Due Diligence: What Is Checked, Who Checks It, and What Is Left Out

You are about to invest in a company, buy a business or enter a partnership. The lawyer has gone over the contracts, and the accountant has gone over the financial statements. Everything seems fine. And yet many deals that failed went through full due diligence. The reason is not necessarily that the reviewers made a mistake. Often, nobody simply checked what needed to be checked.

What due diligence is

Due diligence is a process in which a party to a transaction collects and examines information about the other side before committing. The aim is to confirm that what was presented is true, and to uncover risks that were not presented at all.

It is standard mainly before acquiring a company or business, investing in a company, a merger, a business partnership, a large loan, an engagement with a key supplier or distributor, and the appointment of a senior executive. But the principle fits any commitment where a mistake is costly.

The types of due diligence, and what each one checks

Legal due diligence

The lawyer reviews the company's legal structure, share ownership, material contracts, pending legal proceedings, licenses and intellectual property. The central question: legally, are you getting what you think you are getting?

Financial and accounting due diligence

The accountant reviews the financial statements, the quality of revenue, debts and liabilities, cash flow and forecasts. The central question: are the numbers real, and do they hold up?

Tax due diligence

A review of tax liabilities, disputes with the Israel Tax Authority, and the tax consequences of the transaction itself.

Technology due diligence

In technology companies: a review of the product, the code, information security and ownership of the technology.

Commercial due diligence

A review of the market, the competitors, the key customers and the dependence on them. The central question: does the business have a future?

Investigative due diligence

A review of the people behind the business and its surroundings: background, connections, previous businesses, proceedings, reputation and conflicts of interest. The central question: who are we doing business with, and what have they not told us?

What falls through the cracks

Legal and financial due diligence are essential, but both share a limitation: they work mainly with the documents the other side hands over. When the other side is honest, that is enough. When it is not, it can decide what to show.

Examples of things a standard review may miss:

• The founder ran two companies that collapsed with debts, under a different name or through a family member.
• The company's largest customer is a company linked to the owners.
• One of the managers is involved in legal proceedings abroad.
• A former partner claims the technology belongs to him, but has not yet filed a claim.
• The negative articles were published only in another language, so nobody found them.

None of these things will appear in the deal's data room. All of them can come to light in investigative due diligence.

When to do the check

The short answer: earlier than you think.

In many deals, the stages are roughly as follows: initial introduction, a memorandum of understanding or term sheet, due diligence, negotiation of the contract and signing. The problem is that once a memorandum of understanding is signed, there is already an emotional and business commitment, and sometimes an exclusivity period too. It is harder to back out.

So it is worth splitting the check in two:

1. A quick background check before the memorandum of understanding. A basic check of the people and companies, which can save everything else.
2. A full check after the memorandum of understanding, in parallel with the legal and financial review.

Red flags in due diligence

• A gap between what you were shown and what can be verified.
• Refusal to provide documents, or partial and slow disclosure.
• Pressure to close quickly, combined with resistance to checks.
• Changes in shareholders or directors close to the deal.
• Dependence on a single customer or a single supplier, especially if it is linked to the owners.
• Legal proceedings that were not disclosed to you.
• Former partners or employees who tell a very different story.

A red flag does not necessarily mean you should walk away from the deal. It means you need to ask questions, change the terms, ask for security or contractual undertakings, or look deeper.

How long it takes and what it costs

There is no single price and no single timetable. What determines them is:

• The size of the deal and the risk. A small investment in a local business is different from acquiring a company with operations in several countries.
• The number of people and companies to be checked.
• Activity abroad. Every additional country means additional registries, languages and laws.
• The depth required. A check in open sources only, or also field work and conversations with people who have dealt with the other side.

One rule of thumb does hold: the cost of the check should be very small relative to the amount at stake. If it is not, the check is probably too broad for the deal.

Common mistakes

• Relying on references. The people the other side referred you to will say good things.
• Checking only the company, not the people. A company is just a structure. The people running it are the risk.
• Checking in one language only. If the other side has activity or a history in another country, the important information is in another language.
• Starting too late, when it is already hard to back out.
• Ignoring a bad feeling. When something does not add up, it is worth checking until it does, or until you understand why it does not.

When you need a private investigator

For small deals, a self-check in the public databases may be enough. We set it out in our guide on background checks before a deal.

A private investigator comes in when the amount is large, when several companies and people are involved, when the other side operates abroad, or when the standard checks were passed and something still does not add up. Investigative due diligence does not replace the lawyer and the accountant. It complements them, and checks what they do not: who the people really are.

The information in this section is general and is not legal advice. Every case is assessed on its own facts.

In case of any discrepancy, the Hebrew version prevails.