A due diligence questionnaire is a thorough checklist to help a prospective investor collect information about a potential investment, particularly a large investment that could expose the investor to significant risks. Due diligence is an important part of financial transactions like mergers, acquisitions, and significant investments in new companies. It allows investors to evaluate the investment in a strategic way so they can determine if an investment would be a good decision.
Due diligence questionnaires are available from sources like financial magazines as well as personal finance advisers. Investors can also develop their own or search online for a free version of a questionnaire. Usually the document is broken into a number of parts, covering topics like company organization, information about employees, the environmental record, and the company's financial situation. Each section contains a number of questions to guide the investor as she collects information.
Under company organization, for example, questions cover topics like the company name and location, where it is authorized to do business, how often it holds board meetings, and who is on the board of the company. The company organization section should include prompts to collect minutes from public meetings as well as business licenses and other authorizations. The company's legal information, including official legal contacts, is also part of this section of the due diligence questionnaire.
Filling out the due diligence questionnaire can take weeks. Investors need to collect information from a variety of sources. Considering the origins of information is also important; companies are required to make some public filings but in other cases they are not, and the information they provide is not necessarily reliable, as the company wants to project a positive image of itself. Information from government agencies might be more trustworthy, but only if those agencies are aggressive about collecting accurate and detailed data from the companies they monitor.
The due diligence questionnaire can come with separate sheets that act as request lists, allowing the investor to submit these lists to various potential sources of information. These include lists of desired documentation from a company, lists of information from government agencies, and so forth. The investor can check off each piece of information as it comes in, after checking to make sure it is current and complete. With all the information in hand, the investor can start answering the specific prompts on the due diligence questionnaire to explore the soundness of the potential investment.