Recently, you may have noticed an increase in due diligence questionnaires (DDQs). Whether you issue or respond to them, it’s crucial to get it right. Traditionally, a DDQ comes into play when an organization is considering an investment, completing a merger or assessing an acquisition. In addition, the due diligence questionnaire is now commonly used for vendor risk management.
With the increased prevalence and importance of due diligence, this refresher on DDQ basics will help you feel confident when you encounter your next one. And, with a few real-world examples, both issuers and responders can improve their process.
In this post, we’ll explore the definition of due diligence, the importance of the due diligence questionnaire, who issues them, when and why. Then, you’ll find a list of the most common kinds of due diligence questions. And, finally, we’ll offer our list of the best nine due diligence questionnaire examples.
DDQ meaning: Everything you need to know
Before we jump to the DDQ examples, let’s cover a few basics. Whether you issue or respond to DDQs, it’s important to understand what they are, why they are used, in what situations and who is involved in the process.
Due diligence questionnaire definition
A due diligence questionnaire, referred to by the acronym DDQ, is a list of questions designed to evaluate aspects of an organization prior to a merger, acquisition, investment or partnership. Sometimes, the due diligence questionnaire is called the due diligence checklist.
Investopedia defines due diligence as “an investigation or audit of a potential investment or product to confirm all facts, such as reviewing all financial records, plus anything else deemed material. It refers to the care a reasonable person should take before entering into an agreement or a financial transaction with another party.” It’s important to note that issuing a due diligence questionnaire is just one part of the larger due diligence process.
Download a quick-reference DDQ checklist here.
Why do companies issue DDQs?
The due diligence process reduces risk. As a part of that process, the DDQ simplifies the collection and delivery of important information. For example, the questionnaire may ask about financial information, security, personnel, pending legal matters and regulatory compliance.
DDQs enable organizations to gather large amounts of data quickly and efficiently. Likewise, it streamlines the disclosure process for companies providing information. While there’s no standard due diligence questionnaire, variations of the questionnaire are used globally. Consequently, many DDQs will have overlapping categories and questions.
Who issues due diligence questionnaires?
A variety of roles work together to create, issue and analyze due diligence information gathered in the DDQ. Indeed, a mix of financial, legal, mergers and acquisitions, analysts, compliance, IT and procurement professionals may participate in the process. While DDQs aren’t unique to one industry, they are most extensively used in technology, government and finance.
When do companies issue DDQs?
The due diligence process is intentionally complex. Indeed, it is designed to dig up details and surface insights that may otherwise be overlooked. So, a DDQ isn’t a good all-purpose, information-gathering tool. It delivers the most value in the following situations.
Mergers and acquisitions (M&A) due diligence
Due diligence is crucial in M&A transactions. Prior to completing the transaction, the buy-side organization must verify that the investment is sound and will likely pay off. Typically, the questions cover general company records, personnel information, financial data, current contract obligations and legal matters. If a company is deciding between several similar opportunities, the information can be used to compare business risks and value side by side.
Investment due diligence
Due diligence questionnaires are useful in a variety of investment situations. For example, common projects well suited to the process include hedge fund due diligence, institutional investment due diligence, IPO due diligence and venture capital due diligence. Investment due diligence questionnaires explore topics like company founders, customer and supplier information, intellectual property and competitor analysis.
Vendor due diligence
The term vendor due diligence has two distinct meanings. Once you know the difference between them, it’s easy to identify each within the context of their usage.
Proactive sell-side due diligence
When a company intends to put their business up for sale, and they expect to have more than a few interested parties, they may conduct proactive vendor due diligence. In this situation, the term refers to completing the due diligence process to investigate risks within their own company. Often, potential buyers receive the resulting information. This practice speeds the sale and allows the seller to avoid completing a lengthy DDQ for each interested buyer.
Third-party risk assessment
The second type of vendor due diligence deals with managing the risk inherent in supplier partnerships. In this scenario, buyers issue vendor DDQs to potential suppliers. These DDQs are sometimes called a third-party or vendor risk assessments.
As information security consultancy KirkpatrickPrice puts it, “No matter the vendor, they pose some level of risk to your organization – especially financial risk, operational risk, reputational risk and cyber risk – because they have access to your data, network, hardware, cloud and more.”
This vendor due diligence questionnaire requests information about vendor’s data security, financials, human resources policies and references. Vendor due diligence is often initially conducted as part of the request for proposal (RFP) process. In addition, the selected vendor must participate in ongoing due diligence.
Download the ebook to get a step-by-step guide to the RFP process.
Types of due diligence questions
To be effective, DDQs must be thorough. The responses must provide enough information to empower buyers to confidently determine whether or not to move forward.
Each DDQ is different, depending on the kind of project. And in some cases, a questionnaire may focus entirely on a particular type of due diligence. Financial DDQs, operational DDQs, IT DDQs and vendor DDQs are the most common examples of these category-focused, stand-alone questionnaires.
However, more often, the questions required for a comprehensive DDQ fall into several categories. These categories are subsequently centralized into a single document to suit the engagement. For instance, a hedge fund due diligence questionnaire will use a different combination of questions than an IPO due diligence questionnaire.
Due diligence question categories