The Due Diligence Report: What It Is and How to Read It (2026)

01What a Due Diligence Report Actually Is

A due diligence report is a written document, prepared by the buyer’s or investor’s advisers, that records what they found when they examined a company’s finance, tax, legal and other records before a deal, and tells the buyer what risks they would be taking on. In an M&A or investment process it is the bridge between investigation and decision: the data room (VDR = virtual data room) holds the documents, the DD report says what those documents mean for the deal.

The report has one practical job: to convert a pile of contracts, ledgers and filings into a short list of risks the buyer needs to price, fix or protect against. It does not just describe the company. It grades problems, quantifies exposures in money terms where it can, and recommends what the buyer should do about each one, from cutting the price to walking away.

Crucially, the report is the buyer’s tool, not yours. It is commissioned by, addressed to, and owned by the investor or acquirer. It almost always carries a reliance restriction saying that no one other than the addressee can rely on it. As a founder you will rarely read the document itself, but you will feel every conclusion in it.

02Who Prepares the Due Diligence Report

The buyer or investor appoints and pays the advisers, which is exactly why the report is theirs. Different streams of diligence are handled by different specialists, so a deal of any size produces several reports, not one.

• Financial and tax due diligence: usually a Big 4 firm (Deloitte, PwC, EY, KPMG) or an independent chartered accountant or accounting firm. They produce the financial DD / QoE report and, often as a separate workstream, the tax DD report.
• Legal due diligence: a law firm. They review corporate records, contracts, litigation, intellectual property, employment and regulatory compliance and produce the legal DD report.
• Specialist streams (larger deals): commercial / market DD (a strategy firm), technology DD, HR and people DD, and, for asset-heavy or regulated businesses, environmental and regulatory DD.

There is also a version you commission yourself. Vendor due diligence (VDD) is a DD report prepared on the seller’s side, before the buyer starts, so the seller can find and fix problems first and run a faster, cleaner process. For Brewly, running a light vendor DD before opening the data room would have surfaced its TDS and ESOP issues months earlier, on its own terms.

03The Structure of a DD Report: How to Read It

Almost every due diligence report, whatever the stream, follows the same five-part structure. Once you know the shape, you can read any report fast: start at the top, then jump straight to the red flags.

The first two or three pages, and the only part many investment committees read in full. It states the headline conclusion, the most important findings, and whether the adviser thinks the deal should proceed, proceed with conditions, or not proceed. If you ever see one section of the report, ask for this one.

What the advisers were asked to look at, the period covered, the documents relied on, and what they did not review. This section also carries the limitations and reliance restrictions. It matters more than founders think: a finding outside scope is not the adviser’s fault, and a narrow scope can leave real risks unexamined.

The detailed, area-by-area observations: revenue analysis, margins, working capital and debt for financial DD; tax positions and exposures for tax DD; contracts, litigation and compliance for legal DD. Each finding typically states what was found, the evidence, the potential impact, and a grading (high / medium / low, or a similar scale).

The findings that actually affect the deal, pulled out and ranked. This is where a high-rated finding becomes a “deal issue” with a money number attached and a suggested treatment. As a founder, this is the section that determines your price and your indemnities, so it is the one to fight over.

What the adviser suggests the buyer do about each issue: adjust the price, take a specific indemnity, hold money in escrow, make the fix a condition precedent, or in rare cases reconsider the deal. The recommendations are a menu, not a verdict. The buyer’s deal team decides which to use and how hard to push.

04Financial vs Tax vs Legal DD Reports

The three core reports answer different questions and surface different risks. They overlap (a tax provision shows up in both financial and tax DD), but each has its own focus and its own typical findings. Here is what each one looks for, with the kind of finding it throws up for a company like Brewly.

Jurisdiction matters: India, US and UAE

The structure of the report is the same everywhere, but the typical findings shift by jurisdiction, which matters for founders running cross-border setups:

• In India: tax DD is dominated by GST, TDS, and historical income-tax positions, plus FEMA and pricing-rule issues on any foreign investment, and the validity of CCPS (compulsorily convertible preference shares) terms. Legal DD scrutinises ROC (Registrar of Companies) filings and the cap table closely.
• In the US: financial DD leans on quality of earnings and revenue recognition; tax DD covers federal and state nexus and sales tax; legal DD focuses on stock option (the US equivalent of ESOP) hygiene, 83(b) elections, and IP assignment from every contributor.
• In the UAE: diligence covers corporate tax (introduced in 2023) and VAT, free-zone versus mainland licensing, Economic Substance and Ultimate Beneficial Owner records, and whether the company’s activities match its trade licence.

Our master checklist post has separate downloadable Finance, Tax and Legal checklists for all three jurisdictions, so you can prepare for the report your specific buyer’s advisers will write.

05Red Flag vs Deal-Breaker: The Distinction That Decides Everything

A red flag is a problem the buyer can live with if it is priced or papered correctly. A deal-breaker is a problem so serious that no price and no protection makes the deal worth doing. The whole negotiation after diligence is really an argument about which findings are which, and most findings are red flags, not deal-breakers.

What usually turns a finding into a deal-breaker is not the size of the rupee number alone, it is one of three things: the loss is uncapped or unknowable (open-ended litigation, a tax position that could cascade across years), it strikes at the core asset (the company does not actually own the brand, code or licence the buyer is paying for), or it reveals fraud or dishonesty, which destroys trust in everything else in the data room.

06How Findings Turn Into Deal Terms

A finding in a DD report is worthless to the buyer until it changes the deal. There are five standard levers, and almost every red flag is treated with one or a combination of them. These are negotiated and recorded in the share subscription or share purchase agreement (SSA / SPA) and the shareholders agreement (SHA): see our SHA and SSA guide for how each clause is drafted.

1. Price or valuation adjustment

The cleanest lever: the buyer simply pays less. When financial DD finds that Brewly’s true, sustainable EBITDA is ₹2 crore lower than reported (a one-off contract booked as recurring revenue), the buyer applies the agreed multiple to the lower number. At an 8x multiple, that single finding cuts the valuation by ₹16 crore. Quality-of-earnings findings almost always come out of price.

2. Indemnity

The seller agrees to compensate the buyer for specific losses that arise after the deal, usually breaches of the representations and warranties. Indemnities are bounded by a cap (the maximum payable), a basket or threshold (losses must exceed a floor before any claim), and a time limit. A general indemnity covers unknown problems; it is the buyer’s safety net for things diligence did not catch.

3. Escrow or holdback

Part of the consideration is parked, in an escrow account or simply held back, for a set period to cover potential claims. If the risk does not materialise, the founders get the money; if it does, the buyer draws on it first. For Brewly, the fund holds back ₹3 crore for 18 months against the open tax matters, so it does not have to chase the founders for cash later.

4. Conditions precedent (CPs)

Some findings must be fixed before the deal completes. These become conditions precedent: regularise the unapproved ESOP grants by passing the right board and shareholder resolutions, file the overdue ROC forms, or settle a small dispute. No fix, no closing. CPs are how the buyer makes you clean up the contained, fixable problems on your own time and cost.

5. Specific indemnity

For a known, identified issue, the buyer takes a specific indemnity that ring-fences exactly that risk, often outside the general cap and basket, sometimes for a longer period. Brewly’s three-year TDS exposure becomes a specific indemnity: if the tax authority raises a demand, the founders cover it rupee for rupee, separate from everything else. Specific indemnities are how a buyer says “I will do the deal, but this one is on you.”

One finding can trigger several levers at once. A single tax issue could lead to a small price chip, a specific indemnity for the exposure, and an escrow to back the indemnity. The founder’s job is to keep each finding from being double-counted, paying for the same risk through both a price cut and an indemnity.

07How Founders Should Respond to the Findings

Founders rarely get the full report, but they always get the findings, as a findings list, a CP list, or the issues raised in the agreement. How you respond decides how much each finding actually costs you. Respond fast, factually and in writing.

• Triage every finding into three buckets: correct, partly correct, or wrong. Do not treat the report as gospel. Advisers work from incomplete information and a deadline; some findings are simply a missing document away from disappearing.
• Fix what you can before completion. Anything that can become a clean condition precedent, pass the resolution, make the filing, get the consent, should be fixed, not priced. A fixed issue costs you effort; a priced issue costs you money.
• Provide evidence, not arguments. Where a finding is overstated, answer with the document: the board minute, the challan, the signed assignment. A finding backed by your own paper trail shrinks or vanishes.
• Quantify the real exposure. If the adviser flags a “potential” ₹3 crore liability but the realistic exposure is ₹40 lakh, show the working. Buyers escrow and indemnify against the number on the page, so a vague large number is expensive.
• Negotiate the treatment, not just the finding. Even where the finding stands, you can argue for a specific indemnity instead of a price cut, a shorter escrow, a lower cap, or a higher basket. The treatment is where most of the money actually moves.

08Frequently Asked Questions