Red Flag Report

A red flag report briefly summarises the most important risks and open points from due diligence. Instead of describing every detail, it highlights the key warning signals. This allows the buyer to see at a glance where potential dealbreakers may lie. Its structure follows a clear logic: each finding is described, quantified in economic terms where possible, ranked by severity and paired with a recommendation on how to handle it, such as a price reduction, an indemnity, a condition precedent, a warranty or further investigation.

The advantage over a full report is time and cost, which is why the format is common in the mid-market, in early process phases and where many reviews run in parallel. Its limit is that a review focused on material points cannot by nature capture everything. The scope of work and the thresholds applied must therefore be described expressly in the report. Banks providing acquisition finance often require a full report, as do insurers writing warranty and indemnity cover, because the insurer bases its risk assessment on the scope of diligence performed.

In practice a two-stage approach is therefore common: first a red flag review to decide whether to proceed, then a deeper review of the areas identified as critical. The scope is deliberately limited and relies on the documents available in the data room, without independent enquiries at the target. Typical findings include missing permits, unclear ownership of trademarks or software, change of control clauses in key contracts, open tax audits, provisions for legacy environmental issues and dependencies on individual customers or people. The report ranks each item by likelihood and potential size and states whether it can be addressed through price, an indemnity, a closing condition or not at all.