12 Types of Due Diligence in M&A

Despite ongoing geopolitical tensions and economic uncertainty influenced by a new US approach to tariffs, 51% of businesses are still considering mergers and acquisitions (M&A) as a part of their growth strategy. This demonstrates companies’ readiness to transform their business models to adapt to new challenges.

Considering such a demanding environment, the importance of due diligence only rises. With that in mind, we suggest getting back to the basics and exploring the main 12 types of due diligence in merger and acquisition transactions.

This article describes what soft and hard due diligence are and explains how each type of due diligence is handled in deal-making.

What Is Due Diligence?

First things first, let’s define what due diligence in an acquisition or merger is.

Due diligence refers to a process of a comprehensive review of a company before entering into a major business transaction, such as M&A. It helps the acquiring company understand the true condition of the target company and avoid costly mistakes.

The main goal of due diligence is to give decision-makers a clear picture by examining financial records, legal compliance, operational efficiency, human factors, and other areas of business operations. This includes looking at financial documents, contracts, tax obligations, litigation history, intellectual property rights, and other critical areas. 

Due diligence helps the team to:

• Identify potential risks
• Confirm financial health
• Evaluate future prospects

The outcome of due diligence is a reliable foundation for negotiations, risk management, and strategic planning, ensuring that the acquiring firm makes an informed and well-supported decision. 

Note: Sometimes, target companies (or the sell side) can perform due diligence by themselves, prior to the buyer’s due diligence. This helps to evaluate the state of the company before sharing it with third parties, identify weak areas, and address them before the buyer sees them. This way, the chances for a successful transaction get higher.

What Is a Due Diligence Checklist?

The due diligence checklist is a structured list of documents and information required during the review process. It guides the diligence team through financial, legal, operational, and human aspects of the target company, ensuring no critical detail is missed. 

In other words, it’s like a to-do list but for due diligence.

The due diligence checklist keeps the process organised, speeds up document collection, and makes it easier to compare findings across different areas. By following it, the acquiring company can conduct a comprehensive assessment, identify risks early, and make well-informed decisions about the business transaction.

Who Conducts Due Diligence?

Due diligence involves experts from both the buyer’s and seller’s sides. Each group plays a role in reviewing, preparing, and verifying information. 

On the buyer’s side, there’s a due diligence team that reviews financial documents, legal risks, and operational issues. 

On the seller’s side, there are specialists who prepare due diligence documents and answer buyer requests.

What Is Involved in Due Diligence?

The due diligence process steps are guided by a due diligence framework that ensures every critical area of the target company is reviewed. 

While each deal is unique, the process usually includes the following:

1. Planning and scoping. It’s all about defining what diligence requires, setting priorities, and forming the diligence team.
   
2. Gathering data. Here, the target company collects due diligence documents such as financial records, contracts, tax filings, and operational reports to get them ready for the review.
   
3. Analysing risks. This is about the buyer assessing financial health, operational efficiency, litigation history, and other potential risks that can come from the target company.
   
4. Verifying compliance. Here, the buyer reviews legal compliance, regulatory obligations, and intellectual property rights.
   
5. Interviewing stakeholders. Another important step is to speak with management, employees, and advisors to clarify information.
   
6. Reporting findings. Finally, the due diligence team prepares a structured report that highlights risks, opportunities, and prospects, which helps to decide on whether it’s worth proceeding with the deal.

Hard vs. Soft Due Diligence

Primarily, all due diligence types are divided into hard and soft due diligence. The difference between these two types lies in the areas of operation that they target.

Hard due diligence reviews measurable, document-based areas such as financial statements, contracts, cash flow, and pending litigation. It confirms financial performance, the company’s tax obligations, and overall stability.

Soft due diligence looks at people, culture, the company’s business model, and market position. It shows whether the target’s strategy and leadership can support future growth.

Both due diligence types are essential for a transaction’s success. Hard diligence aims to verify facts through financial analysis, while soft diligence focuses on long-term success beyond the numbers. 

Here’s a quick comparison table of what each type of due diligence focuses on:

Now, let’s focus on what types of due diligence hard and soft due diligence include.

Types of Hard Due Diligence

Hard due diligence focuses on tangible, document-based checks.

It includes financial, legal, tax, operational, intellectual property (IP), IT, and regulatory compliance due diligence.

Let’s take a closer look at what each of these types is all about.

Financial Due Diligence

Financial due diligence confirms the company’s financial performance and highlights risks that may affect the deal. It helps the acquiring firm understand whether the numbers reflect reality and if the business can generate sustainable cash flow.

Key review areas include:

• Financial statements and financial analysis
• Revenue streams and profitability
• Debt and liabilities
• Cash flow and working capital
• Tax compliance and filings with tax agencies

Legal Due Diligence

Legal due diligence reduces the risk of disputes by examining the company’s legal standing and potential liabilities. It focuses on contracts, compliance, and pending litigation that could affect the value of the deal.

Key review areas include:

• Articles of incorporation and corporate governance documents
• Shareholder agreements and joint ventures
• Pending litigation and disputes
• Intellectual property rights and ownership
• Regulatory compliance obligations

Tax Due Diligence

Tax due diligence, or fiscal due diligence, reviews whether the company meets its tax obligations and follows proper tax practices. It helps uncover hidden liabilities and ensures transparency for potential investors.

Key review areas include:

• Corporate tax returns and supporting records
• Transfer pricing policies and compliance
• Pending tax disputes or audits with tax agencies
• Indirect taxes (VAT, GST, customs duties)
• Tax incentives or credits claimed

Operational Due Diligence

Operational due diligence reviews the efficiency of the company’s processes and ability to deliver results. It shows whether operations support the company’s business model and if improvements are needed.

Key review areas include:

• Supply chain contracts and vendor agreements
• Production capacity and scalability
• Internal processes and quality control
• Cost structures and resource management
• Operational efficiency and risk management practices

Intellectual Property Due Diligence

Intellectual property due diligence assesses the value and protection of intangible assets. Since IP can be central to future prospects, verifying ownership and legal rights is critical.

Key review areas include:

• Patent filings and registrations
• Trademarks and trade names
• Copyrights and design rights
• Licensing agreements and royalties
• Pending disputes over intellectual property rights

IT and Technical Due Diligence

IT and technical due diligence checks whether the company’s systems and technology are secure and scalable. It identifies risks in data protection and highlights where investment may be required.

Key review areas include:

• IT infrastructure and system architecture
• Cybersecurity policies and risk controls
• Data privacy compliance (such as GDPR or CCPA)
• Software licenses and technology contracts
• Disaster recovery and backup systems

Regulatory Compliance Due Diligence

Regulatory compliance due diligence ensures the company operates within the laws and standards of its industry. It helps avoid penalties, operational disruptions, or reputational harm.

Key review areas include:

• Industry-specific safety standards
• Environmental laws and obligations
• Required licenses and permits
• Records of regulatory inspections
• Compliance training and monitoring programs

Types of Soft Due Diligence

Soft due diligence focuses on people, culture, and markets. It involves commercial, human resources (HR), and environmental due diligence.

Commercial Due Diligence

Commercial due diligence examines the company’s business model, market position, and growth prospects. It helps potential investors understand whether the target company has a sustainable competitive advantage and if prospects align with deal expectations.

Key review areas include:

• Company’s business model and strategy
• Market size and growth potential
• Competitive landscape and positioning
• Customer base and retention rates
• Sales pipeline and revenue forecasts

Human Resources Due Diligence

Human resources due diligence focuses on the people behind the business. It reviews workforce structure, leadership quality, and employment practices to see whether the team can support long-term success.

Key review areas include:

• Organisational structure and management team
• Employee contracts and compensation plans
• Workforce costs and benefits
• Staff turnover and retention metrics
• HR policies and cultural fit

Environmental Due Diligence

Environmental due diligence evaluates how the company’s operations impact the environment and whether it complies with environmental standards. This type of review is increasingly important for risk management and reputation.

Key review areas include:

• Environmental laws and regulatory compliance
• Permits and licenses related to operations
• Waste management and emissions records
• Environmental risk assessments
• Pending litigation over environmental issues

Specialised and Bespoke Due Diligence

While hard and soft due diligence are the core of any investigation of a business, sometimes there’s more.

Some deals require a tailored approach to address unique risks or industry specifics. 

Specialised reviews, such as cultural or geopolitical checks, and confirmatory due diligence, which serves as a final review before closing, provide deeper assurance for the acquiring firm and potential investors. 

These targeted assessments strengthen confidence in the deal by focusing on issues that general reviews may overlook. 

Here, we can define confirmatory and specialised due diligence.

Confirmatory Due Diligence

Confirmatory due diligence is the final review performed just before the deal is signed. 

Its purpose is to verify that all earlier findings are accurate and no material changes have occurred. It helps the acquiring firm confirm financial performance, ensure pending litigation is resolved or disclosed, and check that the company’s tax obligations remain up to date.

Key review areas include:

• Verification of financial statements and cash flow
• Review of updated financial analysis and forecasts
• Confirmation of pending litigation outcomes
• Compliance with tax obligations and regulatory filings
• Final validation of due diligence documents provided

Specialised Due Diligence

Specialised due diligence is tailored to specific risks, industries, or markets. It goes beyond the general diligence framework to address issues that could affect long-term value or integration. 

For example, a private equity firm may request cultural due diligence to evaluate leadership fit, or geopolitical analysis for cross-border transactions.

Key review areas include:

• Cultural due diligence on leadership and workforce integration
• Geopolitical analysis in sensitive markets
• Sector-specific regulatory or safety risks
• Environmental or social impact reviews
• Bespoke checks requested by potential investors or lenders

Preparing for the Due Diligence Process

The success of any type of due diligence depends on how you prepare for it. Poor preparation may result in misleading outcomes. It can be easily avoided if you prepare appropriately. 

Here are some recommendations that might be helpful:

1. Organise core documents. Gather financial reports, contracts, tax filings, HR records, and compliance certificates. Keep them structured and up to date. This corresponds more to a sell side.
   
2. Use a virtual data room (VDR). Store and share documents securely with controlled access via a virtual data room. This reduces security risks and makes it easier for both sides to review information. VDRs can be used by both a seller and a buyer.
   
3. Create a due diligence checklist. Map out required documents across financial, legal, operational, and HR areas. A checklist ensures nothing is overlooked. This is typically a buyer’s task.
   
4. Align internal teams. Involve finance, legal, operations, and HR departments early. Assign responsibilities and set clear communication channels. This is something both seller and buyer should do.
   
5. Anticipate common questions. A seller should prepare explanations for complex items such as unusual expenses, customer concentration, or compliance issues.
   
6. Test your process. For a seller, it’s advisable to conduct an internal review before sharing documents. This helps identify gaps and prevents delays once the buyer’s team begins.

Powering Due Diligence with Technology

Dedicated due diligence technology has transformed how deals are executed, making the review process faster, safer, and more reliable. In fact, about 33% of business owners expect to use generative AI in 2025.

The most commonly used technology during due diligence is a virtual data room. A secure data room for due diligence offers a safe online space to store and share sensitive documents with third parties. What’s more, it also allows for effective collaboration between deal sides. 

Here are some examples of VDR features that help streamline due diligence and accelerate decision-making:

• Bulk upload and drag-and-drop file import
• Automatic indexing and folder structuring
• Full-text search across all documents
• Document version control and audit trails
• Granular, role-based user permissions
• Dynamic watermarking and print/download restrictions
• Secure Q&A workflows for buyer–seller communication
• Real-time activity tracking and reporting dashboards
• Integration with e-signature and project management tools
• Multi-language support and cross-border accessibility

Key takeaways

• Due diligence is a structured process that reviews financial, legal, operational, human, and other aspects of a company before an M&A deal.
  
• Hard due diligence verifies facts with financial statements, contracts, and compliance checks, while soft due diligence evaluates people, culture, and the company’s business model.
  
• Beyond the core types, specialised and confirmatory due diligence are also available, providing tailored insights and final validation before closing a deal.
  
• Good preparation makes the process faster and more accurate. It includes organising documents, using checklists, and aligning the team.
  
• Dedicated due diligence technology, especially virtual data rooms, enhances security, efficiency, and collaboration between deal parties.

FAQ

What are the main types of due diligence?
The main types include financial, legal, tax, operational, intellectual property, IT, and regulatory compliance (hard due diligence), as well as commercial, human resources, and environmental (soft due diligence). Together, they give a complete picture of the target company’s risks and opportunities.

What is specialised due diligence?
Specialised due diligence is tailored to unique risks or industries that standard reviews may not cover. Examples include cultural checks, geopolitical analysis, or sector-specific compliance reviews.

What is confirmatory due diligence?
Confirmatory due diligence is the final review conducted just before deal closure. It verifies that earlier findings are accurate, ensures no material changes have occurred, and confirms the company is still in good standing.

What are the 4 Ps of due diligence?

The 4 Ps stand for People, Process, Performance, and Purpose. They highlight that due diligence should look beyond numbers to also evaluate leadership, operations, business results, and long-term strategy.