Due diligence can be used in various contexts, however, it is typically a term from the fields of finance and mergers & acquisitions (M&A). We can interpret it in different ways. The most accurate meaning is in-depth analysis.
Due Diligence – Definition, Purpose, and Importance
Within due diligence, we systematically conduct an in-depth analysis of a company or project to determine its condition and health. This analysis usually takes a significant amount of time and is primarily used during transactions—typically the sale of a company or a portion of it, or a capital investment. The company is analyzed from multiple perspectives.1
The reason for conducting this analysis is fairly obvious. It makes sense for both parties involved:
- From the investor’s perspective, the main motivation is to determine the condition and health of the business. This analysis can serve as input for valuing the company or stake, structuring the agreement, and defining financial and non-financial covenants in the case of a capital injection.
- From the seller’s perspective, it is mainly about building trust. The goal is to present the investor with a realistic picture of the company without discouraging them from the transaction. At the same time, the analysis should be conducted with due care, providing truthful and detailed information, and discussing any disputed points together.
The shared objective of both parties is concluding the agreement, verifying legal and financial correctness, and confirming the price. Investor and seller have certain expectations set before the in-depth analysis, which become more precise during the process.
Costs of Due Diligence
The costs of an in-depth analysis are not negligible; however, they can still be considered relatively marginal compared to the risks arising from investor uncertainty about financial performance or legal compliance. Due diligence helps both parties set expectations and avoid future disputes.
Costs typically include:
- M&A advisor (if used)
- Lawyers (legal DD)
- Tax and financial specialists (if not available internally)
- Internal costs (staff allocated to the project)
- One-time expenses – e.g., data room
Costs and scope of due diligence should be proportionate to the value of the transaction and the probability of its completion. For example, it is unreasonable to conduct an in-depth analysis with expected costs of ±500,000 CZK for selling a stake for 1 million CZK. This ratio should be carefully considered.
The allocation of due diligence costs is entirely at the discretion of the parties. If the potential buyer participates in the costs, it demonstrates good faith and serious interest in the transaction.
Types and Areas of Due Diligence
Generally, there are two types of due diligence depending on whether we focus on relationships/trustworthiness or on numbers. For instance, a company may have relatively good numbers but an untrustworthy management team and poor market reputation, which is difficult to restore. Is it a good investment, and at what price? It is always useful to verify.2
- Soft form – focuses on management quality, market reputation, internal processes, employee loyalty (especially key personnel), and similar aspects.
- Hard form – focuses on facts and figures, including financial statements, sales, marketing, trend analyses, financial analyses, and similar data.
From a business area perspective, due diligence may include the following types (not all analyses are always relevant—it depends on circumstances, the nature of the business, size, budget, etc.).3
Key areas often include legal analysis, financial analysis, and business/marketing analyses. The relevance of other analyses depends on the transaction context.
Core types:
- Legal analysis
- Financial analysis
- Business and marketing analysis
- Human resources analysis
- Tax analysis
- Asset analysis
- Management and process analysis
Additional types may include:
- IT analysis
- Strategic analysis
- Customer analysis
- Intellectual property analysis
- Environmental impact analysis
Due Diligence Plan and Checklist
As noted, the costs of due diligence are not insignificant. An in-depth analysis is a project like any other. Especially for larger, more complex transactions, a project plan and timeline should be prepared. The sequence of steps and responsible persons and deadlines should also be defined.
Due Diligence Checklist
Each type of in-depth analysis requires input, such as documents, financial data, reports, etc. These inputs are then analyzed within the respective category. Checklists can vary from simple lists of required inputs to sophisticated forms including responsibilities and timelines (e.g., in Excel).
Data Room – Definition, Requirements, Costs
A data room is a repository where checklist inputs are collected. Usually, it is an external storage managed by a law firm or a third-party service (cloud storage).
Purpose of a Data Room
Data rooms provide a structured space for documents, folder organization, multi-user access, and permission management (e.g., accountants see only the finance folder). Advanced data rooms track changes to ensure documents are not altered after upload unless approved.
Forms and Options
Depending on the complexity and requirements, data rooms may take different forms:
- Virtual data room as a service (SaaS) – suitable for projects of all sizes
- On-premises server storage – medium and large projects
- Online services like OneDrive, Google Drive – suitable for small projects, lower cost
Modern Virtual Data Room Requirements
- Security – the most critical aspect. Data should be protected externally and internally, with encrypted connections (HTTPS), encrypted sensitive data (AES), and backups.
- Stability and availability – the environment should be reliable and available without interruptions.
- Permission management – ability to invite users, assign folder permissions, lock/unlock checklists, etc.
- Change tracking (versioning) – track user access, document changes, and updates.
- Collaborative editing – allow shared editing directly within the data room.
- User-friendly interface
Costs vary depending on features, typically ranging from several hundred to a few thousand USD per project per month. For example, dealroom.com charges $1,250/month for a project, offering extensive features and user-friendly interface.
Alternatively, cheaper services or basic cloud storage like Google Drive may be sufficient for small projects.
Reference
- Investopedia, Due diligence [online]. [cit. 2025-10-29]. Available at: https://www.investopedia.com/terms/d/duediligence.asp
- Corporate Finance Institute, Due diligence overview [online]. [cit. 2025-10-29]. Available at: https://corporatefinanceinstitute.com/resources/valuation/due-diligence-overview/
- Lexis Nexis, What is due diligence [online]. [cit. 2025-10-29]. Available at: https://internationalsales.lexisnexis.com/glossary/compliance/what-is-due-diligence