Red Flag vs Descriptive Due Diligence Reports

In legal M&A practice, two due diligence report formats dominate: the red flag report and the descriptive report. Both are designed to inform the buyer about the legal status of the target company, yet they serve different purposes.

A red flag legal due diligence report highlights only the issues that could materially affect the deal. It is concise, practical, and designed for quick decision-making. A descriptive legal due diligence report, by contrast, captures the full legal framework of a company. It gives a complete picture that is useful not only for negotiating the transaction but also for managing obligations after closing.

It’s not always clear which format will serve the client best, especially when deal timelines are tight. Understanding the distinction helps you align with expectations, adapt to deal dynamics, and deliver the right level of detail.

What Is a Red Flag Legal Due Diligence Report?

A red flag report focuses on deal-critical risks. As a lawyer, you filter out background noise and concentrate on the issues that could impact the deal. The goal is speed and clarity: what should the client act on now, and what can wait?

In practice, each entry in a red flag report contains three parts: severity, description, and recommendation.

1. Reference to Source Document

Each finding starts with a precise reference to where the issue was identified. This allows the client, deal team, or opposing counsel to verify the information immediately.

Example in practice:

• VDR Folder 3.2 → “Key Contracts” → File: Customer_Agreement.pdf, Clause 12.1 (page 45).

By pointing to the exact clause or page, the report avoids ambiguity and makes follow-up work faster and more reliable.

2. Title of the Issue

Every entry carries a short, descriptive heading that signals the core problem. This title should be clear enough for non-lawyers to grasp at a glance.

Example in practice:

• “Change-of-Control Restrictions”

• “Unregistered Trademark for Core Product”

A sharp title ensures that when clients skim the report, they immediately see the issue without reading the full explanation.

3. Severity

Every issue is classified so the client immediately sees which points demand attention:

• Red: Critical issues that may block the deal, such as missing permits, ongoing litigation, or change-of-control clauses.

• Yellow: Significant risks that need mitigation but don’t necessarily derail the deal, like weak compliance processes or vague non-compete terms.

• Green: Low-risk or confirmatory findings that matter for integration but not valuation, such as standard supplier contracts or registered trademarks.

This traffic-light system makes it easier to prioritize and discuss findings with the client.

4. Description

Each entry includes a short explanation that links the fact, the legal risk, and the potential deal impact.

Example in practice:

• Fact: “Key customer contract includes a change-of-control clause.”

• Risk: “If triggered, the contract may terminate and the target could lose 40% of its revenue base.”

• Impact: “This materially affects valuation and requires specific SPA protection or a price adjustment.”

This structure ensures the client understands not just what the issue is, but why it matters.

5. Recommendation

The final step is a recommendation that shows how the risk can be managed. A red flag report doesn’t just raise alarms, it proposes solutions.

Common recommendations include:

• SPA clauses: Warranties or covenants that shift risk back to the seller.

• Indemnities: Negotiated protection against specific liabilities.

• Pre-closing remedies: Obligations for the seller to fix issues before completion.

• Post-closing actions: Tasks for the integration checklist.

By combining severity, description, and recommendation, the red flag report becomes a practical decision-making tool. It is concise enough for deal teams and boards, yet specific enough to guide risk allocation.

What Is a Descriptive Legal Due Diligence Report?

A descriptive report is the full legal map of a company. Instead of filtering for material issues, it records the entire framework in which the target operates. You take raw material from the data room and translate it into a structured overview.

Typical coverage includes:

• Corporate structure and governance

• Financing arrangements and key contracts

• Employment matters

• Intellectual property rights

• Compliance and regulation

• Disputes and litigation

This depth makes descriptive reports longer and more costly, but also more valuable after signing. Buyers often use them as reference manuals during integration.

For example, a descriptive report may include a detailed summary of all lease agreements, noting renewal dates, rent adjustments, and termination rights. That level of information is not deal-critical on day one, but it becomes highly relevant once ownership changes hands.

Because of the investment of time and cost, descriptive reports are usually reserved for large acquisitions, strategic long-term deals, or regulated sectors where nothing can be left uncertain.

Key Differences Between Red Flag and Descriptive Reports

Conclusion

Both red flag and descriptive legal due diligence reports inform the buyer about the legal situation of the target company but they do so in very different ways. A red flag report provides speed and clarity, focusing only on deal-critical issues and practical recommendations. A descriptive report offers completeness, giving the buyer a reliable legal map that extends well beyond closing.

The right choice depends on the transaction. Fast-moving deals often benefit from red flag reports, while large or regulated deals require the depth of a descriptive review. In some cases, a hybrid approach combines both. What matters most is matching the format to the client’s priorities so the due diligence report becomes a tool for negotiation, decision-making, and post-closing management.