The due diligence process: Step-by-step guide

The Due Diligence Process: Step-by-Step Guide

When you are considering a major business move—whether buying a company, investing in a target, or entering a joint venture, the difference between success and disaster often comes down to how you approach due diligence. Here’s a clear, step-by-step guide to running due diligence in Malaysia, so you never sign blind.

When Does the Due Diligence Process Take Place?

Due diligence begins after both sides show genuine interest but before you make any binding commitments. In practice, you should start your checks:

• After a Letter of Intent (LOI) usually in acquisitions or Term Sheet in investment scenarios: This non-binding document signals both sides are interested, subject to due diligence.

• During negotiations: As soon as the idea becomes serious, but before final contracts are signed or money is transferred.

Who Is Involved in Due Diligence?

Due diligence is a collaborative process. Key participants typically include:

• Business owners and directors: Oversee and approve access to company information.

• Buyers, sellers, or investors: The parties on both sides.

• Legal advisers: Run legal checks, review documents, and identify legal risks.

• Accountants and consultants: Handle financial, operational, and technical due diligence.

• Other internal and external specialists as needed for industry-specific matters.

Preparation: Information Access and Team Assembly

A successful due diligence process starts with clear planning and the right team:

• Set objectives: Define what you want to achieve and what information you need.

• Scope and timeline: Outline what will be covered (legal, financial, operational, compliance) and set clear deadlines.

• Build your team: Appoint internal stakeholders and external advisers (lawyers, accountants, consultants) with relevant experience.

Step 1: Issue a Document Request and Checklist

Start by preparing a due diligence checklist—a tailored list of required documents and information. This usually covers:

• Company constitution and statutory records

• Shareholding structure

• Financial statements and tax filings

• Key contracts (customer, supplier, employment)

• Licences and permits

• Litigation history and regulatory filings

Officially request these documents from the target business.

Step 2: Secure Information Access

• Virtual Data Room (VDR): Set up a secure online space for sharing and reviewing documents.

• Physical access: Arrange on-site document review or delivery for sensitive or non-digitised files.

• Confidentiality: Make sure all parties sign NDAs and control who can access information.

Step 3: Conduct Systematic Document Review

Carefully review the documents for legal, financial, operational, and compliance issues:

• Corporate files: Constitution, registers, shareholder records.

• Legal documents: Contracts, licences, IP, pending litigation.

• Financial records: Accounts, debts, contingent liabilities.

• Operational records: Business processes, assets, IT systems.

• Compliance files: Statutory and sector-specific requirements.

Step 4: Management and Staff Interviews

Meet with directors and key managers to clarify any gaps, ask about unresolved issues, and probe for hidden risks or operational bottlenecks.

Step 5: Site Visits and Asset Inspections

Physically inspect key assets, properties, or inventory to confirm their existence and condition. Observe operations first-hand where relevant.

Step 6: Review for Malaysian Legal and Regulatory Compliance

Ensure the company complies with all relevant laws and regulations, including:

• Companies Act 2016: Proper incorporation and statutory maintenance.

• Sector regulations: Industry permits, environmental and safety requirements.

Step 7: Identify and Assess Risks

Create a risk matrix, flagging discrepancies, missing documents, and red flags. Rate their seriousness and suggest actions or deal adjustments.

Step 8: Reporting and Communication

Prepare a clear, business-focused due diligence report, including:

• Executive summary: Key findings and risks.

• Detailed findings: Breakdown by legal, financial, operational, compliance.

• Risk matrix: Visual table of critical, moderate, and minor risks.

• Recommendations: Actionable next steps or contract protections.

Discuss outstanding issues with the target through follow-up questions, supplementary requests, or in-person meetings as needed.

Step 9: Decision-Making—What You Do With the Findings

Based on your due diligence report:

• Go/no-go: Decide whether to proceed, walk away, or renegotiate.

• Negotiation: Use findings to adjust price, seek warranties, or require issues to be resolved.

• Deal protection: Insist on contractual safeguards for unresolved risks.

Special Scenarios: What If You Discover Serious Issues?

If you uncover a major legal issue (undisclosed lawsuits, compliance breaches, disputed ownership, etc.) after signing an LOI but before binding contracts:

• Renegotiate terms: Adjust price or require issues be fixed.

• Impose conditions precedent: Make deal completion dependent on problem resolution.

• Walk away: Withdraw if risks are unacceptable (unless the LOI is binding on certain terms).

• Restructure the deal: Switch from a share to asset purchase, demand indemnities or escrow.

Remember, your last real chance to protect yourself is before signing binding agreements or making regulatory filings. After that, your ability to control outcomes narrows sharply.

Special Considerations for Public Companies or Regulated Sectors

Due diligence for public companies or regulated sectors needs extra care:

• Crossing certain shareholding thresholds may trigger regulatory obligations and public disclosures.

• Regulatory applications must be supported by due diligence—pulling out after filing can be complex and costly.

Why Timely and Transparent Due Diligence Reporting Matters

Effective due diligence reports should give you clear, actionable advice—enabling you to move quickly, negotiate confidently, and protect your interests. In Malaysia’s fast-paced business environment, strong due diligence is what separates winning deals from costly mistakes.

If you need legal assistance on your the due diligence process or exploring your next growth strategy, reach out to our team. We would be happy to assist your and be your legal sound board.