Due Diligence: What is Due Diligence?

What is Due Diligence?

Due diligence is a systematic investigation process conducted by an investor, venture capital fund or potential acquirer before finalising an investment or acquisition. This process aims to verify all information communicated by the target company, identify potential risks and confirm that the proposed valuation is justified. Due diligence is an essential step in any significant financial transaction in the startup ecosystem.

In Belgium, due diligence follows standard European practices while incorporating specificities of Belgian corporate law, Belgian taxation and applicable sectoral regulations. For tech startups, technical due diligence is increasingly important: investors want to ensure that the technology constituting the company's core value is solid, scalable and maintainable.

The duration and depth of due diligence vary by company stage and transaction size. A seed round may require 2 to 4 weeks of light due diligence, while a Series A or B involves 2 to 4 months of thorough investigation. A complete acquisition can take 3 to 6 months of intensive due diligence covering every aspect of the company.

Why Due Diligence Matters

Due diligence protects all parties involved in a transaction. Its importance cannot be underestimated, both for investors and entrepreneurs:

• Investor protection: due diligence verifies the entrepreneur's claims, uncovers hidden risks and enables an informed investment decision based on facts rather than promises.
• Risk identification: each due diligence dimension reveals specific risks — technical debt, potential litigation, major client dependency, security vulnerabilities — that influence valuation and investment terms.
• Trust reinforcement: a startup that successfully passes due diligence demonstrates transparency and professionalism, strengthening investor confidence and establishing a healthy foundation for the post-investment relationship.
• Informed negotiation: due diligence findings directly feed term sheet negotiation — valuation adjustment, specific protective clauses or closing conditions.
• Legal obligation: in many jurisdictions, institutional investors have a fiduciary duty to their own investors (LPs) to conduct rigorous due diligence before each investment.

How It Works

Due diligence is organised into several complementary workstreams, each conducted by specialised experts. The financial workstream examines company accounts, revenue quality (recurrence, client concentration, churn), financial projections, cost structure and cash position. A financial auditor verifies the consistency of figures presented in the pitch deck against accounting reality.

The legal workstream covers corporate structure, existing shareholders' agreements, intellectual property, client and supplier contracts, GDPR compliance, current or potential litigation and regulatory compliance. In Belgium, the analysis also addresses Belgian corporate law specificities (Code of Companies and Associations).

The technical workstream is particularly critical for technology startups. Auditors evaluate source code quality, software architecture, technical debt, test coverage, security practices, infrastructure scalability and technical documentation. They also verify dependency on specific technologies or providers and assess the technical team's ability to maintain and evolve the product.

The commercial workstream analyses the customer base (concentration, churn rate, NPS), sales pipeline, sales process, performance metrics (CAC, LTV, LTV/CAC ratio) and go-to-market strategy. The HR workstream examines the team, employment contracts, non-compete clauses, stock option plans and company culture.

Concrete Example

Consider a Brussels-based startup that developed an IoT fleet management platform with KERN-IT and raised an 800,000 euro seed round. Eighteen months later, it prepares for a 3 million euro Series A round. Fortino Capital, interested in the opportunity, launches a comprehensive due diligence.

The financial audit confirms 700,000 euros in ARR with 8% monthly growth. However, it reveals that 35% of revenue comes from a single client, representing a concentration risk. The technical audit, conducted by a specialist firm, positively evaluates the Django architecture implemented by KERN-IT: modular architecture, clear separation of concerns, 72% test coverage and complete API documentation. The report nevertheless highlights the need to migrate to a multi-region cloud infrastructure to support European expansion.

The legal audit identifies an ambiguous clause in the main client's contract that could complicate a pricing change. Based on these findings, the fund slightly adjusts the valuation downward (from 12 million to 10 million pre-money) and adds a client diversification condition to the term sheet. The startup accepts these terms, acknowledging the observations' relevance, and closes its Series A round.

Implementation

1. Prepare a comprehensive data room: organise all necessary documents (financial, legal, technical, HR) in a secure, structured space well before due diligence begins.
2. Audit internally first: conduct an internal pre-audit to identify and fix weaknesses before investors discover them. This includes a code audit, legal cleanup and financial verification.
3. Maintain up-to-date technical documentation: the quality of technical documentation — architecture, API, deployment processes, security policy — is a major confidence factor during technical due diligence.
4. Be transparent about risks: proactively revealing weaknesses with an action plan is better than letting auditors discover them, which erodes trust.
5. Designate an internal coordinator: appoint a dedicated person to coordinate the due diligence process, respond to information requests and ensure deadlines are met.
6. Anticipate recommendations: prepare an action plan for known weaknesses (technical debt, client concentration, legal documentation) and present it to investors to demonstrate team maturity.

Associated Technologies and Tools

• Virtual data rooms: Datasite, Intralinks or DocSend to share due diligence documents securely with access control and consultation tracking.
• Code audit: SonarQube, CodeClimate or Snyk to generate automated reports on code quality, technical debt and security vulnerabilities.
• Monitoring and observability: Datadog or New Relic to demonstrate technical platform reliability and performance with historical metrics.
• Accounting and reporting: Xero, Pennylane or Exact Online to generate the detailed financial statements required for the financial audit.
• Project management: Linear, Jira or Notion to document development processes, technical backlog and product roadmap presented to auditors.

Conclusion

Due diligence is the moment of truth for any startup raising funds or preparing for an acquisition. The best strategy is to build a company with nothing to hide: transparent finances, quality code, comprehensive documentation and structured processes. At KERN-IT, we develop technical platforms with quality standards that facilitate technical due diligence: clear architecture, automated tests, up-to-date documentation and security built in from design. Our clients arrive at the negotiation table with a technical asset that inspires confidence and supports their valuation.