Due diligence: comprehensive checklist for buyers

What is due diligence and why is it essential?

Due diligence refers to all the checks and analyses that a potential buyer carries out on a target company before finalising its acquisition. This systematic acquisition audit process aims to validate the information communicated by the seller and to discover elements that have not been spontaneously disclosed.

In the Swiss context, due diligence is particularly important because of the principle of freedom of contract: the buyer generally cannot take action against the seller after the transaction, except in cases of fraud or explicit guarantees. Hence the importance of verifying before buying a business rather than discovering problems afterwards.

The objectives of well-conducted due diligence are multiple:

• Verify the accuracy of financial, commercial and operational information provided by the seller

• Identify hidden risks that could affect the value or viability of the business

• Validate or adjust the proposed valuation based on discoveries

• Negotiate final conditions (price, guarantees, suspensive clauses) on factual bases

• Prepare post-acquisition integration by gaining in-depth understanding of the organisation and its challenges

The ideal time to carry out due diligence is after signing a letter of intent (LOI) but before the definitive conclusion of the transaction. The LOI generally establishes a period of exclusivity during which the buyer can carry out their checks without fearing that a competitor might snatch the opportunity.

There are different types of due diligence depending on the aspects examined: financial due diligence, legal due diligence, tax, commercial, operational, HR and environmental. For a secure acquisition, it is recommended to cover all these areas, adapting the depth of analysis to the size of the transaction and the identified issues.

Financial due diligence: analysing economic health

The financial acquisition audit forms the foundation of all due diligence. It enables verification of the company's real profitability, identification of debts and financial commitments, and validation that the proposed valuation rests on solid foundations.

Financial documents to request

To conduct comprehensive financial due diligence, you must obtain an exhaustive set of documents covering several financial years:

• Balance sheets and profit and loss accounts for the last 3 to 5 years, ideally certified by an accountant or auditor

• Interim accounts for the current year to assess the current trend

• Forecast budgets and business plans to understand the seller's projections

• Detailed cash flow statements to analyse cash generation

• Aged customer receivables schedule with detail by customer and age

• Statement of supplier debts and other liabilities

• Detailed stock inventory with valuation method

• Bank statements for at least the last 12 months

• Existing audit or review reports, as well as auditors' management letters

• Detail of investments made and planned

Always favour documents certified or validated by an independent third party. Accounts prepared solely by the manager require more thorough verification.

Financial points of attention

Once the documents are collected, focus your analysis on the following elements:

Profitability and margins: Analyse the evolution of EBITDA, operating profit and margins over several years. Stable or growing profitability is reassuring, whilst significant fluctuations require detailed explanations.

Revenue evolution: Examine organic growth, distinguishing volume effect from price effect. Identify growth factors and their sustainability.

Working capital: Check the structure of working capital requirements (WCR) and its evolution. WCR that increases faster than revenue can reveal collection difficulties or inefficient stock management.

Quality of receivables: Analyse the average customer payment period, identify doubtful debts and verify the adequacy of impairment provisions.

Debts and commitments: List all financial debts, but also off-balance sheet commitments (guarantees, sureties, operating leases). Check early repayment clauses in the event of change of control.

Necessary investments: Assess future investment needs to maintain or develop the business (equipment renewal, digitalisation, expansion).

Accounting/tax consistency: Compare annual accounts with tax returns to identify any discrepancies that could signal irregularities.

Financial red flags

Certain warning signs should immediately attract your attention during the financial acquisition audit:

• Unexplained decline in revenue over recent months or years, especially if it is not consistent with the market

• Deterioration of margins without clear explanation or action plan from the seller

• Significant doubtful debts or old debts, suggesting collection difficulties or customers in difficulty

• Excessive dependence on supplier credit with abnormally long payment terms, potential sign of cash flow tensions

• Significant differences between internal accounting and tax returns

• Manifestly insufficient provisions (obsolete stock, doubtful debts, disputes)

• Unusual transactions with related parties (manager, shareholders, affiliated companies)

• Unaudited accounts or seller's refusal to have accounts certified by an independent expert

These red flags may justify a renegotiation of the price or, in serious cases, abandonment of the transaction. To understand how these elements impact the company's valuation, consult our business valuation service.

Legal due diligence: securing legal aspects

Legal due diligence aims to identify legal risks that could affect the company after acquisition. It enables verification that the company has all the rights necessary for its operation and that it is not exposed to major disputes.

Essential legal documents

The collection of legal documents must cover all legal aspects of the company:

• Up-to-date articles of association and recent extract from the commercial register confirming the legal structure and shareholding

• Minutes of general meetings for the last 3-5 years to understand the strategic decisions taken

• Important commercial contracts: agreements with main customers, suppliers and strategic partners

• Commercial leases for operating premises, with particular attention to termination clauses and renewal conditions

• Licences and authorisations necessary for operation (operating permits, sectoral authorisations, certifications)

• Insurance contracts in force (liability, loss of profits, specific insurance)

• Current or potential disputes: legal proceedings, arbitrations, customer or supplier claims

• Intellectual property: patents, registered trademarks, copyrights, domain names, software licences

• Financing contracts with banks and other creditors

Key legal checks

Beyond simply collecting documents, carry out the following checks:

Legal structure and shareholding: Confirm the identity of the real shareholders (beneficial owners) and verify the absence of pledges or charges on the shares. Ensure that the seller has the power to transfer the company.

Asset ownership: Verify that the company owns its key assets (equipment, vehicles, intellectual property) and that there are no undisclosed privileges or charges.

Contract analysis: Examine restrictive clauses in important contracts, particularly change of control clauses that could allow contracting parties to terminate in the event of sale. Check remaining durations and renewal conditions.

Regulatory compliance: Validate that the company complies with all regulations applicable to its sector of activity (safety standards, health regulations, data protection, etc.).

Intellectual property protection: Verify that trademarks, patents and other IP rights are properly registered in the company's name and that they are protected. Identify necessary licences and their transferability.

Guarantees given: List all guarantees that the company has granted to third parties (bank guarantees, sureties, product warranties) that could generate future liabilities.

Legal red flags

Be particularly vigilant in the face of these legal warning signs:

• Significant disputes not disclosed or minimised by the seller, particularly if they concern significant amounts

• Unbalanced contracts or easily terminable by key customers or suppliers

• Change of control clauses in major contracts allowing automatic termination upon sale

• Ownership problems on key assets (undisclosed leased equipment, unregistered trademarks)

• Regulatory non-compliance that could lead to fines, sanctions or suspension of activity

• Lack of intellectual property protection or ongoing disputes over IP rights

• Precarious leases expiring without guarantee of renewal, especially if the location is strategic

• Significant guarantees or sureties given by the company that could turn into liabilities

These elements may require specific guarantees from the seller or an adjustment of the acquisition price to cover the identified takeover risks.

Tax due diligence: avoiding unpleasant surprises

Tax due diligence enables identification of latent tax liabilities and verification of the company's compliance with its tax obligations. In Switzerland, where the tax system is complex with its three levels (federal, cantonal, communal), this analysis is particularly important.

Tax documents to examine

Collect all the following tax documents:

• Complete tax returns for the last 3 to 5 years (federal, cantonal and communal profit tax)

• VAT returns and proof of payment

• Correspondence with tax authorities (requests for information, responses, decisions)

• Reports of previous tax audits and their conclusions

• Detail of tax losses carried forward and their possible use

• Tax provisions and justification of their amount

• Holding structure and tax implications (holding company, related companies)

• Transfer pricing documentation if the company has transactions with related entities abroad

Tax points of attention

During your tax analysis, focus on these critical aspects:

Consistency of returns: Verify that tax returns are consistent with the accounts and with each other (direct taxes, VAT, social charges).

Latent tax liabilities: Identify risks of tax reassessment linked to aggressive tax positions or questionable interpretations of legislation.

Tax optimisations: Analyse existing tax optimisation schemes and assess their compliance with current legislation and planned regulatory changes.

Tax impact of the transaction: Assess the tax consequences of the acquisition itself: transfer duties, indirect taxes, deductibility of acquisition interest, goodwill amortisation.

Transfer pricing: If the company carries out transactions with related parties (particularly abroad), verify the existence and quality of documentation justifying that the prices charged comply with the arm's length principle.

Losses carried forward: Identify tax losses carried forward and their usability after acquisition (beware of limitation rules in the event of change of control).

Tax red flags

These tax warning signs should alert you immediately:

• Tax audits in progress or recent reassessments not provisioned in the accounts

• Manifestly insufficient tax provisions in view of identified risks

• Aggressive or questionable tax optimisation schemes that could be challenged by the administration

• Significant inconsistencies between accounts and tax returns without satisfactory explanation

• Recurring payment delays for taxes and duties, sign of cash flow difficulties

• Lack of documentation of transfer pricing despite significant transactions with related parties

• Frequent changes of tax advisers or accountants, which may indicate disagreements on tax treatment

• Tax positions not disclosed to the authorities when the law requires it (tax arrangements to be declared)

A significant latent tax liability may justify the establishment of an escrow to cover the risk of future reassessment.

Commercial due diligence: assessing growth potential

Beyond financial figures, commercial due diligence enables understanding of the company's real position in its market, the quality of its customer portfolio and its future development potential.

Analysis of customer and supplier portfolio

Analysis of commercial relationships forms a pillar of commercial due diligence:

Documents to request:

• Detailed customer list with revenue per customer over the last 3 years

• Concentration analysis: share of revenue generated with the 5, 10 and 20 main customers

• Current customer contracts, their remaining duration and renewal conditions

• Customer retention rate and churn analysis (attrition rate)

• Revenue recurrence (recurring contracts vs one-off)

• Sales pipeline and projects under negotiation

• List of strategic suppliers with purchase volumes and negotiated conditions

Assess dependence: Excessive concentration on a few customers represents a major risk. Ideally, no customer should represent more than 10-15% of revenue. Beyond 30% on a single customer, the risk becomes critical.

Quality of relationships: Beyond figures, assess the quality of relationships: longevity of relationships, customer satisfaction, reasons for loyalty, personal dependence on the selling manager. If possible, meet key customers to understand their perception of the company and their intention to continue the relationship after the transition.

Strategic suppliers: Identify critical suppliers and assess risks of supply disruption or unfavourable renegotiation of conditions after the sale.

Market positioning and competition

Understanding the competitive environment is essential to assess future potential:

Market shares: Assess the company's position in its market (leader, challenger, niche). Analyse the evolution of market shares over recent years.

Competitive advantages: Identify real differentiation factors: proprietary technology, unique expertise, privileged relationships, price positioning, quality of service. Assess their sustainability against competition.

Barriers to entry: Analyse obstacles that protect the company from new entrants: necessary investments, regulation, certifications, established relationships, reputation.

Price positioning: Compare the company's price positioning with its competitors. Premium positioning must be justified by superior perceived value.

Awareness and reputation: Assess brand awareness, online reputation (customer reviews, social networks), digital visibility.

Marketing strategy: Analyse the effectiveness of marketing and commercial actions: customer acquisition cost, campaign return on investment, digital presence, content strategy.

Sectoral trends: Understand sector dynamics: growth or decline, technological developments, regulatory changes, new customer expectations. Is the company well positioned to benefit from these trends or does it risk being overtaken?

Commercial red flags

Certain signals should immediately attract your attention during the commercial acquisition audit:

• Excessive customer concentration: more than 30% of revenue on one or two customers, creating dangerous dependence

• Recent loss of major customers not offset by new signings

• Decline in retention rate or increase in churn, indicating growing dissatisfaction

• Total dependence on the owner for customer relationships, making the transition very risky

• Contracts expiring within 6-12 months without guarantee of renewal

• Weak sales pipeline or poorly qualified, compromising future growth

• Market in structural decline without clear diversification strategy

• Increased competition with erosion of margins and market shares

• Dependence on a single distribution channel that could be challenged

• Negative online reputation or recent unresolved controversies

These elements can call into question the proposed valuation and require in-depth analysis of development prospects.

HR due diligence: understanding human capital

Human resources often constitute the most valuable asset of a Swiss SME. HR due diligence enables assessment of team quality, identification of social risks and understanding of employer obligations.

HR documents to collect

Gather the following documents for your HR analysis:

• Detailed organisation chart with functions, responsibilities and hierarchical lines

• Employment contracts of key employees and senior managers

• Complete salary grid with fixed remuneration, variable, benefits in kind

• HR policies: staff regulations, holiday policy, bonus system, training plans

• Turnover history over the last 3 years with analysis of departures

• Applicable collective agreements and their impact on working conditions

• Employment tribunal disputes current or recent, with detail of claims

• Occupational pension obligations (LPP): contributions, commitments, any underfunding

• Social insurance: confirmations of up-to-date payment of AVS, AI, APG, AC contributions

• Succession plans and internal skills development

HR points of attention

Carefully analyse these dimensions of human capital:

Management team: Assess the skills, experience and autonomy of the management team. A solid and autonomous team greatly facilitates the transition and reduces dependence on the seller.

Key people: Identify employees whose departure would represent a significant risk (rare expertise, customer relationships, technical know-how). Verify their intentions to remain after the transaction.

Social climate: Assess employee satisfaction, quality of social dialogue, history of conflicts. A degraded social climate can complicate integration and generate unforeseen costs.

Salary costs: Compare salaries practised with market and sector standards. Significantly higher salaries may indicate limited room for manoeuvre, whilst salaries that are too low can generate a turnover risk.

Social compliance: Verify compliance with Swiss labour law, applicable collective agreements, and up-to-date payment of all social charges. Late payment can lead to penalties and prosecutions.

Non-competition clauses: Examine non-competition clauses of key employees and their legal validity (reasonable geographical and temporal limitation, compensatory indemnity).

Training and development: Assess investments in training and skills development. An absence of training may indicate a risk of skills obsolescence.

HR red flags

Be vigilant in the face of these warning signs regarding human resources:

• High turnover, particularly of key talents or the management team

• Total dependence on the seller without an autonomous management team capable of ensuring continuity

• Numerous or serious social disputes, revealing a tense social climate

• Non-compliance with LPP obligations or late payment of social contributions

• Salaries significantly above market without justification, reducing future room for manoeuvre

• Salaries significantly below market, creating a risk of mass departures

• Absence of written employment contracts or contracts not compliant with labour law

• Departure announcements from key employees following the announcement of the sale

• Ageing team without succession plan or skills transfer

• Obsolete skills in the face of technological developments in the sector

As human capital is often the most important asset of an SME, these red flags can justify significant renegotiation or specific clauses for retention of key talents.

Operational and environmental due diligence

This final dimension of business due diligence covers operational, technological and environmental aspects that can generate significant costs or risks.

Operational aspects

Operational analysis enables identification of necessary investments and technological risks:

Equipment and infrastructure: Assess the condition of production equipment, vehicles, installations. Identify renewal investment needs in the short and medium term. Ageing equipment may require significant unprovided expenses.

Maintenance: Check the history of preventive and corrective maintenance. Deferred maintenance may reveal past financial difficulties but generate significant future costs.

IT systems: Analyse IT infrastructure (servers, network, workstations), software used (ERP, CRM, business tools) and their licences. Verify licence compliance and renewal costs.

Cybersecurity: Assess IT security measures in place: firewall, antivirus, backups, business continuity plan. SMEs are often vulnerable to cyberattacks, and an incident can have serious consequences.

Data protection: Verify compliance with GDPR (if activity in the EU) and the new Swiss Federal Data Protection Act (nFADP). Identify personal data processed, security measures, processing registers, impact analyses.

Operational processes: Assess the quality and documentation of key processes. Well-documented processes facilitate transition and reduce dependence on people.

Production capacity: Analyse capacity utilisation rate, identify bottlenecks, assess flexibility to respond to demand growth.

Environmental compliance

In Switzerland, environmental regulation is strict, and the costs of bringing into compliance or decontamination can be considerable:

Regulatory compliance: Verify that the company complies with all applicable environmental standards: waste management, atmospheric emissions, water discharges, noise, hazardous substances.

Environmental authorisations: Confirm that all necessary authorisations are in force and complied with (operating authorisation, discharge authorisation, authorisations for hazardous substances).

Pollution risks: Identify risks of soil or groundwater contamination, particularly for industrial sites, petrol stations, chemical companies. Historical pollution can generate very high decontamination costs.

Environmental audit: For at-risk activities, have an environmental audit carried out by an independent expert (Phase I and possibly Phase II if contamination indicators are detected).

Future costs: Assess necessary investments to maintain or improve environmental compliance, particularly in the face of foreseeable tightening of regulations.

Past liabilities: In Switzerland, environmental liability can be engaged retroactively. The buyer can be held responsible for pollution caused before their acquisition. Hence the importance of identifying these risks and providing specific guarantees from the seller.

Particularly concerned sectors: Manufacturing industry, construction, chemicals, printing, petrol stations, car garages, dry cleaners, surface treatment. For these sectors, environmental due diligence is absolutely essential.

How to organise and conduct effective due diligence?

Beyond the content of checks, the methodology and organisation of your due diligence largely determine its effectiveness and cost.

Build the team and define the scope

Identify necessary experts: Depending on the size and complexity of the transaction, you will need several specialists:

• Lawyer specialising in corporate law and acquisitions for legal due diligence

• Accountant or auditor for financial and tax audit

• Sector consultant knowing the specifics of the industry for commercial and operational analysis

• HR expert if the company has many employees or presents complex social issues

• Environmental expert for at-risk activities

• IT expert if IT systems are critical for the activity

Leez provides you with a network of qualified experts specialising in business transfers to support you in each dimension of your due diligence.

Define the scope: Adapt the depth of your analysis to the size of the transaction and identified risks. For a small SME, targeted due diligence on critical aspects may suffice. For a significant acquisition, an exhaustive audit of all areas is required.

Establish a timetable: Allow a realistic timeframe, generally 4 to 8 weeks for a medium-sized SME. Too tight a schedule increases the risk of forgetting important elements. Coordinate this timetable with the deadlines of the letter of intent and the envisaged closing date.

Use a secure data room

The exchange of confidential documents requires secure infrastructure:

Secure platform: Use a professional virtual data room (VDR) rather than emails or consumer solutions (Dropbox, Google Drive). The confidentiality of information exchanged is crucial to protect the interests of the seller and buyer.

Logical organisation: Structure the data room by categories corresponding to due diligence areas: financial, legal, tax, commercial, HR, operational, environmental. Clear organisation facilitates the work of experts and reduces the risk of omission.

Traceability: A professional data room enables tracking of who consulted which documents and when. This traceability can be important in the event of subsequent dispute over disclosure of information.

Access control: Define differentiated access rights according to stakeholders. Not all members of the due diligence team need access to all documents.

Leez offers a secure data room integrated into its platform to facilitate document exchange as part of due diligence, guaranteeing confidentiality and traceability throughout the process.

Prioritise and adapt the analysis

Effective due diligence is not necessarily exhaustive, but well targeted:

Risk-based approach: Adopt a risk-based approach: focus your efforts on areas presenting the most significant risks. For a service company, HR and commercial analysis will be a priority. For an industrial company, operational and environmental aspects will be crucial.

Adapt according to size: For a micro-business, light due diligence focused on financial, legal and commercial aspects may suffice. For a medium-sized SME, a more complete audit is required. For a large transaction, all areas must be covered in depth.

Two-phase analysis: Consider a two-stage approach: first a rapid diagnosis (2-3 weeks) to identify major risks and decide whether to proceed, then targeted deepening of sensitive points identified.

Know when to call on experts: Don't try to do everything yourself. Fees of qualified experts are an investment that can save you costly mistakes. An expert will detect risks that a non-specialist might miss.

Targeted questions: Prepare lists of precise questions for each area. Well-formulated questions enable rapid obtaining of essential information and reveal grey areas.

Exploit due diligence results

Due diligence does not only serve to decide whether to buy or not. Its conclusions must be actively used to secure and optimise the transaction.

Adjust price and conditions

Due diligence discoveries constitute a factual basis for renegotiation:

Price renegotiation: If significant risks or undisclosed liabilities are identified, you are justified in requesting a reduction in the purchase price. Precisely quantify the financial impact of discovered elements to support your request.

Working capital adjustment: If working capital at the closing date is below the normal operating level, provide a price adjustment mechanism to compensate for this difference.

Earn-out clauses: If uncertainties remain about future performance (particularly commercial), consider an earn-out clause: part of the price will be paid later depending on the achievement of predefined objectives (revenue, profitability, customer retention).

Liability guarantees: Negotiate specific liability guarantees covering identified risks: ongoing disputes, potential tax reassessments, environmental compliance, etc. These guarantees enable the buyer to take action against the seller if risks materialise.

To understand how these adjustments impact the final valuation, consult our business valuation service.

Define suspensive conditions

Suspensive conditions protect the buyer by making the completion of the sale subject to certain events:

Conditions based on due diligence: Include suspensive conditions for identified risks that require resolution before closing:

• Obtaining or renewal of critical licences or authorisations

• Resolution of significant disputes or confirmation that they do not exceed a defined amount

• Confirmation of renewal of key contracts expiring

• Obtaining creditors' agreement for debt transfer or lifting of personal guarantees

• Confirmation of transferability of strategic commercial leases

Escrow mechanisms: For risks that cannot be totally eliminated before closing (for example, an ongoing tax audit), provide an escrow mechanism: part of the purchase price is placed in escrow and will only be released to the seller when the risk is lifted.

Reasonable deadlines: Set realistic deadlines for the fulfilment of suspensive conditions. Deadlines that are too short put unnecessary pressure, whilst deadlines that are too long prolong uncertainty.

Prepare post-acquisition integration

Due diligence provides valuable information for planning integration:

Integration plan: Use due diligence conclusions to develop your detailed integration plan. Identify priority actions for the first 100 days: meetings with key customers, team stabilisation, bringing into compliance on critical points.

Corrective actions: Plan necessary actions to address identified weaknesses: modernisation investments, recruitment, regulatory compliance, process improvement.

Transition with the seller: Define precisely the terms of the seller's support during the transition period: duration, availability, remuneration. This transition is particularly critical if strong personal relationships exist with customers or if key skills must be transferred.

Communication to stakeholders: Prepare your communication to employees, customers, suppliers and partners. Clear and reassuring communication from the start facilitates acceptance of change and limits risks of departure or contract termination.

Talent retention: If due diligence has identified key people, implement retention mechanisms: retention bonuses, profit-sharing plans, development prospects, involvement in the development project.

To better understand the seller's expectations and facilitate the transition, consult our article on how to prepare for the first meeting with a buyer, which will give you the seller's point of view.