Due diligence in an acquisition: what to investigate before you sign
The process, the seven areas of investigation and the difference between a warranty and an indemnity when buying a company.
In this topic: Strategic choices 10
When you buy a company, you also buy what is not in the accounts. A claim from a former employee, a customer who has already given notice, a tax error from three years ago. Due diligence is the investigation that brings such issues to the surface before you sign. Deloitte describes the purpose as uncovering hidden problems that can affect the valuation, price or contract terms, and adds that due diligence today is at least as much about opportunities as about risks (source: Deloitte, September 2025).
The approach is the same for a first acquisition by an owner-manager, for an adviser supporting a buyer and for a corporate development team doing its tenth deal. Only the depth differs.
How the process runs
- 01
Confidentiality
Before the seller shares sensitive information, the buyer signs a non-disclosure agreement.
- 02
Letter of intent
Buyer and seller record the main terms. A letter of intent is usually not a final contract, but parts of it, such as confidentiality and exclusivity, are often binding. Make the deal conditional on the outcome of the investigation.
- 03
Investigation in the data room
The seller provides documents in a data room; the buyer and its advisers ask questions. What surfaces here determines price and protection.
- 04
Purchase agreement
Findings end up in the purchase agreement as a price adjustment, a warranty or an indemnity. Involve an accountant, a tax adviser and a lawyer.
The seven areas of investigation
Financial
Are the numbers right, and how sustainable is the profit? Look at quality of revenue, working capital, off-balance-sheet commitments and normalised earnings. See business valuation.
Tax
Which tax risks do you take on? PwC notes that tax due diligence pays close attention to tax opportunities as well as potential pitfalls (source: PwC, November 2018).
Legal
Contracts, permits, intellectual property, disputes and transferability: what comes along, and can it transfer without the other party's consent?
Commercial
How strong is the market position? PwC includes the question of what customers think of the company (source: PwC, June 2020). Talk to a few customers yourself, with the seller's consent.
People
In the EU, when a business transfers, the rights and obligations under existing employment contracts pass to the new owner (source: EU Directive 2001/23/EC, March 2001). Deloitte lists secondary benefits and pension schemes as points of attention (source: Deloitte, September 2025). Other jurisdictions have their own rules; check them early.
IT, data and environment
According to Stibbe, GDPR compliance is often underestimated when setting the scope of a due diligence (source: Stibbe, August 2019). Premises and land call for a soil and environmental review.
Warranty or indemnity: the difference that costs money
| Warranty | Indemnity | |
|---|---|---|
| What it is | The seller states that something is true, for example that there are no pending claims | The seller compensates the loss from a specific, known risk |
| Effect of the data room | Information fairly disclosed in the data room qualifies the warranties (source: Stibbe, September 2021) | Specific indemnities are not qualified by disclosure (source: Loyens & Loeff, 2024) |
| When to use | For unknown risks | For risks you found in the investigation |
The lesson: a risk you find and leave under a warranty is often hard to claim later. After all, you knew. Ask for an indemnity or a lower price for risks you identified. Warranty and indemnity insurance is an alternative in larger deals; the buyer then claims against the insurer.
Read also: acquisitions and alliances and buying a business.
The complete due diligence list
Below you will find the full investigation list by area, with the document to request and the red flag to watch for each item, twelve questions to ask the seller in person and a decision table to turn findings into price, warranty or indemnity.
What is due diligence in an acquisition?
What is the difference between a warranty and an indemnity?
Is a letter of intent binding?
Do employees transfer with the business?
Sources
- Deloitte: Due diligence (September 2025)
- PwC: Tax due diligence (November 2018)
- EUR-Lex: Council Directive 2001/23/EC (March 2001)
- Stibbe: Private M&A (September 2021)
- Loyens & Loeff: Private equity (2024)