How to write a red-flag legal due diligence report

A useful red-flag report helps a decision-maker see what matters, what supports it and what needs to happen next. It is not a shortened document inventory or a list of everything the reviewer found interesting.

This guide is for a junior buyer-side transactional associate preparing an internal report for a supervising M&A lawyer. You will produce three evidence-linked findings, one open inquiry and a short summary from a small fictional private-company acquisition file. It is reporting practice, not full diligence or an opinion that a transaction is safe to proceed.

The quick task path

1. Confirm the buyer’s decision, transaction structure, scope and reporting cut-off.
2. Read the supplied records and index what is missing.
3. Separate each source fact from its possible consequence and unresolved questions.
4. Propose a priority with a reason tied to the buyer’s instructions.
5. Assign a specific follow-up and owner; do not imply authority to act.
6. Reconcile the summary, findings, evidence and open requests before handover.

See a useful finding first

Alder proposes buying all shares in ValeRoute. Its initial investment case depends on keeping Cedar Freight and the rights to operate CoreRoute. Cedar represents 42% of management-reported historical revenue. R02’s extract requires written consent before someone acquires more than half of ValeRoute’s voting shares. Consent has not been supplied.

The report’s other entries concern incomplete product-rights evidence (F02), a recurring cloud-service cost (F03) and an unanswered service-credit inquiry (Q01). Read the complete example before filling the blank version.

1. Start with the decision and scope

Write down who will use the report and for what decision. A lawyer preparing negotiation instructions may need something different from a team planning post-acquisition handover.

Here, R01 supplies the share-acquisition structure, two investment assumptions, eight-record scope and cut-off of 5 September 2026, 17:00 UTC+03:00. It also defines proposed priority labels. Do not invent financial thresholds or choose a governing law to make the example feel complete.

State the exclusions prominently: this exercise does not cover full tax, employment, regulatory, financial or technical diligence. “Reviewed eight supplied records” is supportable. “All material risks reviewed” is not.

Local decision: supervising counsel must check how the actual structure, applicable law, complete contracts and specialist work affect the issue. A share purchase is not automatically an assignment of each company contract; read the actual trigger rather than treating the labels as interchangeable.

2. Build an evidence trail before drafting conclusions

Give every finding a stable ID and source locators. Keep an index of reviewed records and an open-request list. Preserve the original files when new versions arrive.

For F02, compare R04’s assignment wording with R05’s management schedule and R06’s seller response. R04 refers to an absent Schedule A and excludes pre-existing tools. Management’s statement that both components are assigned is evidence of its position, not a substitute for the instrument.

Record “not supplied at cut-off”, not “does not exist”. Distinguish an unsigned draft, incomplete extract, executed document and assertion in correspondence. Asking for the exact missing schedule is more useful than a broad request to “confirm IP is fine”.

3. Separate fact, significance and uncertainty

Use a repeatable finding structure: source fact → possible significance → uncertainty → next action. The arrow represents your reasoning, not a rule that every document discrepancy is a legal defect.

F03 records a fixed monthly service fee plus usage charges. Reporting only the fixed fee as the total cost would mislead finance. Reporting it as a transaction loss would add an unsupported conclusion. Instead, identify the ongoing commitment and request the full contract, schedules and invoices.

Keep Q01 as an inquiry: the absent service-credit schedule does not establish a service failure or entitlement to a credit. A well-framed unanswered question can be the correct output. Give it an owner and a next step so it does not disappear.

4. Prioritise against instructions, not colour alone

Explain why a finding warrants attention. In this example, F01 and F02 are proposed Immediate issues because they touch the stated investment assumptions. F03 is Important for operating-cost verification and handover. Q01 is not yet a developed finding.

These labels are working proposals under R01, not a universal legal risk scale or permission to proceed. A finding can become more important when the buyer’s objective changes even if its evidence does not. Conversely, reducing commercial priority does not waive a contractual requirement.

Use words as well as any colour. Do not let a spreadsheet’s red fill do the work of a reasoned explanation.

5. Give the reader an actionable next step

Specify the missing information, who should obtain or assess it and the decision it supports. Separate requests for evidence, specialist interpretation, commercial decisions, possible drafting responses and closing controls. A junior reviewer may propose those responses, not approve them.

“Obtain the executed Schedule A; map each component and excluded tool; refer the scope to IP counsel” is actionable. “Seller to fix IP” is not.

Do not approach a customer or developer just because the report names them. R01 and R06 require requests through supervising counsel. In a real matter, verify confidentiality, data-room permissions and communication authority before sending or sharing anything.

6. Reconcile, then update without erasing history

Write the executive summary after the findings. Every summary assertion should point to a finding; each finding should point to evidence. Check that priorities, owners, amounts and qualifications agree across the report and register. Include the cut-off and open requests.

The changed-facts exercise supplies revised buyer priorities and the missing Schedule A. Keep the original snapshot. A sound update lowers F01’s proposed commercial priority while keeping the consent question open; it narrows F02 but does not clear the excluded interface rights. F03 and Q01 need not change just to make the update look busy.

Have another reviewer trace a finding from summary to source without your help. Use the final checklist before submitting the draft for qualified review.

Common mistakes