What Is a Sensible Diligence Budget for a Direct Investment?

Build the diligence budget around questions that could change your decision, and fund the work needed to answer them. A flat fee or percentage cannot show whether a particular direct investment has been checked well enough.

Price the Questions Before the Providers

Start with claims that support the investment case. For each one, name the evidence needed, who can assess it, and the deliverable you expect. If the case depends on reported earnings, for example, scope a financial review that reconciles accounts to bank records, tax filings, and contracts. If technology ownership is central, scope a review of assignments and development agreements.

Ask each provider for a written scope, fee estimate, timing, assumptions, and exclusions. Clarify whether the estimate covers follow-up questions, document revisions, travel, or a report for the investment committee. A low quote may omit work needed to answer the real question. A broad engagement may include work that does not affect the decision.

Allocate Funds by Risk

Set aside money for workstreams suited to the asset: financial and accounting review, transaction counsel, commercial research, technical review, intellectual property review, and management checks. Real estate may call for engineering, environmental, permit, or construction cost work. A regulated or data-heavy business may need regulatory or cybersecurity expertise. Tie each assignment to a stated exposure; do not order every review by default.

Prioritize risks that could have the greatest effect on capital. Ask, "What finding would make us stop or change the terms?" Fund that test first, then estimate the cost of resolving open questions. The amount at risk, complexity of records, number of entities, and decision deadline all affect the appropriate budget.

Use Stages and Limits

Approve an initial amount for screening and access to core documents. Release further funds after the first review confirms a credible path to closing. Keep a reserve for questions that emerge from the records. Name an approver for scope changes and require the provider to explain what new evidence made additional work necessary.

If the budget runs out while a material issue remains open, compare the cost of resolving it with the potential loss and the decision value of the answer. Pause if the issue cannot be checked in time. Rushed work is no saving if the central assumption remains untested. Talk with your attorney or CPA about legal and tax specifics.

Checklist

• List claims that could change the decision and evidence to test each one.
• Get scoped estimates with exclusions, timing, and deliverables.
• Fund high-impact financial or legal questions first, followed by technical ones.
• Set an initial approval limit, later release points, and a reserve.
• Track diligence spending separately from transaction expenses.
• Pause if essential work cannot be completed within the available budget or time.

Read next: How should a family office prioritize diligence when time is limited? and Which diligence work should be handled by independent specialists? and What should a family office include in a written diligence plan?

At the very least, most single family offices should be conducting 40 hours of due diligence, background checks, reference checks, and fact-gathering practices before making an investment.

Sources: Family Office Club investor due diligence framework, The Single Family Office. Informational only, not financial, legal or tax advice.