What is due diligence and why is it carried out before an investment?
Due diligence means a detailed examination of a company, asset or project before making a business decision. Cambridge Business English Dictionary defines it in a business context as a thorough examination of a company and its financial records before entering into a particular business relationship with it. In investment practice, the analysis primarily aims to establish whether the information presented to the investor reflects the actual state of the business and to reveal liabilities and risks that may affect the value of the transaction.
Is due diligence mandatory?
There is no single universal provision requiring a full due diligence review before every investment or purchase of a company. The importance of exercising due care may, however, arise directly from provisions concerning specific transactions and the purchaser's liability. For example, Article 55 of the Civil Code provides for the joint and several liability of the purchaser of an enterprise or a farm for liabilities associated with its operation, unless the purchaser was unaware of those liabilities despite exercising due care.
How is a due diligence review carried out?
The process begins by defining the subject of the transaction, the main areas of risk and the scope of information that should be verified. The documentation made available by the business owner, often in an electronic data room, is then analysed, and the advisory team identifies gaps, inconsistencies and matters requiring further explanation. PARP (the Polish Agency for Enterprise Development) notes that, when acquiring a company, the review may cover the full legal documentation, the situation concerning intellectual property rights, current liabilities and tax matters.
Defining the scope of the review
The scope of due diligence should reflect the type of investment, the structure of the business and the risks specific to the particular market. The analysis of a service company without significant fixed assets will differ from that of an agricultural business with real estate, machinery, employees, lease agreements and concessions. The review should focus resources on the elements that may genuinely affect the investor's decision, rather than mechanically examining every document with the same level of detail.
Analysing documents and information about the business
At the analytical stage, the information provided by the seller is checked and compared with documents, registers and other available sources. The review may concern, among other things, the ownership structure, contracts, financing, liabilities, permits, disputes, rights to assets and the business's tax situation. PARP points out that it is at this stage that gaps in the company's legal history or disorganised documentation requiring clarification before the transaction is completed may come to light.
Identifying risks and their impact on the transaction
The analysis should identify problems that may increase the cost of the investment, restrict the ability to use assets or lead to liability after the company is acquired. Not every identified risk must mean abandoning the transaction - some can be taken into account in the price, contract terms, safeguards or actions required before closing. The greatest value of due diligence is the ability to make a decision based on verified information before capital is committed.
What are the types of due diligence?
The types of due diligence primarily reflect the areas of a business's activities that require examination. In transaction practice, legal, financial, tax, business and operational matters are most commonly analysed, and, depending on the sector, environmental, technical, employment-related or intellectual property matters may also be examined. European Commission documents concerning transactions also distinguish reviews conducted from strategic, legal, economic and tax perspectives.
Legal due diligence
Legal due diligence serves to establish the business's legal situation and the liabilities that may transfer to the investor or affect the company's continued operation. The analysis usually covers corporate documents, significant contracts, rights to property and intellectual property, concessions, permits, disputes and selected employment matters. When acquiring a company, the absence of rights to a key asset or restrictions arising from contracts may significantly change the assessment of the entire investment. PARP identifies the analysis of legal documentation, IP rights and existing liabilities as an element of the process preceding the acquisition of a company.
Financial and tax due diligence
Financial due diligence aims to verify the business's economic condition and the quality of the data on which the investor bases the valuation. The analysis may cover financial results, debt, cash flows, working capital, receivables and liabilities, while the tax component focuses on tax settlements and potential arrears and fiscal risks. PAIH points out that acquiring a business involves a risk of overestimating its value, which is why carrying out due diligence is an important element of preparing the transaction.
Business and operational due diligence
Business and operational due diligence addresses whether the business actually operates in line with the assumptions presented to the investor. The assessment may cover, among other things, the business model, key customers and suppliers, production organisation, resources, market position and the company's ability to continue operating after a change of ownership. Foreign investments must also take account of the economic, legal and political conditions in the target market, which PAIH highlights when discussing acquisitions of foreign businesses.
Technical, environmental and employment due diligence
Additional areas of review are particularly important for businesses with extensive assets, production plants, farms or large numbers of employees. Depending on the project, the condition of infrastructure and machinery, compliance of operations with environmental requirements, the employment structure and obligations towards employees are analysed. Such a broad approach makes it possible to identify costs that are not apparent solely from the balance sheet or corporate documentation.
What should a due diligence report contain?
A due diligence report should present the results of the review in a way that enables the investor to assess the main risks before making a decision. There is no single legally prescribed report template for all transactions, so its structure depends on the scope of the engagement and the nature of the business. In practice, the document organises findings by the areas examined, identifies the main problems and their potential impact on the investment, enabling the investor to distinguish matters requiring action from information of lesser importance.
What are red flags in a report?
Red flags are problems considered particularly significant from the perspective of the planned transaction. They may concern, for example, disputes over the ownership of assets, significant debt, tax arrears, missing required permits or key contracts that may be terminated after a change of ownership. Identifying a red flag does not automatically mean abandoning the investment, but should lead to a reassessment of the price, the transaction structure or the safeguards required.
Why is due diligence particularly important when buying a business?
When buying a business, the investor acquires more than just its visible assets and should therefore also identify the liabilities and rights associated with its operations before signing the contract. The Civil Code provides that a legal act concerning an enterprise generally encompasses everything that forms part of it, while Article 55 regulates the purchaser's liability for obligations associated with its operation. For this reason, a thorough analysis of the legal and financial situation before purchase may directly affect the purchaser's level of risk, although the due diligence report itself does not automatically provide protection against every future claim.
Due diligence of a farm and agricultural assets
When purchasing a farm, the scope of the analysis should take account of the specific characteristics of the land, infrastructure, machinery, production and legal relationships associated with the use of the property. The Polish Civil Code includes, among other things, land, buildings, equipment, livestock and the rights associated with running the farm as part of a farm, provided they constitute or may constitute an organised economic whole.
Why does analysing a foreign company require a broader approach?
In a foreign investment, due diligence should cover not only the company itself, but also the local legal, economic and operational environment. PAIH notes that acquiring a company in a foreign market may accelerate entry into that country, but involves, among other things, the risk of overvaluing the business, regulatory changes, problems in cooperation with personnel and a deterioration in the political or economic situation. In such projects, local verification of information and the coordination of specialists operating in the relevant jurisdiction are useful, which falls within the scope of Amberlan's operational support for international projects.
Does due diligence eliminate investment risk?
Due diligence does not eliminate all risk, because it is based on a defined scope of review, available information and the facts at a particular point in time. It can, however, reduce the information asymmetry between the seller and the investor and reveal problems that are not apparent in an investment presentation or basic financial data. The aim is not to obtain a guarantee of a safe investment, but to make a more informed decision and appropriately account for the identified risks in the terms of the transaction.
A sound investment decision begins before the contract is signed
Due diligence makes it possible to organise information about a business, verify its situation and identify risks that may matter to the price and security of the transaction. Cross-border investments require particular caution, because, alongside the condition of the company itself, local law, assets, counterparties and the conditions for doing business must be assessed.
If you are planning to buy a business, make an agricultural investment or undertake a project in a foreign market, contact Amberlan and verify the assumptions of the project before committing capital: https://www.amberlan.com/en/
Bibliography and sources
[1] Polish Agency for Enterprise Development, How to sell a start-up? The legal aspects of a company acquisition, https://www.parp.gov.pl/component/content/article/52402:jak-sprzedac-start-up-przejecie-spolki-od-strony-prawnej [accessed 21.09.2026].
[2] Polish Investment and Trade Agency, Strategies for entering foreign markets, https://www.paih.gov.pl/eksport/abc-eksportu/strategie-wejscia-na-rynki-zagraniczne/ [accessed 21.09.2026].
[3] Chancellery of the Sejm of the Republic of Poland, Act of 23 April 1964 - Civil Code, Articles 55¹-55⁴, https://isap.sejm.gov.pl/isap.nsf/download.xsp/WDU19640160093/U/D19640093Lj.pdf [accessed 21.09.2026].
[4] Cambridge Dictionary, Due diligence - meaning and pronunciation, https://dictionary.cambridge.org/dictionary/english/due-diligence [accessed 21.09.2026].