How to Write a Due Diligence Memo for M&A

A due diligence memo is the written deliverable that translates the findings from legal due diligence into deal intelligence for the client and deal team. It is the document that the deal partner reads before the negotiation call. It is the document that the client uses to make the buy or walk-away decision. It is the document that informs every representation, warranty, covenant, and indemnification provision in the purchase agreement. The quality of the memo determines whether diligence findings actually influence the deal, or whether they sit in a folder that no one opens after signing.

The Executive Summary: Write It First, Revise It Last

The executive summary is the most read section of any diligence memo. For many readers, particularly the client's business team, it is the only section they will read in full. It must be self-contained, actionable, and concise.

What the executive summary must include:

• Deal-critical findings. The 3-5 issues that could affect whether the deal closes, how it is structured, or the purchase price. These are the findings that the partner needs before the next call with opposing counsel.

• Key risk categories. A one-paragraph assessment of each major risk area: contract stability, IP ownership, employment matters, regulatory compliance, and litigation exposure. Not a catalog of every finding, but a characterization of the risk level in each category.

• Recommended actions. For each deal-critical finding, a specific recommendation: request a specific representation, negotiate a special indemnity, require pre-closing consent, or adjust the purchase price.

• Open items. A short list of issues that require additional information, follow-up with the target, or specialist analysis before the risk assessment is complete.

What the executive summary should not include: individual contract summaries, comprehensive provision lists, or hedged conclusions that do not help the reader make a decision. The executive summary is a decision document, not a coverage document.

Write a draft executive summary before you start the detailed review. This draft forces you to articulate what you expect the critical issues to be. Revise it after the detailed review is complete to reflect what you actually found. This approach produces a tighter, more focused summary than trying to distill 30 pages of analysis after the fact.

Structure: Organize by Risk, Not by Document Type

The most common mistake in diligence memo drafting is organizing findings by document type: "Section 3: Customer Agreements. Section 4: Vendor Contracts. Section 5: Employment Agreements." This structure forces the reader to mentally aggregate related findings scattered across multiple sections.

Instead, organize by risk category. Group all related findings together regardless of which document type they appear in.

Contract Stability and Continuity

Cover all provisions that affect whether the target's contracts survive the transaction: assignment restrictions, change of control triggers, convenience termination rights, consent requirements, and notice periods. This section answers the question: which contracts are at risk because of the acquisition?

Pull findings from customer agreements, vendor contracts, leases, IP licenses, and any other agreement with relevant provisions. The reader sees the complete picture of contract stability risk in one place.

Competitive Restrictions

Cover all non-competes, non-solicitation provisions, exclusivity obligations, and MFN clauses across employment agreements, commercial contracts, and prior acquisition agreements. This section answers the question: what competitive restrictions does the acquirer inherit?

Intellectual Property

Cover IP chain of title, assignment gaps, open source compliance, and license terms. This section answers the question: does the target actually own the IP the acquirer is paying for?

Financial and Indemnification Risk

Cover indemnification obligations, limitation of liability provisions, uncapped exposures, guarantee obligations, and any financial commitments that create contingent liabilities. This section answers the question: what financial exposure does the acquirer inherit beyond the purchase price?

Employment and Human Capital

Cover key person dependencies, non-compete enforceability, benefits obligations, pending claims, and workforce risks. This section answers the question: what employment-related risks and obligations come with the acquisition?

Regulatory and Compliance

Cover industry-specific regulatory requirements, pending investigations, compliance program adequacy, and data privacy obligations. This section answers the question: is the target in compliance, and what does the acquirer need to maintain that compliance?

The Risk Matrix: Quantifying What You Found

A risk matrix provides a visual summary that complements the narrative analysis. For each identified issue, the matrix should capture:

• Issue description. A concise statement of the finding.
• Affected contracts/relationships. The specific agreements or counterparties involved.
• Severity. High, medium, or low based on potential financial impact and likelihood of materialization.
• Likelihood. High, medium, or low based on the probability that the risk will actually materialize.
• Recommended action. The specific step to address the risk: representation, indemnification, consent, price adjustment, or acceptance.

The matrix is particularly effective for communicating with clients who want to see the full risk landscape at a glance. It also serves as a tracking tool for purchase agreement negotiations, ensuring that every identified risk has a corresponding protective provision.

Connecting Findings to Purchase Agreement Provisions

The diligence memo is most valuable when it explicitly connects findings to purchase agreement recommendations. Every significant finding should include a recommendation in one of these categories:

Representations and warranties. If diligence reveals an area of risk, the purchase agreement should include a specific representation from the seller addressing that risk. For example, if several contracts have potential assignment issues, the seller should represent that all material contracts are assignable or that all required consents have been obtained.

Pre-closing covenants. Issues that can be resolved before closing should be addressed through seller covenants. Consent solicitation for material contracts with assignment restrictions. Remediation of IP assignment gaps. Resolution of compliance deficiencies.

Special indemnification. Known risks that cannot be resolved before closing should be addressed through special indemnity provisions with their own caps, baskets, and survival periods. Pending litigation, identified tax exposures, and environmental issues are common candidates.

Purchase price adjustments. Findings that reduce the value of the target (customer contracts at high risk of termination, unenforceable non-competes, IP ownership defects) may warrant purchase price adjustments. The memo should quantify the impact where possible.

Closing conditions. Deal-critical issues that must be resolved before the acquirer is willing to close should be framed as closing conditions. Receipt of material third-party consents is the most common example.

Practical Drafting Techniques

Write findings, not summaries. "Customer A's agreement contains a blanket anti-assignment clause that would require consent for the contemplated transaction. The agreement represents approximately $3.2M in annual revenue (8% of total). We recommend including Customer A's consent as a closing condition or, alternatively, a specific seller indemnity for losses resulting from termination" is a finding. "Customer A's agreement was reviewed and contains standard commercial terms" is a summary. Findings drive decisions. Summaries fill pages.

Quantify wherever possible. "Several contracts contain assignment restrictions" is less useful than "17 contracts representing $12.4M in aggregate annual revenue (31% of total) contain assignment restrictions that would require counterparty consent." Quantification allows the reader to assess materiality without asking follow-up questions.

Use supporting exhibits for detail. The narrative sections of the memo should contain analysis and recommendations. Detailed contract review matrices, provision extraction tables, and contract-by-contract summaries belong in exhibits that support the narrative without overwhelming it.

Track what you could not verify. Every data room has gaps. Documents that were requested but not provided, questions that were asked but not answered, and areas where the available information is insufficient for a complete assessment should be documented clearly. The reader needs to know both what you found and what you could not confirm.

Building the Memo Efficiently with AI

The traditional workflow for diligence memo drafting is sequential: read contracts, take notes, organize notes, write memo. This workflow means the memo is the last thing produced, often under time pressure that compromises quality.

AI-powered clause extraction inverts this workflow. When provisions are extracted and structured before the attorney begins analysis, the memo framework is already in place. The attorney's role shifts from "read and summarize" to "analyze and recommend," which is both faster and produces better output.

The extracted provisions become the exhibit tables. The risk flags become the findings. The attorney adds the analysis, the materiality assessment, and the recommendations that connect findings to purchase agreement provisions. This workflow produces a more thorough memo in less time because the comprehensive extraction ensures nothing is missed and the attorney's time is spent on judgment rather than reading.

For deal teams managing high-volume M&A diligence, this workflow change is what makes it possible to deliver a thorough, well-structured diligence memo on the timeline the deal requires.

---