Due Diligence

---
name: due-diligence
description: Structures and runs a diligence process with a workstream request list, a findings tracker, and a red-flag log.
---

# Due Diligence Agent

## When to use
Use this when you must structure and run a diligence process on a target, whether buy-side confirmatory diligence or sell-side vendor diligence. It is the right tool the moment a deal moves past a signed LOI or a data room opens. Reach for it when you need to turn a vague "do diligence" instruction into an organized, owner-assigned process.

## What it does
It produces a diligence request list organized by workstream and a findings tracker that logs every issue with severity, owner, and status, plus a running red-flag log that surfaces deal-threatening items early.

## Method
Diligence checklist and findings log, worked step by step.

1. Frame the scope.
   - Confirm deal type, sector, materiality thresholds, and the investment thesis to prove or disprove.
   - Pitfall: an unbounded request list stalls the process; anchor every ask to a thesis question.

2. Build the request list by workstream: commercial, financial, legal, tax, operational, HR, and IT.
   - Under each, list specific documents and data to pull from the data room or management.
   - Commercial: customer concentration, churn, pipeline. Operational: capacity, supply chain, key facilities.

3. Prioritize quality of earnings in the financial workstream.
   - Revenue recognition, one-time and non-recurring items, working capital trends, and normalized EBITDA with a clean add-back bridge.
   - Watch for aggressive capitalization or channel stuffing that flatters earnings.

4. Cover legal, tax, HR, and IT.
   - Legal and tax: material contracts, change-of-control clauses, litigation, IP ownership, open tax positions.
   - HR: key-person dependencies and retention. IT: systems, security posture, and integration debt.

5. Assign each request an owner and a due date.
   - Track receipt status: outstanding, received, under review, or cleared.
   - Good practice: a single owner per item, never a team, so accountability is clear.

6. Log findings as documents arrive.
   - Capture description, workstream, severity (high, medium, low), potential deal impact (price, structure, walk-away), owner, and status.
   - Severity is about deal impact, not effort: a small dollar item with a legal walk-away trigger is high.

7. Escalate high-severity findings to the red-flag log.
   - Add a one-line thesis on why it threatens value and a recommended mitigation (price adjustment, escrow, indemnity, or condition to close).

8. Roll findings into a diligence summary.
   - Tie each material issue to a proposed action in the purchase agreement or valuation, so diligence directly informs deal terms.

## Inputs
- Deal type (buy-side or vendor) and the target sector
- The core investment thesis to prove or disprove
- Data room access or a document index
- Materiality thresholds and the diligence timeline
- Names of workstream owners on the deal team
- Any prior findings or known issues to carry forward
- Purchase agreement stage, so findings can be routed to terms

## Output format
- A request list grouped by the seven workstreams, each item with an owner and status
- A findings tracker as a prose list, each finding naming its workstream, severity, deal impact, owner, and status
- A red-flag log: a short ranked list of the highest-severity items, each with a recommended mitigation
- A diligence summary mapping material issues to purchase-agreement or valuation actions
- All of the above described in prose, never rendered as literal markdown tables

## Example
For Meridian Foods, a buy-side process, the financial workstream flags a high-severity finding: 38 percent of revenue comes from a single grocery chain whose contract carries a change-of-control termination right. Deal impact is rated high and routed to the red-flag log, with a recommended mitigation of a specific indemnity plus a portion of consideration held in escrow until the contract is reaffirmed. A medium finding notes 4 million of owner add-backs in normalized EBITDA that thin the defensible earnings base. A low finding flags an expiring facility lease, tracked but not deal-threatening, and the summary ties the concentration issue directly to a proposed purchase-price adjustment.