Due Diligence Checklist
So, you have decided to purchase a business. Regardless of whether the deal is structured as an asset transaction, a stock transaction, or a merger, make sure you know what you are getting into by requiring detailed information from the seller regarding the business operations and finances. The following is a checklist of information and documents you should review.
Note: Please consult with your professional advisors as to what other information may be needed in your specific situation.
Business Information
- Reasons business is for sale
- Amount of business for sale (all or part)
- History of business
- Description of products and/or services
- Address of business
- Date and state of incorporation
- States in which the company is qualified to do business
- Minute books, bylaws, certificate of incorporation, and stock certificate book
- Shareholder agreements
- Any special restrictions on the sale
- Shareholders and their holdings
- Rights of each class of stock and other securities
- Capitalization
- Fiscal year
- Accountants- name, address for each
- Attorneys- name, address for each
- Location of company records
- Credit rating
- Bank depositories
- Bank references
Operations
- Description of business, including manufacturing, distribution, and marketing activities
- Manufacturing history and agreements
- Distribution history and agreements
- Marketing history and agreements
- Advertising history and agreements
- Public relations history and agreements
- Principal vendors and terms
- Government contracts
- Seasonal factors
- Branch offices and associated operations
- Subsidiaries, associated operations, and intercompany dealings
- Documentation on systems & processes
Sales
- Description of the market
- Relative size in the industry
- Major competitors
- Industry trends and recent developments
- Industry advantages and disadvantages
- Long-range industry prospects
- Client names and address
- Number of customers
- Principal customers
- Customer repeat business
- Pricing policies and fluctuations in the past three years
- Sales backlog
- Sales materials
- Sales personnel compensation
- Effectiveness of advertising and other sales promotion programs
- Gross and net sales for the past three years and for the last twelve months
- Sales comparison with the industry for the past three years and for the past twelve months
Personnel
- Organization chart
- Number of employees and their positions
- Employee contracts
- Independent contractor agreements
- Condition and accuracy of employee records
- Union contracts
- Morale and human resource issues
- Consultants - terms and payments
- Pension, profit-sharing, insurance, stock bonus, deferred compensation, and severance plans
- Accident history, worker's compensation costs
- Industry comparison as to wage rates and number of employees
Intellectual Property
- Status of patents
- Status of trademarks
- Status of copyrights
- Status of trade secrets
- Status of domain names
- Use of name issues
- Intellectual property ownership- company or individual
- Licensing agreements
- Infringement and other intellectual property litigation
- Protection policies
- United Sates/ international strategies
- Brand management strategies
- Research and development strategies
Business Facilities
- Location
- Status of leases
- Assignability of leases
- Land owned or leased - description, value, taxes, future plans
- Buildings owned or leased - description, value, taxes, future plans, depreciation
- Furniture, fixtures - description, value, condition, depreciation, useful life
- Insurance coverage
- Ownership of title
- All Uniform Commercial Code(UCC) filings
Computer Systems
- Network system - type, setup
- Computers networked - how many, description
- Computers- condition, value, depreciation- owned or leased
- Computer programs installed - owned or leased
- Vendor and service arrangements
Financial and Related Data
- Tax returns for the past three years
- Annual and quarterly statements, including balance sheets, income statements
- Earnings record, including gross and net profit margins
- Earnings record compared to the industry
- Break-even analysis
- Payroll - federal and state(s)
- Annual and quarterly payroll report
- Sales tax payments - proper filings
- Nonrecurring income and expenses
- Earnings forecast
- Pro forma balance sheet
- Chart of accounts
- Cash and working capital requirements
- Interest charges
- Annual depreciation and capital additions
- Inventory turnover and policies
- Market and book value analysis
- Accounts payable and receivable analysis
- Accounts receivables
- Notes payable and receivable analysis
- Bad debts - collectibility and policies
- Analysis of investments or other assets
- Deferred expense analysis
- Analysis of short-term, long-term debenture and mortgage debt
- Existing and potential liens
- Status of leases
- Insurance coverage
- Contingent liabilities
- Status of any litigation
- Status of licenses or franchises
- Accounting procedures and practices
- Review of all legal counsel opinion letters related to the business
State and Federal Laws and Regulations
- Current federal, state, and local tax status
- Qualifications for doing business
- Certificate of good standing in all states
- Regulatory agency consents and issues
- Antitrust problems
- Blue-sky laws
- SEC filings and problems
- Stock exchange information, if any
- Environmental issues
Comparison Analysis/ Common Ratio Comparisons
- Earnings/book value
- Price/book value
- Price/earnings
- Price/fixed assets
- Sales/accounts receivable
- Sales/fixed assets
Structure of Sale
- Sale of corporate stock - unforeseen liabilities, taxation, corporate liquidation
- Sale of assets - purchase price, allocation, taxation, bulk sales laws, corporate liquidation
- Reorganization- mergers
Acquisition Issues
- Purchase price
- Purchase terms
- Financing
- Allocation of acquisition price
- Taxation issues
- Default issues and return of business considerations
- Brokerage fees
- Reasons for buying or selling
