision framework. Practice market sizing for market assessment. Understand basic valuation concepts. Most importantly, practice synthesizing information into a clear recommendation - DD cases require strong synthesis skills.
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Start PracticingLast updated: January 15, 2026