Due Diligence (DD): An Explanation and the Steps Involved
ComplianceDue diligence or DD is an important step that must be taken before a major transaction takes place. Examples of situations where this applies include company acquisitions, mergers, or large investments. By conducting due diligence, you avoid facing unpleasant surprises later on. In some situations in the Netherlands (Europe), it is even a mandatory part of the process.
In this article, you’ll learn what a due diligence investigation is, why it’s important, and how the process works. We’ll also explain the different types of due diligence, how organizations apply it in practice, and the increasingly important role artificial intelligence (AI) plays in this process. Finally, you’ll receive practical tips for conducting a successful due diligence investigation.
What is a due diligence investigation?
A due diligence investigation (DD) is a type of investigation that organizations, among others, conduct before making important decisions, such as a business acquisition, merger, or investment. The primary goal is to identify potential risks, financial problems, or other important issues in a timely manner. By doing so, organizations can better assess whether a partnership or investment is prudent or not.
The term “due diligence” literally means “due care”. It primarily involves gathering and verifying information before finalizing an agreement. During a due diligence review, various aspects of an organization are examined. These include financial figures, contracts, debts, legal matters, personnel, and business processes.
A due diligence review is usually conducted by accountants, lawyers, or other specialists. Today, it plays a role not only in acquisitions and investments but also increasingly in sustainable and corporate social responsibility. This is because organizations must be increasingly able to demonstrate that they act responsibly toward people, the environment, and the law.
In 2024, the European Union adopted new legislation for this purpose: the Corporate Sustainability Due Diligence Directive (CSDDD). This law requires large organizations to conduct more thorough investigations into risks related to human rights, the environment, and sustainability.
Why is due diligence so important?
Due diligence helps organizations identify potential risks in a timely manner before important decisions are made. Issues such as hidden debts, legal disputes, or disappointing results can have significant financial consequences if they are only discovered later. By conducting research in advance, organizations gain a better and more realistic picture of the situation.
Furthermore, due diligence helps in making better decisions. The investigation provides greater insight into an organization’s financial, legal, and operational situation. This includes contracts, business processes, personnel, and potential risks within the organization. As a result, companies can better assess whether a partnership or investment is prudent.
What types of due diligence reviews are there?
A due diligence (DD) review almost always consists of multiple components that together provide a complete picture of an organization. The components included vary by situation. In the case of an acquisition of a company that sells products, the emphasis is often on financial and legal risks. However, in the case of an acquisition of an IT company, the emphasis is more often on technology and systems.
In other cases, such as an investment in a rapidly growing company, the focus shifts to the market and commercial opportunities. Combining these elements creates a realistic picture of what is happening within an organization. Different models and research methods can be used for each component.
Financial due diligence
Financial due diligence examines a company’s financial situation, including revenue, profit, debt, and the reliability of the figures. The goal is to determine whether the financial information is accurate and whether there are any hidden issues. This provides a clear picture of how healthy a company truly is.
Legal due diligence
Legal due diligence examines everything related to laws and regulations. This includes contracts, permits, property rights, and any ongoing or concluded legal proceedings. It also verifies whether a company complies with the rules. This helps identify legal risks in a timely manner.
Commercial due diligence
Commercial due diligence focuses on a company’s position in the market. How strong is the company relative to its competitors? Who are its main customers, and are there opportunities for growth? This component determines whether a company will remain attractive in the future.
Operational due diligence
Operational due diligence examines how a company operates in practice. This includes internal processes, collaboration between departments, suppliers, and efficiency. It provides insight into how well an organization is performing and where potential areas for improvement lie.
Technological / IT due diligence
Technological due diligence focuses on the digital side of a company. It examines IT systems, software, security, and the technical infrastructure. This is particularly important for companies that are heavily reliant on technology. It reveals whether the systems are stable and ready for growth or integration.
The due diligence process (step-by-step plan)
A DD is usually conducted step by step. This makes the process clear and reduces the chance that important information will be overlooked. It is not a fixed theoretical model, but primarily a practical way of working in which various specialists collaborate. These include accountants, lawyers, and consultants who contribute their own expertise. The goal remains the same: to gain a clear understanding of the situation before making a major and important decision.
Preparation and Defining the Objective
In the first step, it becomes clear why the due diligence is being conducted and exactly what needs to be examined. This depends on the situation, such as an acquisition or investment. The parties also agree on the scope and depth of the due diligence. By coordinating this thoroughly in advance, there is less uncertainty later on.
Gathering Information
Once the objective is clear, all relevant information must be gathered. This includes, for example, financial figures, contracts, customer data, personnel information, and other important documents. This is often done through a digital environment where everything is clearly organized in one place. The goal is to gather as much relevant information as possible to obtain the most complete picture possible.
Conducting the analysis
Once all relevant information has been gathered, everything is thoroughly analyzed and reviewed. Specialists look for anomalies, discrepancies, or inconsistencies. Checklists or standardized procedures are often used to maintain an overview. This way, the organization’s true state becomes clear step by step.
Identifying risks
Once all analyses have been performed and all information has been verified, the most significant risks are identified. These may include financial, legal, operational, or commercial risks. The assessment also considers the likelihood of something going wrong and the potential impact. This clarifies where the greatest areas of concern lie.
Reporting and Decision-Making
Finally, all findings are compiled into a report. This report clearly explains the most significant risks and insights. It assists in making a decision regarding, for example, an acquisition or investment. Sometimes agreements are adjusted, and sometimes the decision is made not to proceed with the deal after all.
Due diligence checklist: what is examined?
A due diligence checklist helps to conduct the investigation in a structured manner. The exact content varies by situation, but the following areas are often reviewed:
- Financial figures, revenue, profit, debt, and cash flows
- Contracts, permits, claims, and legal obligations
- Customers, suppliers, competitive position, and market trends
- Staff, management, organizational culture, and business processes
- IT systems, software, data, cybersecurity, and technical risks
- ESG, human rights, environment, governance, and compliance
Example of a due diligence investigation
A good example of due diligence is Microsoft’s acquisition of LinkedIn in 2016. Microsoft sought to strengthen its position in the business market and gain better access to professional networks and data. Because this was a significant investment, extensive research was naturally conducted beforehand into the company and the potential risks and opportunities.
Situation: In 2016, LinkedIn was a rapidly growing platform with hundreds of millions of users worldwide. The company was growing very fast, but it was not yet clear to everyone how profitable that would be in the long term. For Microsoft, it was therefore important to fully understand exactly what the company was worth and how future-proof the platform would be.
The due diligence investigation therefore examined various aspects of the company, such as financial results, user growth, its position relative to competitors, and the platform’s technical structure. It also looked at how LinkedIn generated revenue and how that might evolve in the future.
Various analyses were conducted during the review. The financial aspects received significant attention. The focus was primarily on revenue growth, profitability, and future projections. Furthermore, the stability of the platform was examined, as well as whether the systems could handle further growth. The study also investigated how LinkedIn would fit into Microsoft’s strategy. This primarily involved potential benefits, such as combining data, strengthening business software, and expanding services for companies.
Finally, the risks were also taken into account. Examples included dependence on advertising revenue, market competition, and whether growth would remain the same after the acquisition.
Result: Based on the due diligence review, Microsoft had sufficient confidence to acquire LinkedIn. In 2016, LinkedIn was acquired for approximately $26 billion. The review showed that the company had a strong market position and aligned well with Microsoft’s long-term strategy.
This acquisition clearly demonstrates how a due diligence review helps in making major decisions. It provides insight in advance into what you are buying, as well as the opportunities and risks involved.
The role of AI in due diligence
Artificial intelligence, or AI, is playing an increasingly significant role in due diligence investigations. Initially, these investigations were primarily conducted manually, but now digital tools such as AI are being used more and more. This helps in processing large amounts of data.
AI can help analyze large amounts of data more quickly. Think, for example, of financial figures, contracts, or customer data. People used to need a lot of time for this. But now, AI can quickly identify patterns, risks, or inaccuracies.
A due diligence investigation often requires reviewing hundreds or even thousands of documents. AI tools can help automatically scan these documents for important information, such as agreements, obligations, or risks. This makes gathering relevant information much faster.
AI is also increasingly used to identify potential risks. By comparing large amounts of data, the model can pinpoint where potential problems lie. Examples of problems and risks include financial risks, legal issues, or unusual corporate structures. This helps specialists focus more precisely on the most critical points.
Pros and Cons of Due Diligence
A due diligence investigation has advantages, but it also costs time and money. That is why organizations do not undertake it lightly, but only use it for important decisions. The most important advantages and disadvantages are listed below.
Advantages
Fewer risks and surprises later on
One of the biggest advantages of due diligence is that it helps you identify risks earlier. These include (hidden) debts, ongoing or concluded legal proceedings, or operational issues. By investigating these in advance, you reduce the likelihood of encountering unexpected problems after an acquisition or investment. This provides greater certainty in the decision.
Better-informed decisions
A due diligence review provides a comprehensive picture of an organization. You look not only at financial figures but also at contracts, customers, processes, and risks. This allows you to make a decision based on facts rather than assumptions. It helps you assess more realistically whether a company is truly valuable and aligns with your strategy.
Disadvantages
It takes a lot of time
A thorough due diligence investigation takes time, as a significant amount of information must be gathered and verified. Especially with large organizations, it can take weeks to months before everything is properly mapped out. This can be a drawback if decisions need to be made quickly.
It can be expensive
Because specialists such as accountants, lawyers, and consultants are often involved, costs can add up. The more comprehensive the investigation, the higher the costs usually are. This can be a significant barrier to conducting such an investigation, especially for smaller organizations.
Summary
A due diligence investigation is therefore an important process conducted before a major decision is made, such as an acquisition, merger, or investment. It helps organizations gain a thorough understanding of a company in advance and identify potential risks in a timely manner. This includes financial, legal, commercial, or operational considerations. By doing so, the likelihood of unexpected problems arising later is reduced, and organizations can make more informed decisions.
The process involves gathering and analyzing information, after which the most significant risks and insights are compiled into a report. This report forms the basis for the final decision. Increasingly, technology such as AI is also being used to analyze data more quickly and identify risks. Even though the process is time-consuming and costly, due diligence ultimately provides greater certainty and leads to better decision-making in major transactions.
Frequently Asked Questions About Due Diligence
What is the difference between due diligence and a benchmark?
People sometimes confuse due diligence with benchmarking, because both can be used to examine a company more thoroughly. However, they are not the same. Due diligence is conducted before a major decision is made. For example, before a company acquisition, merger, or investment. This involves examining risks, liabilities, financial matters, and other issues that may require extra attention.
A benchmark is primarily used for comparison. An organization can compare its costs, performance, service quality, or processes with other companies or with an industry standard. A benchmark can be part of due diligence, but it does not replace the investigation itself.
What is the difference between due diligence and an audit?
An audit primarily checks figures, processes, or reports. It verifies whether information is accurate and whether certain rules or standards are being followed. Due diligence is broader than that. It is usually conducted before an organization makes an important decision.
During due diligence, a buyer or investor examines risks, contracts, debts, obligations, customers, systems, and expected growth. The process is therefore not just about verifying information. It is also about identifying potential issues that could arise after the deal is closed.
What is the difference between due diligence and valuation?
Valuation refers to the financial value of a company. This can include: revenue, profit, assets, liabilities, and future growth. Due diligence examines the information underlying that value. Are the figures reliable? Are there any hidden liabilities? Are there any contracts, risks, or obligations that could affect the transaction?
Recommended books and publications on due diligence
Due diligence helps to better identify risks, opportunities, and uncertainties before an important business decision is made. Think of an acquisition, investment, partnership, or merger. The books and publications below provide additional insight into financial due diligence, legal review, strategic analysis, operational risks, ESG, compliance, and decision-making in transactions.
- Angwin, D. (2001). Mergers and acquisitions across European borders: National perspectives on pre-acquisition due diligence and the use of professional advisers. Journal of World Business, 36(1), 32-57. → This article demonstrates that due diligence does not function the same way in every context. In international acquisitions, culture, legislation, advisors, and local knowledge play a major role. This makes the source useful for readers who wish to understand due diligence as more than just a financial audit.
- Bing, G. (2007). Due diligence techniques and analysis: Critical questions for business decisions. Westport, CT: Praeger. → This book addresses the core of due diligence investigations directly. Bing demonstrates which questions must be asked before a decision is made. As a result, the source is practically applicable in acquisitions, investments, and strategic choices where facts, assumptions, and risks must be carefully examined.
- Gaughan, P. A. (2017). Mergers, acquisitions, and corporate restructurings. Hoboken, NJ: John Wiley & Sons. → A comprehensive resource on mergers, acquisitions, and restructurings. The book helps to situate due diligence within the broader transaction process. This is important because the outcomes of due diligence can influence valuation, negotiation, financing, and the decision to proceed with or abandon a deal.
- Gomes, E., Angwin, D. N., Weber, Y., & Yedidia Tarba, S. (2013). Critical success factors through the mergers and acquisitions process: Revealing pre- and post-M&A connections for improved performance. Thunderbird International Business Review, 55(1), 13-35. → This article examines success factors throughout the entire M&A process. This is valuable because due diligence is not separate from what happens afterward. A thorough investigation should not only identify risks but also clarify what is needed for integration, collaboration, and performance after the deal.
- Harvey, M. G., & Lusch, R. F. (1995). Expanding the nature and scope of due diligence. Journal of Business Venturing, 10(1), 5-21. → This publication demonstrates that DD must be viewed more broadly than just financial figures and legal documents. Market position, organization, management, culture, and operational assumptions can also be decisive. This aligns well with modern DD, in which hard and soft factors together shape the risk profile.
- Howson, P. (2017). Due Diligence: The Critical Stage in Mergers and Acquisitions. London, England: Routledge. → A practical resource on due diligence as a critical phase in mergers and acquisitions. Howson demonstrates how due diligence helps uncover hidden risks, incorrect assumptions, and unclear obligations. This makes the book particularly valuable for readers who want to understand how DD works in a real transaction process.
- OECD. (2018). OECD due diligence guide for corporate social responsibility. Paris, France: OECD Publishing. → This guide is important for the social aspect of DD. The publication helps organizations better identify and address risks related to human rights, the environment, corruption, employees, consumers, and governance. This makes the resource particularly relevant for ESG, compliance, and corporate social responsibility.
- Perry, J. S., & Herd, T. J. (2004). Reducing M&A risk through improved due diligence. Strategy & Leadership, 32(2), 12-19. → This article demonstrates how improved due diligence can help reduce acquisition risks. The emphasis is on closely examining assumptions, synergies, integration risks, and priorities. This aligns well with practice: due diligence is only valuable when it helps decision-makers make concrete decisions.
- Picot, G. (Ed.). (2002). Handbook of international mergers and acquisitions: Preparation, implementation and integration. London, England: Palgrave Macmillan. → This book provides a comprehensive in-depth analysis of international mergers and acquisitions. It is relevant to DD because preparation, execution, and integration are closely interrelated. In cross-border transactions, legal, tax, cultural, and organizational differences become particularly important.
- Sherman, A. J. (2018). Mergers and acquisitions from A to Z. New York, NY: AMACOM. → A practical guide to the entire M&A process. Sherman discusses, among other things, preparation, valuation, negotiation, documentation, and due diligence. This makes the book useful for readers who want a complete picture of what needs to be investigated, discussed, and documented in connection with an acquisition.
- Very, P., & Schweiger, D. M. (2001). The acquisition process as a learning process: Evidence from a study of critical problems and solutions in domestic and cross-border deals. Journal of World Business, 36(1), 11-31. → This article demonstrates that acquisitions are also learning processes. This is important for due diligence, because research is not only intended to identify errors. It also helps to better understand how an organization operates, where integration issues may arise, and what knowledge is required for successful execution.
- Wangerin, D. D. (2019). M&A due diligence, post-acquisition performance, and financial reporting for business combinations. Contemporary Accounting Research, 36(4), 2344-2378. → This publication demonstrates that due diligence is associated with post-acquisition performance and the quality of financial reporting. The source is valuable because it clarifies that insufficient or rushed DD can have subsequent consequences for profitability, valuation, and goodwill.
Citation for this article:
Jimmink, J. (2026). Due Diligence (DD). Retrieved [insert date] from Toolshero.com: https://www.toolshero.com/decision-making/due-diligence/
Original publication date: May 16, 2026 | Last update: May 20, 2026
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