M&A Due Diligence ChecklistJanuary 22, 2016
When a business decides to acquire, or merge with, another business, the individuals who make that decision have a duty to exercise due diligence. The failure to exercise due diligence may result in the buyer paying more than a business is worth or taking on unforeseen operational/financial problems and liabilities when the transaction closes. Failure to perform adequate due diligence has the potential to weaken (or destroy) the buyer’s business and to trigger shareholder lawsuits.
Due diligence requires a thorough review of everything that affects the value of the business that is being acquired. Due diligence should begin as soon as the Letter of Intent and/or Non-Disclosure Agreements are executed. Because due diligence requires a review of material that might be voluminous, adequate time should be budgeted to gather and inspect the necessary documents and to conduct necessary interviews.
Hundreds of tasks might need to be undertaken before a due diligence review is completed. Here are a few key examples.
It is essential to have a complete understanding of the financial condition of the business being acquired. Critical steps in the process include review and verification (including potentially reviewing same with legal counsel and/or accountants) of:
- Financial statements.
- Notices of delinquency and default.
- Guaranties, repurchase agreements, and other obligations the business has assumed.
- Accounts payable.
- State and federal tax returns, payroll tax records, unemployment tax records, and other relevant tax documents.
- Audit reports.
Understanding Business Assets
To know what you are buying, you need to obtain:
- Current valuation of real estate and other significant fixed assets, along with verification of ownership of those assets.
- Current schedule of inventory.
- Accounts receivable.
- Proof of ownership of intangible assets, including intellectual property.
Understanding the Corporate Structure and Human Resources
Gaining familiarity with the business being acquired will require you to interview key personnel and understand their role in the business. It is also important to review:
- Articles of Incorporation, Bylaws, minutes of directors’ meetings, and other corporate documents.
- Schedules of all securities authorized, issued, or repurchased by the corporation.
- The most recent business plan.
- The organizational chart, taking note of key employees.
- Personnel files of key employees, including employment contracts, compensation agreements, and termination agreements.
- All other agreements between the business, its shareholders or members, and its officers or employees.
- Employee benefits, including retirement plans.
Understanding Suppliers and Customers
Suppliers and customers are both integral components of a business’ success. To know what you are acquiring, you need to review:
- A list of key suppliers.
- Contracts with suppliers.
- Open purchase orders.
- A list of key customers over a period of years, including trends that might identify a shrinking customer base.
- Contracts with customers.
- Sales projections.
Understanding Potential Liabilities
To be sure that the newly acquired business will not expose your business to hidden liabilities, you must review:
- Contracts that have not yet been performed.
- Insurance coverage, including pending claims.
- Legal files and correspondence from the business’ attorneys regarding potential or pending claims against the business.
- Notices from regulatory agencies and regulatory enforcement proceedings.
- Potential environmental issues.
As general diligence, you will need to become familiar with the market the target serves, major competitors, marketing strategies, and market research. You will need to understand the products the company produces and products that are under development.
Due diligence investigations should be guided by a law firm. They also require the assistance of accountants and other business professionals. Assembling the right team assures that you will discharge your duty to engage in due diligence before completing a merger or acquisition.
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