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In addition to the bankruptcy context, the increasingly common use of auctions managed by investment banks or other financial advisors has affected early-stage due diligence activities. While sellers typically permit interested bidders to examine data room documents and submit follow-on questions, full-scale due diligence generally is not permitted until the seller has selected the winning bidder following a review of the prospective buyers' markups of a proposed acquisition agreement. Buyers frequently propose numerous additional revisions to the acquisition agreement based on their subsequent due diligence, but sellers often impose tight deadlines on the winning bidders and otherwise attempt to limit the due diligence-driven revisions to a bare minimum.

The science of due diligence is in the preparation of comprehensive and customized checklists of the specific questions to be presented to the seller, in maintaining a methodical system for organizing and analyzing the documents and data provided by the seller, and in quantitatively assessing the risks raised by those problems that are discovered in the process. One of the key areas is detection of the seller's obligations, particularly those that the buyer will be expected or required to assume after closing (especially in a stock purchase transaction or comparable merger; in an asset purchase, purchased liabilities are specifically defined, subject to a few successor liabilities that cannot be contractually avoided). The due diligence process is designed first to detect the existence of the obligations, and second to identify any defaults or problems in connection with these obligations that will affect the buyer after closing.

due diligence checklist, however, should be a guideline, not a crutch. The buyer's management team must take the lead in developing questions that pertain to the nature of the seller's business. These questions will set the pace for the level of detail and adequacy of the review. The key point here is that every type of business has...

due diligence is not a perfect process and should not be a tedious fishing expedition. Like any audit, a due diligence process is designed to answer the important questions and provide reasonable assurance that the seller's claims about the business are fair and legitimate.

the due diligence team is on a risk discovery and assessment mission, looking for potential problems and liabilities (the search) and finding ways to resolve these problems prior to closing and to ensure that risks are allocated fairly and openly after the closing.

Astute buyers typically employ comprehensive due diligence checklists that are intended to guide the company's management team while it works closely with counsel to gather and review all legal documents that may be relevant to the structure and pricing of the transaction; to assess the potential legal risks and liabilities to the buyer following the closing; and to identify all of the consents...

key objective of due diligence is not only to confirm that the deal makes sense (e.g., to confirm the factual assumptions and preliminary valuations underlying the terms by which the buyer negotiates the transaction), but also to determine whether the transaction should proceed at all.

The due diligence process involves a legal, financial, and strategic review of all of the seller's documents, contractual relationships, operating history, and organizational structure. Due diligence is not just a process; it is also a reality test--a test of whether the factors that are driving the deal and making it look attractive to the parties are real or illusory. Due diligence is not a quest to find the deal breakers; it is a test of the value proposition underlying the transaction to make sure that the inside of the house is as attractive as the outside.