3 3 assignment due diligence

ACC 330 Module Three Assignment 3-3 Due Diligence (1)

Southern New Hampshire University *

Feb 20, 2024

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Everything You Need to Know About Due Diligence: Types, Roles, and Processes

By Andy Marker | March 14, 2019 (updated July 27, 2021)

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Due diligence is the process of examining the details of a transaction to make sure it’s legal, and to fully apprise both the buyer and seller of as many facts in the deal as possible. When the deal satisfies both aspects of due diligence, the two parties can finalize and correctly price the transaction. It’s a process of verifying, investigating, and auditing a potential deal or investment opportunity to corroborate facts, financial information, and other pertinent data.

People and organizations perform due diligence in many areas, including the sales of securities, IPOs, private equity funding, and real estate. Financial advisors commonly practice due diligence as well. The most widespread use, and the main topic of this article, is in mergers and acquisitions (M&A).

What Is Due Diligence in Business?

In business, due diligence is the process of making sure every aspect of a transaction is in order before it moves forward. When a company considers issuing an IPO, potential investors perform due diligence on that company to make sure it’s worth the investment. The term is sometimes used in the hiring process to verify that a candidate has the experience they claim.

Due diligence in M&A can include not only looking at obvious details like financial stability, sales, real estate, and intellectual property, but also pending litigation, labor relations, environmental problems, and relationships with third parties.

A Brief History of Due Diligence

The term due diligence , as related to transactions, entered common usage as a result of the U.S. Securities Act of 1933 , specifically section 11b3, which says that sellers of securities have to give investors enough information to make an informed decision before buying. In this situation, the term meant "required carefulness" or "reasonable care." Since then, the expression has spread to other areas and has found its most common use in mergers and acquisitions.

The Role of Due Diligence

With proper due diligence, all involved parties are educated, informed, and covered in a transaction, an arrangement, or any other kind of agreement. Think of it like homework: It should be completed before the close of a deal to provide a buyer with a guarantee of what it’s getting.

In M&A, due diligence helps buyers and sellers make informed decisions. The process validates the accuracy of the information presented, ensures that the transaction complies with the criteria laid out in the purchase agreement, verifies that the parties consider all benefits and risks, and allows the buyer to know what they are buying.

Due diligence increases the chances of a successful deal by uncovering major problems or assets that need to be addressed. Additionally, due diligence can lead to a more accurate pricing of the transaction. Without proper due diligence, unforeseen problems may arise after the deal closes. At that point, they fall on the buyer, which may not be able to address them through litigation.

Charles Elson is the Director of the Weinberg Center for Corporate Governance at the University of Delaware, and co-author (with Alexandra Lajoux) of the book The Art of M&A Due Diligence: Navigating Critical Steps and Uncovering Crucial Data . He says, “[When] you're buying a business, you buy all kinds of potential liabilities, and you want to be clear on what are the pitfalls of the transaction.”

Certainly, due diligence incurs upfront costs, but the outlay is justified because it provides buyers and sellers with peace of mind and a level of comfort with their expectations. Ultimately, it helps ensure the buyer and the seller are equally knowledgeable about the transaction.

As Elson says, “You want to assure yourself that you've appropriately investigated the affairs of the counterparty so that [the] transaction, a year later, will be effective. It's a legal term basically offered from a director standpoint, meaning that you carry out your fiduciary responsibilities appropriately in terms of the transaction itself. It's there to protect you, from a legal standpoint, if things go bad.

“Basically,” he continues, “you're trying to understand the other person's business — ‘Is what I'm buying really going to be complementary to me? And will it not only be complementary, but also increase my value, or do I have a lot of problems in acquiring? If so, do I need to adjust the purchase price, or do I frankly need to even engage in the transaction?’ That's the issue. And there's just a ton of litigation around this stuff.”

Is There a Difference Between Due Care and Due Diligence?

In most areas of business, due care is not a well-defined concept. Informally, it means taking the steps that an ordinary, reasonable person would in similar circumstances, but is rarely used in business circumstances.

In IT — specifically, IT security — the two terms are different but related. With due care, the organization develops a structure that contains security protocols and procedures; with due diligence, it follows those protocols and procedures.

Some in the legal world say due care and due diligence are the same, but others contend they are different, albeit related in a manner similar to the IT description above.

Types of Due Diligence

Due diligence applies to many aspects of business. See how they’re used in the key areas listed below:

Mergers & Acquisitions

In an acquisition , a company buys another company (or even part of another company); a recent example is Amazon's purchase of Whole Foods. When two companies come together on equal terms, it’s a merger . In either case, due diligence helps companies do the following:

Make sure that all information reported by the seller is accurate.

Find and mitigate any risks.

Ensure compliance with legal and regulatory requirements.

Allow the deal to be priced based on facts, not assumptions.

Performing due diligence helps the buyer determine whether it actually will make the purchase and how much it should pay. The process may be voluntary in some cases and involuntary in others.

The concepts of soft and hard due diligence also come up within the M&A world. Hard due diligence is the traditional process described in this article. Soft due diligence focuses on culture fit and other elements related to how people work together. If the two cultures of the acquiring and target companies seem like they won’t combine well, then the companies may have to change personnel decisions, particularly with top executives and influential employees.

Securities Sales

The phrase due diligence was first used for securities sales. Specifically, securities sellers must disclose any material information they discover related to the securities that they plan to offer investors. If they fail to disclose such information, they are liable for criminal prosecution. Securities sellers research the offerings they are considering selling, the backers of the securities, the owners of the company, the performance history of the security, and other data in order to perform their analysis and uncover pertinent material information.

Before a company's IPO, attorneys, underwriters, and the company itself have to prove to the SEC that the declarations the company made when filing are true. Key employees and those in the C-suite answer questions about areas such as the business plan (including marketing), product development, intellectual property, and revenue projections, with an eye to finding possible pitfalls. Third parties (e.g., vendors and customers) may be interviewed, as well. Companies can also expect an audit of their records, from HR to finance to licenses to tax filings and more.

Banking and financial services companies may perform due diligence on potential customers to make sure they are not involved in illegal activities that could bring legal action against the institution.

Enhanced Due Diligence

Due diligence is not always enough. In such cases, organizations perform enhanced due diligence , which is required when a potential banking customer poses a higher risk of being connected to money laundering, terrorist financing, or other financial crimes. A customer may run a higher risk due to their business activity, ownership structure, or anticipated or actual amount and types of transactions (this includes transactions that involve higher-risk jurisdictions).

In cases where enhanced due diligence is necessary, the bank should request the following information, both upon the creation of the account and on a recurring basis afterward:

Nature of the business

Purpose of the account and expected types of business transactions

Source of account funds and other assets

List of all individuals who have ownership or control over the account (e.g., beneficial owners, signatories, guarantors)

Type of businesses of all individuals with ownership or control over the account

Financial statements

Key business documents

Where the customer resides and the primary trade area

Where the business is located and the primary trade area

Proximity of the bank to the customer’s residence, place of business, and place of employment

Expectations of routine international transactions

Description of business operations, anticipated volume of transaction, and total sales

Major customers and suppliers

Explanations for any changes in account activity

The bank should also review the internet and news sources for negative mentions of the customer.

Simplified Due Diligence

Unlike enhanced due diligence, simplified due diligence means performing a less rigorous version of standard due diligence. The organization can implement simplified due diligence when the customer runs a very low risk for money laundering, terrorist financing, or other financial crimes. This term is more prevalent in the European Union and a few Asian countries than in the United States.

Contingent Due Diligence

Contingent due diligence is a term used in real estate to designate one of the status periods before the deal is final. During the contingent due diligence phase, the buyer can terminate the deal without penalty (generally for any reason).

Due Diligence in Others Areas of Business

The term due diligence is also used by financial advisors and in private equity funding.

Why Due Diligence Is Important

The process of due diligence serves numerous functions that benefit both buyers and sellers in a merger or acquisition. These benefits include the following:

Allows a buyer to confirm financial, contract, customer, and other pertinent information about the seller

Paints a fuller picture of the scope of the transaction, including discovery of previously unknown problems and assets

Leads to more accurate pricing (the initial offer could rise or fall, depending on what due diligence uncovers) because decisions are better informed

Permits the buyer to back out of a deal if due diligence uncovers problems that are too big or complex to address

Creates greater awareness, clearer expectations, and increased comfort for the buyer and seller of what’s expected of them to close the deal

Reduces the knowledge gap between buyer and seller, leading to better (and better-informed) decisions

The Challenges of Due Diligence

Due diligence poses a number of challenges. Working through these issues is essential to ensuring that the process reveals all connected information and the transaction is performed legally.

It can be difficult to ensure that the parties meet all applicable legal and regulatory requirements. In the United States, this includes the Sarbanes-Oxley Act .

Buying a private company draws more scrutiny than buying a publicly traded company, as private companies haven't gone through the examination required for a public offering.

If the deal includes international components, companies must comply with the Foreign Corrupt Practices Act and international accounting standards.

Every deal is unique, so every process has to be customized. This is even more complicated with the different types of M&A structures — for example, a stock transaction versus cash or an acqui-hire (i.e., buying a company to gain key personnel).

Sellers may not be ready to step aside after you complete the deal. This is hard to plan for, and due diligence can’t uncover it.

It may take 12 to 16 months for a certified exit planning advisor to prepare a transition plan.

Sellers may not start preparing information soon enough. It should happen when the company is being shopped around, not after the deal is signed. Deals often fail due to inadequate preparation and transition planning.

Companies must keep on top of changing regulations, such as a recent decision on mergers made by the Delaware Chancery Court (and upheld by the Delaware Supreme Court).

Sellers may be reticent to provide all information requested by the buyer, especially if it’s negative and may impact the final price, or if it takes lot of time to gather.

Brett Cenkus is an attorney with over 20 years of experience in mergers and acquisitions, and the owner for Cenkus Law . “Sellers view [due diligence] as a necessary evil to get the deal done, but underneath it are a bunch of benefits,” he says. “A buyer who isn't getting the information they need is going to be concerned about closing; things slow down when they're not getting what they're looking for. If there's any effort to sort of sidestep an issue, it has legal ramifications.

“The truth is, you’re better off with a buyer by making them comfortable and giving that information. You don't want a buyer who doesn't know what they bought. A lot of sellers don't appreciate that these buyers want to buy your company — they're spending money and time, so this is an opportunity to be sure they own all of it.”

How Can Companies Use Due Diligence?

The questions raised during due diligence should drive further investigation.

“If you find something that appears problematic, you have to do further investigation,” says Elson. “In other words, if something comes to your attention that appears problematic, you then need to determine how serious is the issue. Does it affect the price of the transaction? Or more concerning, does it affect the ability to enter in the transaction at all?”

Due diligence also protects shareholders by determining if the transaction makes sense in terms of valuation.

Once the companies complete their due diligence, the process will drive one of the following results for the proposed deal:

Changing the terms or scope

Moving forward as originally planned

A letter of intent (LOI) is a document that states the buyer and seller are negotiating a merger or acquisition but have not yet reached a final agreement. Most LOIs have a material adverse change (MAC) clause that allows the parties to change or terminate the deal if new information comes out.

When to Conduct Due Diligence

Due diligence takes time. Sellers should prepare as much as they can before they sign a deal — in other words, the target company should compile the basic information while the company is being marketed (two or three months is a realistic timeline). The seller may have a formal auction to draw bids from multiple buyers.

After the parties sign a letter of intent, the process truly begins. The parties should complete due diligence before the deal is scheduled to close, so there's time to fix problems, change the price, or cancel the transaction.

How Long Does Due Diligence Take?

While the LOI will delineate a time frame for due diligence, the general consensus is 30-60 days, but each merger or acquisition is different. Due diligence might run longer or shorter; the benchmark time frame exists to ensure that the due diligence process doesn’t become a sprawling, unending monster with no end in sight.

Consider the following when setting a timeline:

The complexity of the deal (e.g., how many subsidiaries does the acquired company have?)

What business (industry and vertical) is the acquired company in?

How large is the target company?

What kind of merger or acquisition is it?

Are any international properties involved in the deal?

The legal portion of the process can take 10-20 percent of your time and effort, and other portions take up the remaining 80-90 percent.

Can Companies Extend Due Diligence?

You can prolong due diligence, but the process may grow without boundaries. You should avoid extensions unless absolutely necessary.

Can Companies Capitalize Due Diligence Costs?

The answer is complicated. The buyer should always consult legal and financial professionals to ensure that they are categorizing the costs correctly.

For accounting purposes, due diligence and other acquisition-related costs cannot be capitalized and must be considered as expenses.

Charles Elson of the University of Delaware says, “You thought that [an M&A deal] was going to be treated one way, tax-wise, and instead the transactions treated another. It kills the economics of it. Taxation is very significant in this process.”

For tax purposes, due diligence and other acquisition-related costs may be treated as capital expenses if they occur on or after the bright line date . On this date, the seller indicates they are committed to moving forward with the merger or acquisition, demonstrated by either the execution of an LOI or by the buyer’s board of directors authorizing or approving the terms of the transaction.

If one or both companies abandons the deal, the parties will probably not be able to capitalize the costs of due diligence for tax purposes.

Who Can Conduct Due Diligence?

Due diligence is a demanding, high-pressure process that requires a lot of skill and expertise. The buyer is the primary responsible party, but they can bring in third-party advisors for support (companies with a lot of experience may perform the entire process in-house). External consultants could range from a single person for a small deal to a vast team for a multinational corporation. Regardless of the size of the buyer and the advisory team, the buyer should try to engage both internal and external experts to help them evaluate the deal (based on available funds). These experts should include the following:

M&A attorneys (for smaller deals, using an outside expert to lead the process allows the buyer and seller to focus on running their existing businesses)

Attorneys and experts in common fields, such as labor

Attorneys and experts in fields specific to the transaction (e.g., environmental authorities for the purchase of a oil spill cleanup company)

Accountants, including CPAs

Limited partners

VCs (for larger deals, if outside funding is needed to complete the deal)

Specialized consultants

Seller Due Diligence

Sellers can also conduct due diligence on potential buyers before offers come in (this often happens when buyer stock is part of the purchase). They can thus weed out weak bids, preventing wasted time and effort.

Who Can Prepare a Due Diligence Report?

The people and teams (both internal and external) involved in the due diligence process should prepare the report based on their findings. Larger buyers may bring in the corporate development team, or they may outsource the task to a third party.

Crucial Targets in the Due Diligence Process

The due diligence lifecycle is different for each kind of business. Key steps are outlined below for each business type.

Before they can put up a company for sale, the sellers need to do their work — some of which is later used in the due diligence process. Key preliminary due diligence actions include the following:

Strategy planning and preparation

Exit planning (the seller determines how to transition out of the business once it’s sold)

Formal marketing of the sale of the business

Both buyers and sellers must sign nondisclosure agreements (NDAs) and confidentiality agreements along with — or, for some key people, before — the LOI. Then due diligence begins. The seller sends a confidential information memorandum (CIM ), also called a deal book , which provides crucial information about the company.

One of the first steps is to establish a document exchange. Pre-internet, this required a team to visit (often multiple times) the seller’s location and physically handle documents. Much of this work can now be done via a secure online data repository. The parties can post documents and grant access to those who need to see them. They also have the luxury of accessing documents at any time from their own office. However, site visits are still important.

“The ability to go to an operation and actually meet and greet people is a good thing,” says Elson. “Going to an operation and sitting there, feeling it, seeing it, understanding how people come together is an important part of the process … you don’t conduct due diligence merely on the internet.”

During due diligence, you may repeat a number of steps if new information comes to light:

Analysis of the purpose of the project (i.e., if the deal still meets business goals)

Analysis of the financial business case

Review of key documents

Risk analysis

Analysis of offer price (which may be tweaked based on discovery)

The results of the due diligence process (which should be compiled in a final report) will indicate whether or not you should move forward with the deal. If you do, negotiation then takes place, and you can make a final offer.

After the close of the deal, the companies issue a final announcement regarding the transaction. From there, they begin integrating functions, staff, and operations.

Due diligence is used mostly for securities, but it can also apply to debt. When investigating securities, financial advisors should look at the following areas (at a minimum):

Market capitalization (total value) of the company

Revenue, profit, and margin (investments, net income)

Competitors and industries

Valuation multiples (e.g., price-to-earnings ratio)

Management and share ownership

Balance sheet (bond ratings, dividends paid, debt-to-equity ratio)

Stock price history

Stock options and dilution possibilities (e.g., 10-Q and 10-K reports)

Expectations

Long- and short-term risks

The amount of stock that the executives own

Income and revenue estimates for the next two to three years

Any long-term trends that might affect the corporation

Details about partnerships, joint ventures, IP, and new merchandise/companies

While advisors may not be legally obligated to perform due diligence on funds they recommend, it's a smart move to preserve the portfolios of your clients.

A company trying to launch an IPO, in tandem with attorneys and underwriters, must focus on the registration statement. They will have to substantiate all claims made in the document in order to comply with state and federal security laws. Large investors should conduct their own due diligence, ensuring the company’s product or service is promising, considering an investment partnership to share the risks, developing a strategy to harvest returns over time, and planning an exit strategy in case the company fails.

Due Diligence Techniques

Regardless of the business area, communication is key both during and after due diligence. The concept of 360-degree communications , wherein you keep all required parties up to date, is a good rule of thumb. This doesn't mean everybody gets to know everything, however. Create a communication plan before due diligence, so you have a prepared strategy once you get underway.

“The people who are doing the implementation … don't know the company well, like the C-suite, who don't really want to do that work,” says Brett Cenkus. “It starts by having a good connection between who's going to execute and who’s [going to] set it all up.”

Both the buyer and seller should set up a structure for the process. As Cenkus explains, “From the seller’s standpoint, put the information out there in a very clear, structured manner. It's really as simple as organizing the information, and being out ahead of it in a really structured manner.

“On the buyer’s side, it's similar,” he continues. “If they're not organized in the information they're asking for, and not having high enough level people in the weeds, at least at the beginning, to be sure they can push the whole process out the door in a structured manner.

“The process, at least at the beginning, if it's going to be set up right, requires high-level input from the people who know where the bodies are buried (if it’s the seller) or what they're looking (if it’s the buyer),” Cenkus concludes.

This structure should include some centralization to avoid duplication of work and propagation of errors. The buyer and seller should each appoint a gatekeeper.

“From the seller's standpoint, to flow through one person and know exactly what's been requested can feel like a little bit of an impediment if the buyer starts dealing directly with the seller’s people,” explains Cenkus. “But that really starts to create problems.

“Number one, you don't have a good record of what's being communicated. Number two, what was communicated could be incorrect or not structured right. Number three, there's repeat questions. People start to get really frustrated in that administrative flow.

“From the buyer’s standpoint,” he continues, “the problem is even worse, which is where you want to make sure that everyone who needs information is getting it. So it's really [about] centralization. It feels like a little bit of an impediment to how the process is run overall, but it will make it smoother and make sure there aren't holes in the process.”

It’s a good idea to use a due diligence checklist to keep track of in-progress and completed items. That way, you can document and manage every detail as you move through the process.

Cenkus adds, “When you're able to give it [information] in a structured way and be very forthright, it makes buyers feel more comfortable and helps get deals closed.”

During due diligence, SWOT analysis can help you manage the process and stay focused on areas that need the most attention.

What Happens When Due Diligence Expires?

Ideally, you wrap up due diligence and the buyer decides whether to go forward with the purchase. If you don’t complete the process on schedule, you have a couple of options: You can either extend the due diligence period until you complete the process or move on without completing the deal.

Due Diligence M&A Checklists

In this section, you’ll find a variety of free, downloadable checklists for various aspects of the due diligence process. These checklists strive to cover mergers and acquisitions in general, but they may not include some documents and information that are specific to particular fields, and others that may not apply to all deals. Buyers should review the lists and add or delete items as needed.

Financial Due Diligence Checklist

This checklist contains documents and information related to finance that a seller might request from a buyer.

Download Financial Due Diligence Checklist

Excel | PDF

Technology and IP Due Diligence Checklist

This checklist contains documents and information related to technology and intellectual property that a seller might request from a buyer.

Download Tech and IP Due Diligence Checklist

Customer/Sales/Suppliers Due Diligence Checklist

This checklist contains documents and information related to customers, sales, and suppliers that a seller might request from a buyer.

Download Customers/Sales/Suppliers Due Diligence Checklist

Strategic Fit Checklist

This checklist contains documents and information related to the strategic fit of the deal that a seller might request from a buyer.

Download Strategic Fit Checklist

Material Contracts Due Diligence Checklist

This checklist contains documents and information related to technology and material contracts that a seller might request from a buyer.

Download Material Contracts Due Diligence Checklist

Employment/Management Due Diligence Checklist

This checklist contains documents and information related to employees and management that a seller might request from a buyer.

Download Employment/Management Due Diligence Checklist

Litigation/Legal Due Diligence Checklist

This checklist contains documents and information related to litigation and legal issues that a seller might request from a buyer.

Download Litigation/Legal Due Diligence Checklist

Taxes Due Diligence Checklist

This checklist contains documents and information related to taxation that a seller might request from a buyer.

Download Taxes Due Diligence Checklist

Antitrust and Regulatory Due Diligence Checklist

This checklist contains documents and information related to antitrust and regulatory issues that a seller might request from a buyer.

Download Antitrust and Regulatory Due Diligence Checklist

 Excel | PDF

Insurance Due Diligence Checklist

This checklist contains documents and information related to insurance that a seller might request from a buyer.

Download Insurance Due Diligence Checklist

General Corporate Matters Checklist

This checklist contains documents and information related to general corporate matters that a seller might request from a buyer.

Download General Corporate Matters Checklist

Environmental Issues Checklist

This checklist contains documents and information related to environmental issues that a seller might request from a buyer.

Download Environmental Issues Checklist

Related Party Transactions Checklist

This checklist contains documents and information addressing related party transactions that a seller might request from a buyer. These checklists strive to cover mergers and acquisitions in general, but they may not include some documents and information that are specific to particular fields, and others that may not apply to all deals. Buyers should review the list and add or delete as needed.

Download Related Party Transactions Checklist

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Property Due Diligence Checklist

This checklist contains documents and information related to property ownership and leases that a seller might request from a buyer.

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Marketing Due Diligence Checklist

This checklist contains documents and information related to marketing that a seller might request from a buyer.

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Competitive Landscape Due Diligence Checklist

This checklist contains documents and information related to the competitive landscape that a seller might request from a buyer.

Download Competitive Landscape Due Diligence Checklist

Online Data Room Due Diligence Checklist

This checklist contains documents and information related to the online data room setup that a seller might request from a buyer.

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Disclosure Schedule Checklist

This checklist contains documents and information related to the disclosure schedule that a seller might request from a buyer.

Download Disclosure Schedule Checklist 

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What Is Due Diligence?

Understanding due diligence.

• Due Diligence for Stocks
• Due Diligence for Startups
• M&A Due Diligence
• Due Diligence FAQs

The Bottom Line

• Investing Basics

Due Diligence

James Chen, CMT is an expert trader, investment adviser, and global market strategist.

Due diligence is an investigation, audit , or review performed to confirm facts or details of a matter under consideration. In the financial world, due diligence requires an examination of financial records before entering into a proposed transaction with another party.

Key Takeaways

• Due diligence is a systematic way to analyze and mitigate risk from a business or investment decision.
• An individual investor can conduct due diligence on any stock using readily available public information.
• The same due diligence strategy will work on many other types of investments.
• Due diligence involves examining a company's numbers, comparing the numbers over time, and benchmarking them against competitors.
• Due diligence is applied in many other contexts, for example, conducting a background check on a potential employee or reading product reviews.

Investopedia / Ellen Lindner

Due diligence became common practice (and a common term) in the United States with the passage of the Securities Act of 1933 . With that law, securities dealers and brokers became responsible for fully disclosing material information about the instruments they were selling. Failing to disclose this information to potential investors made dealers and brokers liable for criminal prosecution.

The writers of the act recognized that requiring full disclosure left dealers and brokers vulnerable to unfair prosecution for failing to disclose a material fact they did not possess or could not have known at the time of sale. Thus, the act included a legal defense: as long as the dealers and brokers exercised "due diligence" when investigating the companies whose equities they were selling, and fully disclosed the results, they could not be held liable for information that was not discovered during the investigation.

Due diligence is performed by equity research analysts, fund managers, broker-dealers, individual investors, and companies that are considering acquiring other companies. Due diligence by individual investors is voluntary. However, broker-dealers are legally obligated to conduct due diligence on a security before selling it.

Types of Due Diligence

Depending on its purpose, due diligence takes different forms.

Context-Specific Due Diligence

• Commercial due diligence considers a company's market share and competitive positioning, including its future prospects and growth opportunities. This will consider the company's supply chain from vendors to customers, market analysis, sales pipeline, and R&D pipeline. This can also encompass a firm's overall operations, including management, human resources, and IT.
• Legal due diligence makes sure that a company has all of its legal, regulatory, and compliance eggs in a row. This includes everything from pending litigation to intellectual property rights to being sure the company was properly incorporated
• Financial due diligence audits a company's financial statements and books to make sure that there are no irregularities and that the company is on solid financial footing.
• Tax due diligence looks at the company's tax exposure, whether it may owe any back taxes, and where it can reduce its tax burden going forward.

Hard vs. Soft Due Diligence

Due diligence can be categorized as "hard" or "soft" based on the approach used.

• Hard due diligence is concerned with the numbers and data found on the financial statements like the balance sheet and income statement. This can entail fundamental analysis and the use of financial ratios to get a grasp on a company's financial position and make projections into the future. This type of due diligence can also identify red flags or accounting inconsistencies however, Hard due diligence, which is driven by mathematics and legalities, is susceptible to rosy interpretations by eager salespeople. Soft due diligence acts as a counterbalance when the numbers are being manipulated or overemphasized.
• Soft due diligence is a more qualitative approach that looks at aspects such as the quality of the management, the people within the company, and the loyalty of its customer base. There are indeed many drivers of business success that numbers cannot fully capture, such as employee relationships, corporate culture, and leadership. When M&A deals fail, as an estimated 70%-90% of them do, it is often because the human element is ignored.

We discuss more on how these two types of due diligence are put into practice in the context of M&A deals below.

How to Perform Due Diligence for Stocks

Below are 10 steps for individual investors undertaking due diligence. Most are related to stocks, but, in many cases, they can be applied to bonds, real estate, and many other investments.

After those 10 steps, we offer some tips when considering an investment in a startup company.

All of the information you need is readily available in the company's quarterly and annual reports and in the company profiles on financial news and discount brokerage sites.

Step 1: Analyze the Capitalization of the Company 

A company’s market capitalization , or total value, indicates how volatile the stock price is, how broad its ownership is, and the potential size of the company's target markets.

Large-cap and mega-cap companies tend to have stable revenue streams and a large, diverse investor base, which tends to lead to less volatility. Mid-cap and small-cap companies typically have greater fluctuations in their stock prices and earnings than large corporations.

Step 2: Revenue, Profit, and Margin Trends

The company's income statement will list its revenue or its net income or profit. That's the bottom line. It's important to monitor trends over time in a company's revenue, operating expenses, profit margins , and return on equity .

The company's profit margin is calculated by dividing its net income by its revenue. It's best to analyze profit margin over several quarters or years and compare those results to companies within the same industry to gain some perspective.

Step 3: Competitors and Industries

Now that you have a feel for how big the company is and how much it earns, it's time to size up the industry in which it operates and its competition. Every company is defined in part by its competition. Due diligence involves comparing the profit margins of a company with two or three of its competitors. For example, questions to ask are: Is the company a leader in its industry or its specific target markets? Is the company's industry growing?

Performing due diligence on several companies in the same industry can give an investor significant insight into how the industry is performing and which companies have the leading edge in that industry.

Step 4: Valuation Multiples

Many ratios and financial metrics are used to evaluate companies, but three of the most useful are the price-to-earnings (P/E) ratio, the price/earnings to growth (PEGs) ratio, and price-to-sales (P/S) ratio. These ratios are already calculated for you on websites such as Yahoo! Finance.

As you research ratios for a company, compare several of its competitors. You might find yourself becoming more interested in a competitor.

• The P/E ratio gives you a general sense of how much expectation is built into the company's stock price. It's a good idea to examine this ratio over a few years to make sure that the current quarter isn't an aberration.
• The price-to-book (P/B) ratio , the enterprise multiple, and the price-to-sales (or revenue) ratio measure the valuation of the company in relation to its debt, annual revenues, and balance sheet. Peer comparison is important here because the healthy ranges differ from industry to industry.
• The PEG ratio suggests expectations among investors for the company's future earnings growth and how it compares to the current earnings multiple. Stocks with PEG ratios close to one are considered fairly valued under normal market conditions.

Step 5: Management and Share Ownership

Is the company still run by its founders, or has the board shuffled in a lot of new faces? Younger companies tend to be founder-led. Research the bios of management to find out their level of expertise and experience. Bio information can be found on the company's website.

Whether founders and executives hold a high proportion of shares and whether they have been selling shares recently is a significant factor in due diligence. High ownership by top managers is a plus, and low ownership is a red flag. Shareholders tend to be best served when those running the company have a vested interest in stock performance.

The P/E ratio gives a sense of the expectations that investors have for the stock's near-term performance.

Step 6: Balance Sheet

The company's consolidated balance sheet will show its assets and liabilities as well as how much cash is available.

Check the company's level of debt and how it compares to others in the industry. Debt is not necessarily a bad thing, depending on the company's business model and industry. But make sure those debts are highly rated by the rating agencies.

Some companies and whole industries, like oil and gas, are very capital intensive while others require few fixed assets and capital investment. Determine the debt-to-equity ratio to see how much positive equity the company has. Typically, the more cash a company generates, the better an investment it's likely to be because the company can meet its debts and still grow.

If the figures for total assets, total liabilities, and stockholders' equity change substantially from one year to the next, try to figure out why. Reading the footnotes that accompany the financial statements and the management's discussion in the quarterly or annual reports can shed light on what's really happening in a company. The firm could be preparing for a new product launch, accumulating retained earnings , or in a state of financial decline.

Step 7: Stock Price History

Investors should research both the short-term and long-term price movements of the stock and whether the stock has been volatile or steady. Compare the profits generated historically and determine how it correlates with the price movement.

Keep in mind that past performance does not guarantee future price movements. If you're a retiree looking for dividends, for example, you might not want a volatile stock price. Stocks that are continuously volatile tend to have short-term shareholders, which can add extra risk for certain investors.

Step 8: Stock Dilution Possibilities

Investors should know how many shares outstanding the company has and how that number relates to the competition. Is the company planning on issuing more shares? If so, the stock price might take a hit.

Step 9: Expectations

Investors should find out what the consensus of Wall Street analysts is for earnings growth, revenue, and profit estimates for the next two to three years. Investors should also look for discussions of long-term trends affecting the industry and company-specific news about partnerships, joint ventures , intellectual property , and new products or services.

Step 10: Examine Long and Short-Term Risks

Be sure to understand both the industry-wide risks and company-specific risks. Are there outstanding legal or regulatory matters? Is there unsteady management?

Investors should play devil's advocate at all times, picturing worst-case scenarios and their potential outcomes on the stock. If a new product fails or a competitor brings a new and better product forward, how would this affect the company? How would a jump in interest rates affect the company?

Once you've completed the steps outlined above, you'll have a better sense of the company's performance and how it stacks up to the competition. You will be better informed to make a sound decision.

Due Diligence Basics for Startup Investments

When considering investing in a startup , some of the 10 steps above are appropriate while others just aren't possible because the company doesn't have the track record. Here are some startup-specific moves.

• Include an exit strategy. Plan a strategy to recover your money should the business fail.
• Consider entering into a partnership: Partners split the capital and risk, so they lose less if the business fails.
• Figure out the harvest strategy for your investment. Promising businesses may fail due to a change in technology, government policy, or market conditions. Be on the lookout for new trends, technologies, and brands, and get ready to harvest when you find that the business may not thrive with the changes.
• Choose a startup with promising products. Since most investments are harvested after five years, it is advisable to invest in products that have an increasing return on investment (ROI) for that period.
• In lieu of hard numbers on past performance, look at the growth plan of the business and evaluate whether it appears to be realistic.

M&A Due Diligence

In the mergers and acquisitions (M&A) world, a company that is considering a deal will perform a financial analysis on a target company. The due diligence might also include an analysis of future growth. The acquirer may ask questions that address the structuring of the acquisition. The acquirer is also likely to look at the current practices and policies of the target company and perform a shareholder value analysis.

In traditional M&A activity, the acquiring firm deploys risk analysts who perform due diligence by studying costs, benefits, structures, assets, and liabilities. That's known colloquially as hard due diligence.

Increasingly, however, M&A deals are also subject to the study of a company's culture, management, and other human elements via soft due diligence.

Performing Hard Due Diligence

In an M&A deal, hard due diligence is the battlefield of lawyers, accountants, and negotiators. Typically, hard due diligence focuses on earnings before interest, taxes, depreciation and amortization (EBITDA), the aging of receivables and payables, cash flow, and capital expenditures.

In sectors such as technology or manufacturing, additional focus is placed on intellectual property and physical capital .

Other examples of hard due diligence activities include:

• Reviewing and auditing financial statements
• Scrutinizing projections for future performance
• Analyzing the consumer market
• Seeking operating redundancies that can be eliminated
• Reviewing potential or ongoing litigation
• Reviewing antitrust considerations
• Evaluating subcontractor and other third-party relationships

Performing Soft Due Diligence

Conducting soft due diligence is not an exact science. It should focus on how well a targeted workforce will mesh with the acquiring corporation's culture.

Hard and soft due diligence intertwine when it comes to compensation and incentive programs. These programs are not only based on real numbers, making them easy to incorporate into post-acquisition planning, but they can also be discussed with employees and used to gauge cultural impact.

Soft due diligence is concerned with employee motivation, and compensation packages are specifically constructed to boost those motivations. It is not a panacea or a cure-all, but soft due diligence can help the acquiring firm predict whether a compensation program can be implemented to improve the success of a deal.

Soft due diligence can also concern itself with the target company's customers. Even if the target employees accept the cultural and operational shifts from the takeover, the target customers and clients may well resent a change in service, products, or procedures. This is why many M&A analyses now include customer reviews, supplier reviews, and test market data.

What Exactly Is Due Diligence?

Due diligence is a process or effort to collect and analyze information before making a decision. It is a process often used by investors to assess risk. It involves examining a company's numbers, comparing the numbers over time, and benchmarking them against competitors to assess an investment's potential in terms of growth.

What Is the Purpose of Due Diligence?

Due diligence is primarily a way to reduce exposure to risk. The process ensures that a party is aware of all the details of a transaction before they agree to it. For example, a broker-dealer will give an investor the results of a due diligence report so that the investor is fully informed and cannot hold the broker-dealer responsible for any losses.

What Is a Due Diligence Checklist?

A due diligence checklist is an organized way to analyze a company. The checklist will include all the areas to be analyzed, such as ownership and organization, assets and operations, the financial ratios, shareholder value, processes and policies, future growth potential, management, and human resources.

What Is a Due Diligence Example?

Examples of due diligence can be found in many areas of our daily lives. For example, conducting a property inspection before completing a purchase to assess the risk of the investment, an acquiring company that examines a target firm before completing a merger or acquisition, and an employer performing a background check on a potential recruit.

Due diligence is a process or effort to collect and analyze information before making a decision or conducting a transaction so a party is not held legally liable for any loss or damage. The term applies to many situations but most notably to business transactions. Due diligence is performed by investors who want to minimize risk, broker-dealers who want to ensure that a party to any transaction is fully informed of the details so that the broker-dealer is not held responsible, and companies who are considering acquiring another firm. Fundamentally, doing your due diligence means that you have gathered the necessary facts to make a wise and informed decision.

Govinfo.gov. " Securities Act of 1933 ."

Harvard Business Review. " Don't Make This Common M&A Mistake ."

Business Harvard Review. " Human Due Diligence ."

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Free guide: Reviewing change of control & assignment provisions in due diligence

Written by: Kira Systems

September 9, 2015

3 minute read

Due diligence may not be the glamorous work that you imagined performing as an M&A lawyer or banker. In due time, you may become the next Harvey Spectre, closing deals in spectacular fashion. However, until then, contract review and analysis will still be a major part of your job description.

As rigorous and tedious as it may be, due diligence is a key component of any transaction and must be completed with care. One of the most important parts of legal due diligence is the contract review, and in particular, the review of the target company’s contracts for problematic change of control and assignment clauses. Lucky for you, Kira has just released a free, comprehensive guide to reviewing these provisions.

Change of control and assignment provisions, individually or in aggregate, can impact the intended consummation date and post-acquisition value of the target company. One of the purposes of due diligence is to separate the target company’s material contracts into two distinct groups:

• Contracts that will require counterparty consent , notice or payments in order to remain in effect after consumation of a proposed transaction
• Contracts that will remain in effect without any further action with respect to their respective counterparties

What are the consequences of change of control and assignment provisions?

If triggered by a transaction involving the target company, a change of control provision may entitle the counterparty to terminate its contract outright (or seek damages), refuse consent to the transaction and thereby terminate its agreement with the firm if the deal goes through, or receive payment from the target company.

Meanwhile, an anti-assignment provision may entitle the counterparty to terminate its contract with the target company if the target company has to assign its rights and/or delegate its duties under a contract to another party and the consent of the counterparty is required to do so.

Why do these clauses exist in the first place?

Although they can prove to be a headache, these clauses exist to protect the counterparties in an agreement with the target company.

Companies like to know who they are doing business with. It is only natural to want to protect against fundamental changes to the nature of the target company’s business and/or major shifts in the ownership of the target company. Change of control and assignment provisions exist so that counterparties have an opportunity to decide whether or not they wish to continue their relationship with the target company if the changes meet the specified criteria. These provisions also provide them with a method of compensation for any additional risk in the new business or any added value they bring to the target company.

How do I spot all the different types of change of control and assignment provisions, and how do I know if they are problematic?

There are many variations of change of control provisions – for example, they may cover transfers of “all or substantially all assets,” “mergers,” “transfers” (to “affiliates” or not), and variety of other events (e.g. reorganizations, consolidations). Assignment clauses also have almost as many variations as change of control provisions.

It is critical to identify these variations early on and to determine whether they will pose an issue under the contemplated transaction structure. A provision that is not triggered by an asset purchase might be triggered by a merger, and so on. A more in-depth discussion on this topic will follow in a future blog post.

To learn more about these clauses and effective strategies to deal with them, download Kira’s free guide on “Reviewing Change of Control and Assignment Provisions in Due Diligence” .

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The Ultimate Guide to the Due Diligence Process in M&A

Table of contents

Due diligence is the process that allows buyers to fully understand target companies in mergers and acquisitions.

For confidentiality purposes, companies do not disclose every detail of their operations to every company that expresses an interest.

Thus, the due diligence process allows the buyer to gain more insight into the company, its people, and how it operates.

If you’d like to know more about how DealRoom can transform your company’s due diligence process , click the link and visit our due diligence solution page.

What is Due Diligence Process?

Due diligence process is a solid review or audit of a company, usually undertaken before a financial transaction, usually merger or an acquisition. The aim of due diligence in business is to ensure that any decision taken regarding the company in question is an informed one, maximizing your chances of adding value in an M&A transaction.

Due Diligence Review

The due diligence process throws up lots of information on the target company, across all of its operational areas. The goal of the due diligence review is to piece together all of this information into a coherent story.

This usually involves the people in charge of the due diligence process convening and deciding if there’s anything that was disclosed in the process that changes their initial opinion on a deal.

For example:

• can the deal still go ahead?
• should it go ahead with a certain set of covenants?
• what concerns should be raised with the target company?

These are typical of the questions that will arise during the due diligence review.

The History of Due Diligence

“I like not fair terms and a villain’s mind.”

This line from Shakespeare’s Merchant of Venice shows that some form of due diligence existed all the way back to 1605 .

In fact, the first known usage of the term ‘due diligence’ came shortly before Shakespeare’s play in 1598 . But due diligence may be as old as transactions themselves - with the transaction itself creating a need to know more about the other side.

It wasn’t until the 20th century that due diligence took on the more structured form that we know today. The first time that due diligence is mentioned in SEC documents was 1933 , but it is fair to assume that the arrival of more sophisticated management accounting methods in the second decade of the twentieth century, saw the first tentative steps in modern due diligence.

What Types of Due Diligence are There?

In mergers and acquisitions, we typically think of four major types of due diligence:

• Financial due diligence : Focusing on the financial performance of the company until the present date and ensuring that the numbers presented in the financial statements are accurate and sustainable.
• Legal due diligence : Focusing on all legal aspects of the company and its relationships with its stakeholders. Areas typically analyzed include licences, regulatory issues, contracts, and any legal liabilities that may be pending.
• Operational due diligence : Focusing on the company’s operations - essentially looking at how the company turns inputs into outputs. This is generally considered to be the most forward looking type of due diligence.
• Tax due diligence : Focusing on all of the company’s tax affairs and ensuring that its tax liabilities are paid in full to date. Due diligence in tax also looks at how a merger would affect the tax liabilities of the new entity created by the transaction.

Why is Due Diligence Important?

A merger or acquisition is the biggest corporate transaction that any business will undertake.

Due diligence enables companies to undertake these transactions from an informed standpoint.

It can add significant value for the buyer by showing where the target company’s weaknesses (or red flags) are as well as identifying some opportunities within the target company that it previously wasn’t aware that existed.

What are the Challenges of Due Diligence?

Gaining an in-depth understanding of a company can be a highly specialized process beyond most people without experience in the field.

There tend to be a myriad of challenges, but the following are usually among the most commonly encountered:

• Not knowing what questions to ask: It is vitally important to know in advance what the issues are and what diligence questions need to be asked to investigate them properly.
• Slowness of execution: Asking sellers to acquire documentation or information can take time, often with the consequence of delaying the transaction’s closing.
• Lack of communication: Sellers, even willing sellers, tend to regard due diligence as a hassle, leading to impatience, poor communication, and even friction.
• Lack of expertise: There is a good chance that you’ll have to bring in some hired hands tor at least some parts of the due diligence process (e.g., an IP expert).
• Cost challenges: Due diligence can be expensive, running into months and extensive specialist hours, making many erroneously think that they can cut corners.

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Conducting Due Diligence

Conducting due diligence is an essential component of any M&A transaction.

To conduct due diligence means to thoroughly analyse a commercial business. It is done typically by a potential buyer prior to business transactions.

How to conduct due diligence on a company differs by transaction, but there are certain steps that are common to each deal. As a general rule, the larger and more complex the deal, the more due diligence will be required.

DealRoom has been a catalyst for due diligence in hundreds of M&A transactions, and the following steps for due diligence were present in each of them:

• Income statements
• Balance sheets
• Partnership agreements
• Existing contracts
• Profit/loss records
• Annual reports
• Tax filings
• Business and operational practices

You can find the detailed due diligence checklist below.

Due Diligence Checklists

DealRoom's Due Diligence Reports and Playbooks help team efficiently manage due diligence from the start. Diligence incorporates many moving parts and it is critical to a deal's success.

Our library of pre-built ready to use playbooks enables teams to thoroughly and effectively collect necessary diligence information.

Access the Diligence Templates Gallery

Due diligence process steps, policies and procedures.

Due diligence in M&A is a lengthy and intimidating process that involves multiple parties and phases. Listed are general due diligence process steps.

1. Evaluate Goals of the Project

As with any project, the first step delineating corporate goals. This helps pinpoint resources required, what you need to glean, and ultimately assure alignment with the firm’s overarching strategy.

This involves introspective questions revolving around what you need to gain from this investigation.

2. Analyze of Business Financials

This step is an exhaustive audit of financial records. It ensures that documents depicted in the Confidentiality Information Memorandum (CIM) were not fluffed.

Additionally, it helps gauge the company’s asset health, asses overall financial performance and stability, and detect any red flags.

Some of the Items inspected here include:

• Balance sheets and income statements
• Inventory schedules
• Future forecasts and projections
• Revenue, profit, and growth trends
• Stock history and options
• Short and long-term debts
• Tax forms and documents
• Valuation multiples and ratios in comparison to competitors and industry benchmarks

The detailed financial due diligence checklist could be found here .

3. Thorough Inspection of Documents

This due diligence step begins as a two-way conversation between buyer and seller. The buyer asks for respective documents to audit, conducts interviews or surveys with the seller, and goes on site visits.

Responsiveness and organization on the seller’s end are key to expedite this process. Otherwise, it may create an arduous experience for the buyer.

Following, the buyer examines the information collected to ensure proper business practices as well as legal and environmental compliances. This is the major part of due diligence process.

Overall, the buyer gains a better understanding of the firm as a whole and can better appraise long term value.

4. Business Plan and Model Analysis

Here, the buyer looks specifically at the target company’s business plans and model. This is to assess whether it is viable and how well the firm’s model would integrate with theirs.

5. Final Offering Formation

After information and documents are gathered and examined, individuals and teams collaborate to share and evaluate their findings.

Analysts utilize information collected to perform valuation techniques and methods. This substantiates the final dollar you are willing to offer during negotiation.

6. Risk Management

Risk management is looking at the target company holistically and forecasting risks that may be associated with the transaction.

How Long is Due Diligence Period

While road mapping, it may seem difficult to forecast how much due diligence is enough.  Despite its comprehensive nature, the due diligence process should only last between 30 and 60 days .

This is achievable if delegated to an efficient, dynamic team from multiple business functions. Ultimately, you want to close the deal as soon as possible, while also being thorough.

But, in reality, it is impossible to uncover all issues and potential complications during the investigation. Some items will not be uncovered until integration. However, the same idea applies to potential benefits.

This reinforces the importance to be energetic and efficient while maintaining quality to meet the due diligence period deadline.

How Many Due Diligence Requirements are There

Cultivating good organization and strategizing is key when trying to navigate due diligence process and meet the necessary requirements.

So you can stay systematic, outlined below is a typical due diligence management folder structure for M&A transactions:

• Transaction Related Documents
• Corporate Documents
• Contracts and Agreements
• Customers, Sales, and Marketing
• Procurement (Suppliers)
• Property and Equipment
• Environmental
• Legal, Litigation, and Regulatory
• Intellectual Property
• HR and Employees
• Information Technology
• Industry and other

How to Do Due Diligence on a Private Company

No two M&A deals are the same.

Each incorporates its own character of size, business owner and leadership personalities, culture, and industry to create a unique transaction.

One factor that makes transactions more complex and due diligence process more complicated is when a company is privately held.

Unlike publicly traded companies, private companies are not auctioned and traded conventionally on the stock market.

Investors cannot easily buy shares unless they are founders, employed there, or have invested via venture capital or private equity firms.

Aside from it being more difficult to invest in private companies, they are not obligated to publicly disclose as much information. Compared to private companies, public companies are also held to stricter business and accounting practice standards.

While buying out privately owned companies and startups may have a high payoff and rewards, they come with distinct complexities. These may affect or hinder the M&A process.

To save some headaches down the line, detailed here are some best practices for the private equity due diligence process:

• Understand Your Financial Situation - Before even researching companies or drafting out an LOI, you need to look at your own books. Do you have enough resources to complete the transaction and bounce back if it does not work out? If not, maybe consider a smaller scale investment or wait a little while.
• Accounting Procedures and Financial Statements - Publicly held companies must abide by GAAP and IFRS and are audited regularly to ensure compliance. Regulations on privately held companies are not as strict. This allows them to use different accounting procedures or even practices off the beaten path. Rather than traditional accrual accounting, it may not be unusual to see cash-basis or something else more arbitrary.
• Size - Private companies are almost always smaller than public. This doesn’t only mean fewer employees and less office space, but also likely smaller revenues.
• Human Resources Practices - Smaller, younger businesses may not have standardized HR processes. Here, you want to check out items such as questionable terminations, harassment charges, hiring practices, and if/what workplace policies exist.
• Legal - The last thing you want from any investment is to soon find that it is riddled with legal issues. Some details to consider here are tax compliance, any past or outstanding lawsuits, and overall obedience to applicable jurisdictions.
• Valuation - Valuation methodologies are the same between private and public companies. However, you have to adjust for lack of liquidity and publicly available market caps.
• Management and Leadership - The company you are considering buying could have been the brainchild of siblings or friends. Meaning, they could be a little protective. You will want to meet and get to know them to determine if there is any hostility associated with the transaction. By and large poor, disgruntled management will trickle down the m&a buy side due diligence process and negatively impact the business.
• The Business - Overall, do you believe in the company, their strategy, and mission? Is this something you see as truly being successful?

Conduct Due Diligence Process the Right Way

Conducting proper due diligence is an important, yet tedious process. Here are a few helpful tips:

• Use a Diligence Management Software - Diligence management software combines the features of a traditional virtual data room with project management capabilities. This allows users to not only securely store data, but effectively manage and share files as well.
• Start Early - The diligence process can be extremely time-consuming. It’s best to get started early in an organized manner. When teams utilize a tool like DealRoom, they can start the process within minutes.
• Utilize Checklists - When teams use a diligence management software, they can easily create organized checklists. For example, rooms can be broken down into different stages of diligence. Users can efficiently check items off as they are completed.
• Address Potential Risks Throughout the Process - If potential bottlenecks and risks arise during diligence, teams should address them promptly.
• Employ Experts - Hiring M&A professionals such as investment banks and consultants make the due diligence process more efficient. Deal teams have experience with conducting diligence and know the necessary steps to take.

Easy Due Diligence Process with DealRoom

Traditionally, due diligence process is completed using a virtual data room , Excel trackers, and one-off emails.

Unfortunately, this leaves room for inefficiencies such as version control worries, miscommunication, duplicate work, and information silos.

With DealRoom , all diligence can be managed within the platform.

Teams no longer have to switch between multiple platforms and this allows diligence to be completed up to 40% faster. They can effortlessly share information and collaborate internally, as well as externally with clients.

Final Thoughts

The due diligence process is never easy, but that doesn’t mean it has to be inefficient and disorganized. With the proper software and workflows in place, diligence can be straightforward and productive.

After all, the information that is discovered during diligence is critical to a deal’s success.

Due Diligence Software like DealRoom, equips teams with the proper tools to be thorough, yet efficient, and to close deals faster.

Free Resource: Due Diligence Checklist

This exhaustive list of requests ensures you’re asking the right questions during the diligence process of your next transactions

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Archived Content

Bold bloom filters, learning objectives.

• Implement the bloom filter using C++ built-in data structures
• Understand bitvectors and fundamental bitvector operations
• Measure the accuracy of a bloom filter over its multi-dimensional parameter space

Assignment Description

In this lab we will be implementing bloom filters and building up our understanding of probabilistic data structures as well as fundamental bit operations.

Lab Insight

Bloom filters are a great example of a probablistic data structure – a data structure whose accuracy is not guaranteed but is usually bounded in some meaningful way (or one-sided in error). Additionally data structures in this class generally have great performance with speeds or overall efficiency that are hard to beat. Among the data structures in this classification, the bloom filter is the most straightforward as it directly extends from what we now know about hashing.

In addition to the basics of implementation (which you are coding up here), in class we also discussed that the optimally accurate bloom filter can be determined if you know any two of the following three properties: (1) Size of bloom filter (2) Number of hashes (3) Expected number of items. You will explore that relationship by implementing an integer-hash bloom filter with variable hashes, sizes, and input items and observing how the filter compares to the underlying ground truth.

Checking Out the Code

All assignments will be distributed via our release repo on github this semester. You will need to have set up your git directory to have our release as a remote repo as described in our git set up .

You can merge the assignments as they are released into your personal repo with

The first git command will fetch and merge changes from the main branch on your remote repository named release into your personal. The --no-edit flag automatically generates a commit message for you, and the --no-rebase flag will merge the upstream branch into the current branch. Generally, these two flags shouldn’t be used, but are included for ease of merging assignments into your repo.

The second command will push to origin (your personal), which will allow it to track the new changes from release .

You will need to run these commands for every assignment that is released.

All the files for this lab are in the lab_bloom directory.

Part 1: The Bloom Filter Class

As every provided hash function takes an integer as input (and returns an integer as output), unlike most the assignments in this class our bloom filter is not templated! For the first part of this assignment, your task is to finish implementing this integer-hash bloom filter. The specific functions you should fill in are:

• BF::BF() (Both constructor and copy constructor)
• BF::contains()
• BF::bit_union()
• BF::intersect()

To help you debug the assignment, the BF class has an override to print the content of a bloom filter when passed to cout as well as five ‘hash’ functions of varying performance so you can explore the space of possible implementations. While you should read the doxygen to understand the specific details of each function, some tips to help you out are below.

Remember that functions can be stored as variables and passed as function arguments! In this assignment we actually go one step further and pass a vector of hashFunctions , which we have type defined for you in bloom.h to be any function that takes in an integer as input and returns an integer as output.

Don’t overthink add () or contains() ! If you understand how a bloom filter handles collisions and the probabilistic errors possible in a BF, they should be very straightforward.

The lab slides briefly review what a bit vector is and the fundamentals of bitwise union and intersection. Depending on your background you may find it easier to consider them as logical gates or the basic connectives of predicate logic. As a simple truth table:

Part 2: False Positive Rate Experiment

Once you have a functional BF class, its time to evaluate how the accuracy in a BF is a function of its size, the number of hashes, and the number of items inserted. As the bloom filter has one-sided error, the only mistakes it can make are when it identifies an item as being ‘present’ when it was not actually inserted into the bloom filter. Accordingly, the only measure of accuracy we need to track is the False Positive Rate . For a refresher on what that means conceptually, see the following table:

As seen in class (and re-iterated in the slides), \(FPR=\frac{FP}{(FP+TN)}\). From a coding point of view, we can estimate this by keeping track of the raw number of false positives and the raw number of true negatives. Then it is a simple matter of querying every number and tracking how many numbers not in our set were identified as being part of our set (FP) as well as the number of items we correctly identify as not present (TN). However in order to do this correctly, we need one additional piece of information – the size of the universe! Given this information, you can query the full range and get the correct estimate.

Warning: You should always assume the universe starts from 0 and ends at (but not including) the universe max. In other words, the universe parameter defines the size of the universe, not the final item in the universe.

Ex: A universe of 100 is the items 0 through 99.

The specific functions you should fill in are:

• measureFPR()

Part 3: Bit Mask Tutorial

When using vector<bool> , you can use standard array indexing [] to look up the value of any bit. But when using actual bit vectors, it is much harder to access a single bit. Here you are tasked with looking up specific bits in a vector<char> . For the purposes of the lab, you will first implement this for a single character and then extend that logic to work for an array of characters:

• getBitFromByte()
• getBitFromArray()

Figuring out how to actually accomplish this is the point of the lab exercise, but as a hint you should be familiar with the fundamental bit-wise operators discussed in class. A brief summary of them can be found in the lecture slides.

Part 4: (Optional) Data Exploration

Given the completed functions in parts 1 and 2, you have the ability to get the FPR for any combination of hashes, bit vector sizes, and input items (as well as the size of the universe). You are encouraged to play around with different parameter sets to see if the empirically derived accuracy has an optimal accuracy that matches the equation we saw in class with k hashes, m bits, and n items inserted:

If the accuracy you are seeing doesnt match, why do you think this is? What might you change to restore the optimality?

Submitting Your Work

The following files are used in grading:

All other files including any testing files you have added will not be used for grading.

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Raiders Did Their Due Diligence Before Selecting TE Brock Bowers

The Las Vegas Raiders now have two of the best tight ends to enter the National Football League in recent memory.

• Author: Ezekiel Trezevant IV

In this story:

Almost no one could have seen the Las Vegas Raiders selecting tight end Brock Bowers from Georgia with the 13th overall pick in the NFL Draft. However, practically no one could have predicted the first round would play out as it did, either. While the first few picks went as expected, multiple teams made surprise picks, including the Raiders, after the sixth pick of the draft.

The Raiders took the best player available, though, not at a position of need. It was a questionable move, but the Raiders made an understandable choice, considering how the draft played out. 

"We went through a lot of prep and scenarios, and just the way it worked out, we kind of figured there could be a lot of quarterbacks going early, too, just by looking at the needs of who was there,” said Raiders general manager Tom Telesco. “Because somebody may come down that maybe usually wouldn't, didn't know who it would be, but the fact that it was somebody that can really make some plays on the offensive side of the ball was helpful."

When the 13th pick rolled around, the top-six quarterbacks were off the board. No defensive players had been selected, and the Raiders would have been choosing the third or fourth-ranked offensive lineman in the draft. While offensive line was undoubtedly a pressing need, the Raiders had the chance to draft an impact player in Bowers, and they did so.

"He's [Bowers] tough,” Telesco said. “When you play at Georgia, as a tight end, you have to be able to block. And in the SEC, he's played against some real defenders. ourselves. But he's an athletic move receiving tight end, but he can get down and block a bit on the line of scrimmage, which you're going to have to do at this level, too. So, this kind of shows you what his game's like."

Telesco said he and the Raiders had about the usual amount of contact a team has with a potential draft pick, not to tip off other teams to their interest in Bowers.

"The normal amount of contact,” Telesco said. “We don't like to put up billboards on who we're going to be possibly interested in. But yeah, we did a lot of work on Brock. Our scouts had seen him for obviously not his freshman year. You're not eligible, but he obviously he jumped out as a freshman right away.

“But yeah, good amount of work through the fall, through the pre-draft process, all the way through it just like everybody else. You do all the work on all these guys because you never know who you're going to be taking in reality. We do cut our board down pretty significantly as we do a lot of work for a smaller group of players, but you have to be prepared for every scenario, so that worked out."

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