A due diligence checklist is the most essential tool for closing on a deal. It’s as essential as your contact database during the sourcing phase. This tool ensures that you stay organized and don’t miss any critical inspection items.
You’ll want to be sure that your due diligence checklist aligns with your project management approach. However, the framework below may help inspire what to include.
Integrate with Underwriting File
I love spreadsheets, and I’m not afraid to admit it.
I use Microsoft Excel for high octane analysis and Google Sheets for organization. Each has its strengths that lend well to these respective tasks in terms of functionality and accessibility.
I wouldn’t discount the value of various cloud-based competitors, like Smartsheet and Airtable. However, I like to have all my deal documents close together. For example, a due diligence checklist that can just attach to my financial model ensures that I have everything I need in one place.
Don’t take this the wrong way. If you prefer another project management resource, use it. Just set up a new worksheet in your underwriting file with a high-level summary and links to your cloud system.
Working Parties
Project plans don’t DO anything. You need people for that.
The working parties list is an essential part of your due diligence checklist because it makes contact information available at a moment’s notice. Consider this an extension of your contact database that highlights everyone that touches your deal.
I break my working parties list into four sections.
- Buyer – everyone on your team that will perform a task throughout the diligence and closing process
- Seller – representatives from the seller’s team (internal and external) that will provide diligence materials or negotiate the purchase agreement
- Financing – lender and investor representatives that request items for their diligence processes
- Third-party consultants – everyone else that’s not on the other lists, e.g., environmental and property inspectors, surveyor, title agent, etc.
Create a separate table for each group with full contact information. Also, include a column for notes/comments to remind you of the next steps and assigned responsibility.
Critical Dates
The critical path project management framework works so well for the due diligence and closing process. It allows you to identify and work toward the goal by clearly defined dates within the purchase agreement.
Your due diligence checklist should capture all the milestone dates in that agreement along with any important predecessors. For example, if you need to clear title issues, you’ll need the title report well in advance. That is a critical date outside but related to the purchase agreement.
Set this up in the most effective way to match your project management framework. I like to include a table with the following columns.
- Item number
- Item
- Description
- Due date
- Predecessors
- Successors
- Reference
- Notes/comments
Oversampled Diligence Items
So far we discussed everything but forensic analysis. I bring this up last for a few reasons.
First, it’s the thing most people think of immediately when they think of a due diligence checklist. However, the other points are essential and rarely given adequate coverage.
Second, this part is super technical. You will rely heavily on your working parties to collect and disect the data herein.
Finally, every property and asset class has a different set of diligence points. Some areas apply to all commerical real estate, like title and financial forensics, but the bulk is specific to your niche. Therefore, it’s tough to cover everything in one article.
All that said, I like to take the approach of oversampling due diligence items and using only what I need.
If you’re in this business to do many deals, your due diligence checklist will be a template that you bring from one to the next. You’ll discover new methods and means for analysis with each new deal.
Some of these due diligence needs translate well across deals, and others not so much. It takes very little time to hide irrelevant rows, but you could miss some important information if you don’t capture and save the best practices as you go along.