Here’s a recent post by Rick Colosimo in the Five-Minute General Counsel series on due diligence, with an even shorter short form due diligence request list than our own investor-based due diligence list.
One question we haven’t answered here yet is: what is the point of all this? Well, investors/acquirors have three main risks to consider: the risk that you have a plan that can’t be achieved, the risk that the present team can’t accomplish the plan, and the risk of some ugly problem that destroys value. Due diligence, the process, should be designed to uncover information that affects these risks, either in magnitude or probability. But that’s only part of the process, and it’s where many otherwise high-quality “advisors” get stuck.
You have to do something with the information you gather, or it’s close to a waste of your time (the only exception is “keeping the other side honest”). You can do three things with information you find: you can use it to decide to kill the deal (a major patent litigation is this kind of problem); you can change the price of the deal (inventory discrepancies or overly aggressive business model assumptions are good examples), or you can change the terms (founder IP transfers are a good example). Allocating risks to the other party is one very common way of changing the terms of the deal.