A due diligence checklist will often parallel the structure of the representations and warranties that the seller makes in the acquisition agreement. These are essentially written assurances from the seller that things are as they seem—for example, the buyer must require that the seller state that the consolidated financial statements of the target fairly represent the financial condition of the target in accordance with GAAP.

In creating a workable checklist, acquirers should concentrate on areas of relevance to the transaction at hand. For example, inquiries regarding the frequency and extent of customer complaints and returned goods would be most relevant to a consumer goods retail business, while questions regarding environmental violations would be most appropriate in a manufacturing firm. Some due diligence categories apply across the board. For example, given the nearly universal trend of companies to have websites and to store data in the cloud, data protection is mandatory item in any checklist.

Depending on the size of the acquisition, the checklist may reflect a threshold of materiality. For example, a checklist may put a dollar threshold on documentation needed in a quality of earnings analysis (e.g., the seller need not produce physical receipts for all adjustments to EBITDA if the value of the adjustments add up to less than $50,000). Or for another example, the checklist may set a limit of five years back for certain documents. Acquirers should agree to limits of this kind carefully, bearing in mind that any ground given at this point is likely to limit the scope of the seller’s representations and warranties in the acquisition agreement.

Some items on the checklist will require the seller to provide documentation—often in a separate checklist. As noted earlier, there is no need to overdo this. Not everything has to be a document from the seller. Some sellers will not welcome information requests that require creating new documentation; if possible, the buyer might attempt to obtain data through interviews with the seller’s officers or other key employees. This information can be stored in memo form in the VDR and then captured in the acquisition agreement signed by buyer and seller.

Remember, though, the checklist (or VDR starting template) should be used as a reminder rather than a sequential road map. Investigators should focus their investigation on the particular issues as they arise. Due diligence will often unfold as a series of independent mini-investigations with respect to the key issues.