It’s a structured process for gathering relevant information about a company, its documents, liabilities, contracts, legal situations, labor relations, and other relevant aspects.
This is a truly in-depth analysis, which may involve different fronts of analysis.
Most common types of due diligence
To ensure a complete and strategic analysis, the due diligence process can cover different areas within a company.
See the main types:
Legal due diligence
Evaluates all legal aspects of the company, such as contracts, ongoing lawsuits, regulatory issues, intellectual property, contractual obligations, and licenses.
It is essential to identify legal risks that could compromise the operation or impact negotiations.
Accounting due diligence
Examines the accounting records, balance sheets, financial statements and practices adopted by the company.
Tax due diligence
Focuses on the company’s tax obligations: correct tax payment, tax classification, possible fines, compensation or tax credits.
This analysis helps avoid tax surprises after the acquisition or investment.
Labor due diligence
examines adherence to internal HR policies, employment contracts, labor regulations, legal obligations, and benefits provided.
Preventing conflicts and maintaining the regularity of the connection with employees are crucial.
Due diligence on the environment
confirms that the business has the necessary licenses, conforms with environmental regulations, and has no unresolved issues with regulatory bodies.
In industries like construction, agribusiness, and industry, this kind of due diligence is even more important.
Structural and operational due diligence
Analyzes the company’s physical and organizational structure, such as facilities, equipment, logistical processes, operational flows, supply chain and technology used.
This step helps to understand the company’s ability to maintain or scale its activities.
This process can be conducted by law firms , auditors, specialized consultancies or in-house teams.
A good governance structure facilitates the due diligence process, as the organization usually has clear rules, transparent documentation, and well-defined internal controls. Understand how corporate governance directly impacts the management and reputation of companies: Corporate governance and its impacts on management.
Why is due diligence important?
Anyone who has participated in a strategic decision knows that relying on a pitch or well-structured sales presentations is not enough.
On paper, almost every company looks attractive. But what do the documents, contracts, processes, and numbers reveal?
Due diligence comes into play precisely at this point: to help you see beyond the surface and make a safer, more informed decision.
See the main reasons why this process is so important:
Helps identify hidden liabilities
Risks aren’t always obvious. Behind the scenes, there can be unpaid taxes, labor obligations, poorly written contract provisions, or legal issues.
By exercising due diligence, you can bring up these concerns beforehand and avoid unpleasant shocks later on.
Generates more security for investors and partners
When there is transparency and clarity, risks are better measured. Investors, partners, or stakeholders feel more comfortable moving forward, or even backing down if necessary.
Trust comes not just from good intentions, but from concrete data.
One of the critical points in due diligence processes is the existence of informal contracts, without a valid signature or outside of legal procedures.
Understand why so-called “under-the-table contracts” pose a real risk to business and strategic operations: Under-the-table contract : what it is and what the risks are.
Protects against future legal disputes
Through the identification and documentation of such risks, the due diligence process also reduces the possibility of future lawsuits.
For instance, the company making the purchase or investment may put clauses in the contract that shield it from future issues like tax assessments or labor lawsuits that are inherited.
In addition to prevention, due diligence can serve as evidence in legal proceedings. Digitally signed documents are legally valid and accepted in court, reinforcing the legal security of the transaction.
When to apply due diligence?
Due diligence is common in mergers and acquisitions, but it can be applied in a variety of contexts involving shared risks and interests.
Here are some examples:
- Mergers and Acquisitions (M&A): Evaluating the Target Company Before Incorporation
- Investments: analyzing startups or early-stage businesses
- Franchises: to analyze the franchisor’s situation before closing the contract
- Acquisition of assets, including machinery, real estate, and intellectual property
Main steps of the due diligence process
Each due diligence is different, but the structure usually follows the same logic.
Understanding this flow helps you visualize where each type of challenge lies and where technology can make a difference.
- Scope definition: Before beginning, it is essential to define which areas will be evaluated, which documents will be requested, and what the estimated deadline is.
- Document request: A checklist is created with the documents that will be analyzed: contracts, certificates, financial statements, records, etc.
- Technical analysis: Legal professionals, accountants or auditors review all materials, looking for risks, nonconformities or points of attention.
- Report preparation: Based on the analysis, a detailed report is produced with the findings, critical points and recommendations.
- Decision: The report serves as input for negotiation, contract review, or withdrawal from the deal if the risks are high.
The most common challenges of due diligence
Although it is a well-established practice, due diligence brings a series of operational challenges:
- High volume of documents to be analyzed
- Rework with different versions of contracts
- Sharing files via email, which poses risks
- Lack of standardization in data
- Tight deadline for completion
- Difficult to track what was reviewed or not
How can technology support due diligence?
The use of digital technologies in planning and carrying out due diligence is becoming more and more significant. They do not replace human knowledge, but they help to organize, standardize, streamline and document each step of the process.
Here’s how:
Electronic signature
The contract review stage is often one of the most sensitive in due diligence. Having electronically signed contracts makes this process much more organized and secure.
In addition to ensuring legal validity, electronic signatures facilitate version tracking, centralize documents in a single environment, and allow parties involved to access and review everything remotely, without having to schedule in-person meetings or deal with physical bureaucracy.
For law firms and legal departments, this means greater agility, time savings, and reduced operational risks.
Technology also helps maintain document integrity, with auditable records and robust authentication.
During due diligence, several documents are analyzed and require valid signatures, such as articles of association, amendments, NDAs , and financial reports.
The good news is that many of these documents can now be signed electronically, with complete legal security.
Process digitalization
Contracts, licenses, financial reports, tax records, and other papers are frequently dealt with during due diligence.
The method is far more flexible when these files are digital and arranged on safe platforms.
With access control based on permission levels, folder structure, and keyword searches, digital environments let you put everything in one location.
This lowers the danger of loss, eliminates back-and-forth emails with loose attachments, and makes it easier for legal, accounting, and operational experts to evaluate.
Standardization of minutes
Businesses that regularly conduct due diligence can save pre-made templates for workflows, checklists, and documents.
AI-powered automation
Artificial intelligence has made it feasible to automatically evaluate contracts, finding important terms, making recommendations for changes, and producing dynamic summaries.
How to prepare for more efficient due diligence?
If you’re part of a company that may undergo due diligence in the future, start preparing now.
Having documents organized and in a digital environment is one of the main factors for a more fluid and less stressful analysis.
Here are some actions that help:
- Digitize contracts and organize them by category
- Establish a secure and accessible repository for those responsible
- Keep certificates and documentation up to date
- Create internal checklists with everything you can request.
- Use electronic signatures whenever possible
- Train teams to respond quickly to requests