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Private Equity Due Diligence: Master the Process in 204 (+ Checklist)

Kison Patel
Kison Patel

Kison Patel is the Founder and CEO of DealRoom, a Chicago-based diligence management software that uses Agile principles to innovate and modernize the finance industry. As a former M&A advisor with over a decade of experience, Kison developed DealRoom after seeing first hand a number of deep-seated, industry-wide structural issues and inefficiencies.

CEO and Founder of M&A Science and FirmRoom

Private Equity Due Diligence

The $730 billion of private equity transactions registered in 2023 makes it the second most active year for the private equity industry this decade. If private equity is booming, so too is private equity due diligence.

In this article, FirmRoom looks in more detail at private equity due diligence, how it works, and its importance to value generating private equity transactions.

Private Equity Due Diligence

What is Due Diligence in Private Equity?

Private equity due diligence is the external audit and analysis conducted by the private equity fund of a target company.

The audit and analysis are made with the intention of confirming the company’s value, and enabling them to make a more informed decision on a potential investment or acquisition. In some circumstances, the due diligence can reveal non-public information which could materially affect the value of the target company.

Understanding the Due Diligence Process in Private Equity

Due diligence is always important, but takes on particular importance in private equity owing to the lack of public disclosures required of non-listed companies. This creates additional informational challenges for those conducting the due diligence process.

A good example of this can be seen in the auditing of financial statements. Whereas the SEC requires that publicly listed companies should produce audited financial statements four times a year, there are far less stringent controls around the auditing of private companies.

Stages of the Due Diligence Process

For all intense and purposes, the due diligence process should begin as soon as a potential investment is identified by the private equity company.

Private Equity General Partners (GPs) tend to begin taking notes on specific questions to ask of the target company management when a decision has been made to investigate the feasibility of a transaction. These company specific questions can be added to the due diligence checklist (see below).

Stages of the Due Diligence Process

Generally, the due diligence process in private equity is composed of four separate phases:

Pre-due diligence

This is the period in which the company-specific questions mentioned above are added to a set of general questions and requested documents (checklist) posed by the private equity company to target companies. The due diligence team will have an internal discussion about issues that are likely to arise.

Initial due diligence

The private equity company will send a request for documents and information to the target company management, usually inviting them to a virtual data room, where progress can be monitored and communication is more structured. This phase is usually passed without too many issues.

In-depth due diligence

This phase involves a far more in-depth analysis of the company and the information provided. It can include interviews with management, staff, and suppliers. A more forensic analysis of the company’s cash flows and contracts will occur, as new specific questions that arose since the beginning of the process.

Post-acquisition due diligence

This phase of due diligence could also be considered the first phase of the post-merger integration (PMI).

It involves working with the acquired company’s management to ensure that any remaining issues at the target company are resolved to ensure maximum value creation from the transaction.

Research to be conducted during due diligence

At its heart, due diligence is about obtaining high-quality information to drive good decision making, and that means research is always required.

Research to be conducted during due diligence

At a minimum, this research involves:

Industry analysis

  • How will this industry grow over the next decade?
  • What are the supply and demand dynamics of the industry?
  • What are the industry’s biggest risks?

Competitive analysis

  • What are the competitive dynamics of the company’s market and industry?
  • What is the target company’s competitive positioning?
  • How are the competitive dynamics set to change over the next decade?

Market analysis

  • What are the market shares of each of the competitors?
  • What defines the company’s target market and is it growing or declining?
  • How captive is the target market?

Financial Analysis

  • Analyze the target company’s financial statements over the past 3-5 years.
  • Assess the target company’s balance sheet and capital structure.
  • Compare the target company’s ratios with those of others in the industry.

Operational Analysis

  • How effectively does the target company convert inputs into outputs?
  • Does the company have any competitive advantage owing to its operations?
  • What are the risks inherent in the current operational model?

Private Equity Due Diligence Challenges

Most of the challenges for the private equity firms in due diligence will come from the target company side.

In private equity transactions, the buy side tends to have extensive experience in due diligence but  the same usually cannot be said of the sell side.

This asymmetry of experience can lead to challenges for the private equity company, which include:

Time constraints

Private company managers are often highly involved in their company’s day-to-day operations, reducing the time they have to contribute to due diligence.

Communication issues

The time constraints feed into communication issues - managers are already answering dozens of e-mails every day, with communication around due diligence often competing with that of major clients and suppliers.

Lack of expertise

A general issue that arises is lack of expertise in due diligence - which documents to retrieve, where to retrieve them, how to present information, and more. This lack of expertise creates friction for the private equity fund.

How to overcome these challenges?

It should be pointed out that issues like these are the ones that due diligence project management software is designed to overcome.

FirmRoom’s private equity due diligence solution has been designed to be intuitive, so that even company owners that have never taken part in due diligence before should find the process relatively straightforward.

firmroom private equity data room

Areas to analyze during due diligence process

As the company-specific questions mentioned in the first paragraphs above allude to, every company will bring its own due diligence challenges.

That said, most due diligence processes tend to cover the following areas:

Due Diligence Checklist

FirmRoom and its sister company, DealRoom, work with private equity companies in their due diligence processes.

Our private equity due diligence platform has helped private equity companies close several hundred deals across the industry spectrum.

This experience inspired our checklist for each of the areas that private equity companies need to address in their due diligence process can be downloaded for free below.


Key players involved in the due diligence process

On the private equity side, due diligence is typically conducted by everybody on the acquisition team, in addition to some hired or in-house subject experts (e.g., on intellectual property, legal issues, forensic accounting, etc.).

On the sell side, due diligence tends to be less structured and it can fall on the private equity company to suggest who from within the organization should participate.

They will usually suggest a core cross-functional team of cross-functional specialists, with the occasional participation of external experts - particulary, the company’s legal firm and auditors.

Sharing Information During the DD process

The success of a due diligence process can in large part be measured by the sharing of information.

High-quality information, which flows fluidly between the target company and the private equity fund is the goal.

Technology plays a crucial role here. A recent study found that private equity due diligence software helps cut the DD process timeline by 37% on average.

Technology doesn’t just reduce the timelines - it adds value across the due diligence process, helping to overcome those challenges mentioned above, making everything easier for the private equity side and company managers inexperienced in due diligence.

The process typically works as follows:

1. confidentiality agreement is shared between the company and the private equity fund. This will be the first document added to the data room.

2. The data room is created by the private equity company and shared with the target company. Key members of both teams will be invited, and some others may be invited - with limited access rights - to share information (but not view or edit, for example).

3. Data requests are sent by the private equity company to the target company via the data room, giving everyone full transparency over where information gaps remain.

4. Specific requests can be related to the target company on documents or already provided information through the data room (e.g., “can you also add…”).

5. Both sides continue to contribute and communicate through the due diligence platform, tracking the status of individual requests, and the overall process.

The due diligence process massively contributes to efficiency and brings focus to what could otherwise be an organizational headache that threatens to bring the deal down.


Private equity due diligence is a critical process. At the outset of this article, we mentioned how three quarter of a trillion dollars were invested in private companies in 2022.

All of this capital only exchanged hands after significant due diligence had taken place - including through the use of due diligence platforms like FirmRoom.

Frequently Asked Questions (FAQs)

We ensure that private equity due diligence is conducted securely and with confidence.

Learn more about how FirmRoom can add value to your due diligence process.

See more

Key takeaways

Private Equity Due Diligence Checklist

Download a use this checklist to thoroughly and effectively help you collect necessary diligence information.

Download Now!

Contact M&A Science to learn more