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