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What is due diligence?
Due diligence is the careful review of a company before a purchase, a sale or an investment. It covers contracts, financials, taxes and risks, based on the documents in the data room, so that the purchase price and the purchase agreement rest on documented facts.
In short
- Due diligence literally means “the care that is due”.
- Most reviews cover legal, financial and tax matters and, depending on the deal, also the market, HR, IT and the environment.
- The review is based on the documents in the data room and the seller’s answers.
- The result is a report with findings and recommendations for the purchase price and the purchase agreement.
Where does the term come from?
It comes from US securities law. The Securities Act of 1933 gives those involved in a securities offering a defense if they carried out their review with due care: the “due diligence defense”. In German-speaking countries, the term now mainly refers to the review carried out when a company is bought, in other words in M&A.
Who carries out due diligence?
In most cases, the buyer commissions the review before making a binding offer. This is called buy-side due diligence. If the seller has its own company reviewed in advance and gives the report to the bidders, this is called vendor due diligence. That way, the seller knows the weak points before the bidders do and can explain or fix them before they weigh on the price.
Specialists carry out the review: lawyers for the legal part, accountants and auditors for the financials and taxes. M&A advisors coordinate the process. If only the major risks matter, a shorter red flag due diligence is often enough.
What types of due diligence are there?
| Type | What is reviewed | Typical question |
|---|---|---|
| Legal | Corporate matters, contracts, employment, disputes, permits | Can an important customer terminate on a change of ownership? |
| Financial | Earnings, balance sheet, cash flow, business plan | How much does the company earn on a sustainable basis, and which debts count against the purchase price? |
| Tax | Taxes for open tax years, structures, consequences of the purchase | Which tax risks pass to the buyer along with the company? |
| Commercial | Market, customers, competition | Does the business plan hold up? |
| HR | Employment contracts, pensions, key people | Who is indispensable, and will that person stay? |
| IT | Systems, software, data security | Who owns the software the business runs on? |
| ESG | Environment, social, governance | Are there contaminated sites or risks in the supply chain? |
How does due diligence work?
- Confidentiality and intent. The parties sign a non-disclosure agreement (NDA), often followed by a letter of intent (LOI) with the main terms of the deal.
- Request list. The buyer sends a list of the documents it wants to see. You’ll find an overview by area in our due diligence checklist.
- Data room. The seller puts the documents in a data room, which today is almost always virtual.
- Review and questions. The advisors read, cross-check, ask questions and request missing documents.
- Report. The findings go into the due diligence report, with an assessment and a recommendation.
- Negotiation, signing and closing. The findings feed into the purchase price and the purchase agreement: as a warranty, an indemnity, a condition for closing or a lower price.
How long does due diligence take?
Usually a few weeks; large or international transactions can take months. The time needed depends mainly on how complete the data room is, how many companies and countries are involved and how quickly the seller answers questions. Reading and cross-checking the documents takes up most of the time, and this is exactly the work that AI in due diligence takes on today.
Why does the review also matter legally?
What a buyer knows can be held against them. In Switzerland, the seller is not liable under Art. 200 of the Swiss Code of Obligations (CO) for defects that the buyer knew about at the time of purchase. In Germany, Section 442 of the German Civil Code (BGB) excludes the buyer’s rights if the buyer knows about the defect when the contract is concluded. That is why, in a company acquisition, the parties usually set out in the purchase agreement how knowledge from the due diligence and the seller’s warranties interact.
The buyer’s management needs the review too. Under Art. 717 CO, the board of directors of a company limited by shares must perform its duties with all due care. In Germany, the business judgment rule in Section 93 of the German Stock Corporation Act (AktG) protects a management board only if it made its decision on the basis of adequate information.
Frequently asked questions
Is due diligence mandatory?
In a private company acquisition, no law expressly requires it. But anyone who buys without a review takes on risks they don’t know about and often can’t bring claims for defects later. For the buyer’s management, an appropriate review is part of its duty of care.
How much does due diligence cost?
That depends on the scope: the number of companies, the areas reviewed and the depth of the review. Advisors usually bill based on time spent. Reading the documents takes the most effort, and that is where AI platforms save the most time.
How does due diligence differ from an audit?
An audit checks whether financial statements comply with the rules. Due diligence asks what the buyer gets for the price and which risks it takes on, and it also looks ahead, for example at the business plan.
Who pays for the due diligence?
As a rule, the party that commissions it: the buyer for buy-side due diligence, the seller for vendor due diligence.
Read next
- AI in due diligence: what it checks today
- Due diligence checklist: documents by area
- The due diligence report: structure and content
Also read: Due Diligence Software and Due Diligence with AI Switzerland.
As of November 5, 2026. This article is a general overview and does not replace legal or tax advice on a specific case.