Due Diligence Process

Purpose of Due Diligence

• Due diligence is the reasonable investigation performed to verify material information, identify risks, support disclosure, and inform valuation and negotiations. In underwriting, it helps establish a due diligence defense and reduce the risk of material misstatements or omissions.
• In M&A, due diligence supports the buyer's understanding of financial, legal, tax, operational, commercial, environmental, cybersecurity, and compliance issues before signing or closing.

Process

• The process typically involves a request list, data room review, management Q&A, expert workstreams, site visits, customer and vendor analysis where permitted, and iterative issue tracking. Bankers coordinate specialists and help determine which issues are value-affecting, indemnifiable, or deal-breaking.
• Findings can change price, structure, financing terms, covenants, closing conditions, indemnities, escrows, or the decision to proceed at all.

Types of Review

• Financial diligence focuses on quality of earnings, debt-like items, working capital normalization, and cash conversion.
• Legal diligence reviews contracts, litigation, permits, intellectual property, organizational documents, and compliance. Tax diligence addresses exposures, structure, and post-closing consequences.

Series 79 focus

• Understand why diligence is continuous rather than a one-time checklist, how red flags affect negotiation leverage, and why diligence is central both to underwriting liability management and advisory quality. Exam questions may test which issues are material, who performs diligence, and how discoveries influence transaction terms.