BUYING
A BUSINESS
CHECKLIST:
DUE
DILIGENCE
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 its business operations and finances. The following
is a checklist of information and documents you should review:
A.
Organization and Good Standing.
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The Company’s
Articles of Incorporation, and all amendments thereto.
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The Company’s
Bylaws, and all amendments thereto.
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The Company’s
minute book, including all minutes and resolutions of shareholders and
directors, executive committees, and other governing groups.
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The Company’s
organizational chart.
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The Company’s
list of shareholders and number of shares held by each.
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Copies of
agreements relating to options, voting trusts, warrants, puts, calls,
subscriptions, and convertible securities.
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A Certificate of
Good Standing from the Secretary of State of the state where the
Company is incorporated.
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Copies of active
status reports in the state of incorporation for the last three years.
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A list of all
states where the Company is authorized to do business and annual
reports for the last three years.
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A list of all
states, provinces, or countries where the Company owns or leases
property, maintains employees, or conducts business.
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A list of all of
the Company’s assumed names and copies of registrations thereof.
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List of all
subsidiaries and affiliates of the company
B. Financial
Information.
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Audited financial
statements for three years, together with Auditor’s Reports.
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The most recent
unaudited statements, with comparable statements to the prior year.
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Auditor's letters
and replies for the past five years.
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The Company’s
credit report, if available.
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Any projections,
capital budgets and strategic plans.
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Analyst reports,
if available.
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A schedule of all
indebtedness and contingent liabilities.
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A schedule of
inventory.
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A schedule of
accounts receivable.
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A schedule of
accounts payable.
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A description of
depreciation and amortization methods and changes in accounting methods
over the past five years.
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Any analysis of
fixed and variable expenses.
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Any analysis of
gross margins.
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The Company’s
general ledger.
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A description of
the Company’s internal control procedures.
C. Physical
Assets.
D. Real
Estate.
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A schedule of the
Company’s business locations.
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Copies of all
real estate leases, deeds, mortgages, title policies, surveys, zoning
approvals, variances or use permits.
E.
Intellectual Property.
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A schedule of
domestic and foreign patents and patent applications.
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A schedule of
trademark and trade names.
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A schedule of
copyrights.
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A description of
important technical know-how.
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A description of
methods used to protect trade secrets and know-how.
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Any "work for
hire" agreements.
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A schedule and
copies of all consulting agreements, agreements regarding inventions,
and licenses or assignments of intellectual property to or from the
Company.
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Any patent
clearance documents.
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A schedule and
summary of any claims or threatened claims by or against the Company
regarding intellectual property.
F. Employees
and Employee Benefits.
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A list of
employees including positions, current salaries, salaries and bonuses
paid during last three years, and years of service.
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All employment,
consulting, nondisclosure, nonsolicitation or noncompetition agreements
between the Company and any of its employees.
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Resumes of key
employees.
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The Company’s
personnel handbook and a schedule of all employee benefits and holiday,
vacation, and sick leave policies.
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Summary plan
descriptions of qualified and non-qualified retirement plans.
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Copies of
collective bargaining agreements, if any.
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A description of
all employee problems within the last three years, including alleged
wrongful termination, harassment, and discrimination.
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A description of
any labor disputes, requests for arbitration, or grievance procedures
currently pending or settled within the last three years.
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A list and
description of benefits of all employee health and welfare insurance
policies or self-funded arrangements.
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A description of
worker’s compensation claim history.
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A description of
unemployment insurance claims history.
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Copies of all
stock option and stock purchase plans and a schedule of grants
thereunder.
G. Licenses
and Permits.
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Copies of any
governmental licenses, permits or consents.
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Any
correspondence or documents relating to any proceedings of any
regulatory agency.
H.
Environmental Issues.
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Environmental
audits, if any, for each property leased by the Company.
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A listing of
hazardous substances used in the Company’s operations.
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A description of
the Company’s disposal methods.
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A list of
environmental permits and licenses.
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Copies of all
correspondence, notices and files related to EPA, state, or local
regulatory agencies.
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A list
identifying and describing any environmental litigation or
investigations.
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A list
identifying and describing any known superfund exposure.
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A list
identifying and describing any contingent environmental liabilities or
continuing indemnification obligations.
I. Taxes.
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Federal, state,
local, and foreign income tax returns for the last three years.
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States sales tax
returns for the last three years.
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Any audit and
revenue agency reports.
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Any tax
settlement documents for the last three years.
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Employment tax
filings for three years.
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Excise tax
filings for three years.
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Any tax liens.
J. Material
Contracts.
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A schedule of all
subsidiary, partnership, or joint venture relationships and
obligations, with copies of all related agreements.
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Copies of all
contracts between the Company and any officers, directors, 5-percent
shareholders or affiliates.
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All loan
agreements, bank financing arrangements, line of credit, or promissory
notes to which the Company is a party.
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All security
agreements, mortgages, indentures, collateral pledges, and similar
agreements.
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All guaranties to
which the Company is a party.
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Any installment
sale agreements.
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Any distribution
agreements, sales representative agreements, marketing agreements, and
supply agreements.
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Any letters of
intent, contracts, and closing transcripts from any mergers,
acquisitions, or divestitures within last five years.
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Any options and
stock purchase agreements involving interests in other companies.
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The Company’s
standard quote, purchase order, invoice and warranty forms.
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All nondisclosure
or noncompetition agreements to which the Company is a party.
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A list of all
insurance policies held by the company and any claims made or
threatened over the past 3 year
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All other
material contracts.
K. Product
or Service Lines.
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A list of all
existing products or services and products or services under
development.
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Copies of all
correspondence and reports related to any regulatory approvals or
disapprovals of any Company's products or services.
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A summary of all
complaints or warranty claims.
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A summary of
results of all tests, evaluations, studies, surveys, and other data
regarding existing products or services and products or services under
development.
L. Customer
Information.
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A schedule of the
Company’s twelve largest customers in terms of sales thereto and a
description of sales thereto over a period of two years.
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Any supply or
service agreements.
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A description or
copy of the Company’s purchasing policies.
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A description or
copy of the Company’s credit policy.
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A schedule of
unfilled orders.
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A list and
explanation for any major customers lost over the last two years.
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All surveys and
market research reports relevant to the Company or its products or
services.
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The Company’s
current advertising programs, marketing plans and budgets, and printed
marketing materials.
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A description of
the Company’s major competitors.
M.
Litigation.
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A schedule of all
pending litigation.
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A description of
any threatened litigation.
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Copies of
insurance policies possibly providing coverage as to pending or
threatened litigation.
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Documents
relating to any injunctions, consent decrees, or settlements to which
the Company is a party.
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A list of
unsatisfied judgments.
N. Insurance
Coverage.
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A schedule and
copies of the Company’s general liability, personal and real property,
product liability, errors and omissions, key-man, directors and
officers, worker's compensation, and other insurance.
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A schedule of the
Company’s insurance claims history for past three years.
O.
Professionals.
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A schedule of all
law firms, accounting firms, consulting firms, and similar
professionals engaged by the Company during past five years.
P. Articles
and Publicity.
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