By: Robert C. Hackney
The following is a due diligence checklist that I have used for years in every merger or acquisition. Of course, some of the items may not apply in every situation, but this document gives you a broad scope of topics to explore if you are considering acquiring a company. Good luck and happy hunting with your new acquisition.
DUE DILIGENCE CHECKLIST
Please provide copies of the following documents relating to the Company for our due diligence review. Please organize such documents according to the list below, and cross reference the appropriate items if duplicative.
1. CORPORATE LEGAL MATTERS
1.1. Copies of the Company’s and each subsidiary’s Articles of Incorporation, and all amendments thereto, and By-laws, as currently in effect.
1.2. Copies of all corporate minutes of the Company and each subsidiary including minutes of all Board meetings, all meetings of each committee of the Board, and all meetings of stockholders, as well as written consents in lieu of such meetings, for the last three years).
1.3. Copies of the stock ledgers and records of the Company and each subsidiary.
1.4. Copies of all documentation authorizing and governing the issued stock of the Company and each subsidiary.
1.5. Copies of all stockholder agreements, voting agreements or trust agreements binding upon the stockholders of the Company and any subsidiary.
1.6. A list of all subsidiaries or affiliates of the Company or any subsidiary.
1.7. A schedule of assumed, fictitious or other business names under which the Company or any subsidiary has conducted business and the jurisdictions in which those names are registered, pending registration, applied for or otherwise protected.
1.8. A list of the states in which the Company and each subsidiary conduct business, have offices used in connection with its business, file tax returns, have registered trade names, maintain property, or have an agent who is a resident in the jurisdiction in which he or she solicits customers for the Company’s or any subsidiary’s business, whether or not the Company or any subsidiary is qualified to conduct business in any such jurisdiction, specifying with respect to each such jurisdiction the nature of the Company’s or any subsidiary’s activities, together with a list of each jurisdiction in which the Company and any subsidiary are qualified to conduct business.
1.9. Copies of all minority interests owned by the Company or any subsidiary in any entity and any partnership or joint venture, showing investment, other investors, respective investment amounts and major covenants of relevant agreements and all documents relating thereto.
1.10. Copies of any other material and reports that describe the history, present operations and business, or present corporate structure and management of the Company and each subsidiary.
2. REGULATORY AND OTHER LEGAL MATTERS
2.1. List and copies of all notices, information requests, material filings, permits, licenses, approvals and certificates obtained or required to be obtained from federal, state, local or foreign governmental authorities or agencies held or required to be held in connection with the Company’s or any subsidiary’s business.
2.2. Indicate the extent to which any of the permits, licenses, approvals and certificates referred to under 2.1 above will be affected by the contemplated transaction.
2.3. Summary of any allegation or claim that the Company or any subsidiary has violated any law, ordinance, regulation, or other requirement of any governmental authority, including, but not limited to, the FDA, the DEA, OSHA or the EEOC or any antitrust, zoning, environmental, controlled substance or tax laws, whether federal, state or local or foreign, as well as any statute or regulation governing the labeling, testing, safety, storage, record keeping, approval, advertising or promotion of the Company or any subsidiary products.
2.4. Copies of all reports filed and significant correspondence between the Company or any subsidiary and any state or federal regulatory agency during the past five years.
2.5. Summary of, and copies of all documents and correspondence relating to, any pending or threatened FDA, DEA, OSHA, EPA or Department of Labor investigations, inquiries, warnings or proceedings and copies of all such items which occurred during the last five years.
3. FINANCIAL AND TAX MATTERS
3.1. Copies of the Company’s and each subsidiary’s audited and/or unaudited financial statements for the last five years.
3.2. the Company’s and each subsidiary’s monthly and quarterly unaudited financial statements during each of the last twelve months and each of the last four quarters, respectively.
3.3. Copies of historical audited financial statements, actual verses budget by product line for last two years and present year to date.
3.4. Copies of quarterly financial projections for present year and next two years.
3.5. Copies of all foreign, federal, state and local income, sales, excise and franchise tax returns or assessments of the Company and each subsidiary for the last five years.
3.6. Copies of all correspondence regarding the tax treatment of any transaction to which the Company or any subsidiary is a party including, without limitation, applications for private letter rulings and opinions of counsel.
3.7. Summary and copies of all consents and agreements with any tax authority executed by the Company or any subsidiary.
3.8. Discussion of recent tax audits at the federal and state level, if any.
3.9. Summary of a pending or threatened disputes between the Company or any subsidiary with any tax authorities and copies of all relevant documents and correspondence related thereto.
3.10. Description of any intercompany transactions and accounts involving the Company or any subsidiary.
3.11. Copies of all written tax sharing or tax benefit agreements involving the Company or any subsidiary.
3.12. Latest available aging of accounts receivables for the Company and each subsidiary, including collections since aging date.
3.13. Description of other current and non-current asset accounts, including calculations of valuation allowances, at the end of the most recent month and at the end of the last fiscal year for the Company or any subsidiary with back up.
3.14. Schedules detailing the composition of prepaid and deferred expenses of the Company and each subsidiary with back up.
3.15. Description of sales, monthly, by product line for last year and year to date for present year.
3.16. Detailed aged accounts payable listing at the end of the most recent month and at the end of the last fiscal year and the Company and each subsidiary.
3.17. Schedules detailing the computation of accrued liability accounts at the end of the most recent month and the end of the last fiscal year for the Company and each subsidiary.
3.18. Description of all contingent liabilities whether included in the financial statements or not) of the Company and each subsidiary, including all agreements guaranteeing, indemnifying or otherwise becoming liable for the obligations or liabilities of another.
3.19. Copies of all auditors’ letters relating to the Company and each subsidiary during the last five years.
3.20. Copies of all auditors’ inquiry letters and replies thereto relating to the Company and each subsidiary during the last five years.
3.21. Description of significant account policies adopted by the Company or any subsidiary, including those adopted with respect to depreciation and the establishment of bad debt reserves and any other reserves.
3.22. Description of any variation, amendment or other change in accounting policies or procedures adopted by the Company or any subsidiary during the past five years.
3.23. Name of accountants, length of relationship with accounts, and description of any interest in, or position held by such accountants with respect to the Company and each subsidiary.
3.24. Internal financial, operating, management and similar reports or memoranda relating to operations of the Company and each subsidiary, including budgets and projections and marketing and strategy reports.
3.25. Summary of bad debt expense policies and detail for last two years and present year to date.
4. REAL PROPERTY
4.1. List and details about all real property owned by the Company or any subsidiary, together with a legal description thereof.
4.2. For each item of real property listed in response to item 4.1 above, copies of deeds, title policies, title opinions, mortgages and sales contracts, appraisals, surveys, approved zoning site plans, schedule of accumulated depreciation, list of encumbrances and copies of any other documents relating to such real property.
4.3. List of all leases of real property to which the Company or any subsidiary is a party and a description thereof, including: parties to and date of each such lease, location, leasehold amortization rates, total current amortization, Unamortized cost, property and other taxes paid or assessed but unpaid, and appraised value. Please indicate each such lease, license or permit that is an oral agreement.
4.4. List all capital expenditures over the last six months, and provide a detailed capital expenditure budget for the next two years.
4.5. Describe any idle assets and/or passive investments
4.6. For each real property lease, license and permit listed in response to item 4.3 above, copies of the lease agreement including all amendments thereto), title policies, title opinions, mortgages, assignment and sublease contracts, insurance policies, appraisals and any other documents relating to such leased property, including a summary of key lease or ownership terms, by facility.
4.7. Description of all material zoning, building, environmental and similar laws, ordinances and regulations to which any of the properties referred to under items 4.1 and 4.3 above are subject, together with a list of all variances and conditional or special use permits granted with respect to such properties.
4.8. Specify if the transfer of the real property disclosed in response to item 4.1 above or the real property leases disclosed in response to item 4.3 above will affect the rights of the transferee in respect of such real property or real property leases, or will require the consent of any landlord, mortgagee, lender, lessee or other person having an interest in such real property or real property leases.
4.9. Copies of all real estate tax bills for the past five years relating to the property listed in items 4.1 and 4.3 above.
4.10. Description of any other real property used by the Company or any subsidiary in connection with the operation of their respective businesses, together with a description of the Company’s or such subsidiary’s legal right to use such real property.
4.11. Copies of all legal opinions relating to real property, including, but not limited to, the sale, financing or zoning or real property.
5. PERSONAL PROPERTY
5.1. List of machinery, equipment and other tangible personal property with an original cost of $1,000 or more), owned by the Company or any subsidiary including administrative equipment and leasehold improvements) and a description thereof, including: date of acquisition, original cost, depreciation reserve, method of depreciation, estimated remaining useful life and appraised value. For vehicles and other registered equipment, the description also should include the state of registration, registration number, year and model.
5.2. List of all machinery, equipment and other tangible personal property leased by the Company or any subsidiary and a description thereof, including: age, method of amortization, amortization reserve, remaining term, annual payments, option, if any, to purchase the property at expiration of term, and indication of the assignability of the leases without consent, together with a copy of all such leases.
5.3. Specify whether of not any of the assets listed in 5.1 or 5.2 above are subject to any liens, claims, mortgages, pledges, leases, restrictions or other encumbrances or charges. Furnish copies of any such restrictions or encumbrances that are in writing, and fully describe all others.
5.4. Summary and list of other tangible assets of the Company and each subsidiary not previously disclosed.
6 INTELLECTUAL PROPERTY
6.1 Copies of all Internet/Website Related Agreements/Items, including:
6.1.1 Software development agreements, including website development.
6.1.2 Website related agreements, such as website hosting, linking and framing, banner advertising and click through revenue sharing agreements.
6.1.3 Database, processing and outsourcing services agreements.
6.1.4 Technology, know how, and research and development agreements.
6.1.5 Partnership, joint venture, strategic alliance and teaming agreements.
6.1.6 Government grants and related agreements.
6.1.7 Source code escrow agreements
6.1.8 Non compete and non solicitation agreements.
6.2 List of all patents and applications pending, held or being prosecuted by the Company or any subsidiary in the United States or elsewhere, with descriptive titles, numbers, jurisdiction, and copies of all correspondence regarding such patents and patent applications.
6.3 List of all copyright registrations and applications pending, held or being prosecuted by the Company or any subsidiary in the United States or elsewhere, with descriptive titles, numbers, jurisdiction and a list of all unregistered copyrighted materials of the Company’s or any subsidiary’s business for which there is no copyright application pending.
6.4 List of all trademarks, registered or unregistered, used in connection with the business of the Company or any subsidiary, whether or not such trademarks are owned by licensed to the Company or any subsidiary with a description of products or services associated therewith, and numbers, jurisdiction, and status of any registration or pending applications, if any.
6.5 List of proprietary products under development and the status of such products.
6.6 Copies of all license, option to license or sublicense agreements pursuant to which the Company or any subsidiary licenses intellectual property rights to or from third parties. Description of license agreements by product.
6.7 Copies of all agreements regarding assignment of any intellectual property rights to, or obtained any intellectual property rights from, third parties.
6.8 Copies of all agreements pursuant to which any products owned or licensed by the Company or any subsidiary are distributed or marketed by third parties.
6.9 Copies of all agreements regarding manufacture or acquisition of any products or components for products from, third parties.
6.10 Copies of all research and development/product development agreements to which the Company or any subsidiary is a party.
6.11 Copies of all other agreements relating to intellectual property that are material to the business of the Company or any subsidiary.
6.12 List of employees, including, but not limited to, programmers and engineers, who have participated or contributed in a material way to the development of any intellectual property created by the Company or any subsidiary, a brief description of their roles, and copies of their resumes or other evidence of previous job history.
6.13 Copies of all standard form agreements used by the Company or any subsidiary regarding confidentiality or non-disclosure, and a list of all persons who have executed each of such forms.
6.14 Copies of confidentiality, non-disclosure and assignment of invention agreements between the Company and any subsidiary and any other person, the contents of which differ from those set forth in the standard form.
6.15 Copies of all other documents, company memoranda, policies and the like relating to the Company’s or any subsidiary’s written policies on intellectual property or trade secrets.
6.16 Copies of all security agreements regarding intellectual property of the Company or any of its subsidiaries.
6.17 Copies of Uniform Commercial Code filings, or other state and federal filings, that relate in any way to any of the Company’s or any subsidiary’s intellectual property.
6.18 Copies of all documents, (including pleadings and/or correspondence) relating to any pending or threatened litigation involving the Company or any of its subsidiaries” intellectual property or any claim by a third party that the Company or any subsidiary is infringing upon its intellectual property rights.
6.19 Copies of all documents, correspondence, pleadings, memos, notes and other papers relating to any pending or threatened intellectual property litigation to which the Company or any subsidiary is a party. Describe any perceived violation of the intellectual property rights of the Company or any subsidiary by a third party and provide any copies of documents, correspondence, memos, notes or other papers relating to the perceived infringement.
7 BUSINESS MATTERS
7.1 Organization chart for the Company and each subsidiary.
7.2 Describe the Company’s and each subsidiary’s product lines, including the respective amount each such product line has contributed to gross sales in each of the past three years.
7.3 List of customers, including those with sales over 5 percent of total sales.
7.4 List of the Company’s and each subsidiary’s top 10 customers and suppliers including all contact information about such customers or suppliers, and, any financial data regarding revenue per customer or purchase volume for supplier.
7.5 Copies of all standard forms of customer lease, sale and service contracts and invoices used by the Company and each subsidiary, together with a list and copies of all lease, sale and service contracts, invoices and arrangements that deviate from the standard forms, indicating the contract value of each such contract, invoice or arrangement.
7.6 Copies of all warranties other than those included in standard form contracts supplied in response to item 7.6 above) made with respect to any products sold or services provided by the Company or any subsidiary.
7.7 Description of customary sales or service credit terms and credit control procedures and policies used by the Company and each subsidiary.
7.8 Copies of all outstanding agreements between the Company and any subsidiary and their respective customers relating to annual sales or rentals in excess of $50,000.
7.9 List each agreement or commitment to which the Company or any subsidiary is a party for the purchase or acquisition of materials, supplies, merchandise, equipment or services which requires performance by the Company or any subsidiary or any other party thereto more than six months from the date of such agreement.
7.10 Copies of all distribution agreements, and all agreements with independent agents, sales representatives or others involving any discounts or the payment of commissions or other consideration, to which the Company or any subsidiary is a party.
7.11 Copies of all joint venture and partnership or other similar agreements to which the Company or any subsidiary is a party and any documents summarizing the terms of any such agreements.
7.12 Copies of any contracts restricting the ability of the Company or any subsidiary to compete in any line of business with any person or entity, or committing the Company or any subsidiary to continue in any line of business.
7.13 If any significant portion of the assets of the Company or any subsidiary were acquired from a third party, copies of the acquisition agreements and any related agreements and schedules.
7.14 Copies of all advertising agreements or arrangements binding the Company or any subsidiary.
7.15 Copies of all agreements granting a right of first refusal or other right to acquire any of the Company’s or its subsidiaries’ assets and all other agreements that restrict the ability of the Company or any subsidiary to sell or otherwise dispose of their assets.
7.16 Copies of any barter arrangements in existence binding the Company or any subsidiary.
7.17 Copies of all agreements binding upon the Company or any subsidiary involving aggregate payments of more than $50,000, or describe any such contracts currently in the process of negotiation.
7.18 Copies of all contracts, agreements, understandings and commitments of the Company or any subsidiary not of the type requested above if oral, description of key terms) binding on the Company or any subsidiary.
7.19 Summary of any existing or threatened circumstances which may give rise to the cancellation of, or claims for damages of loss under, any of the agreements or understandings referred to herein.
7.20 Descriptive literature concerning the Company or any subsidiary and their respective business and products, including advertising and marketing programs, strategic marketing plans, business plans, customer lists, catalogs, brochures, flyers, etc.
7.21 Summarize and list the process by which materials are ordered, purchased and paid.
7.22 Summarize the process for order entry and customer service, including cancellation.
7.23 List of the computer systems and computer equipment and gross and net book value of such equipment.
8 SECURITIES LAW MATTERS
8.1 Copies of all agreements, instruments, offering documents (including private placement memoranda or prospectuses) relating to sales or attempted sales of equity or debt securities of the Company or any subsidiary within the past five years. Please include any agreements relating to registration rights and written or oral proposals for the acquisition of the Company’s or any subsidiary’s securities within the past five years. Such agreements should include all previous Preferred and Common Stock placements and warrants or debentures issued by the Company or any subsidiary to others.
8.2 Copies of all material correspondence between the Company or any subsidiary and the Securities and Exchange Commission and/or any state securities office during the last three years.
8.3 A schedule of all outstanding warrants, options and conversion privileges granted by the Company or any subsidiary, including date of issuance, exercise or conversion prices and amount exercised.
8.4 Current list of all shareholders, including options granted, issued, exercised and canceled, including exercise price and exercise date information).
8.5 Copies of preferred stock purchase agreements.
8.6 Copies of all material communications between the Company and any subsidiary and their respective shareholders during the past five years.
8.7 Copies of all approvals to issue securities within the past five years granted to the Company or any subsidiary, and all federal securities law filings.
9 BANK AND CREDIT ARRANGEMENTS
9.1 Description of all indebtedness and guarantees incurred by the Company or any subsidiary and copies of all loan agreements, guarantees, indentures, conditional sales contracts, chattel mortgages, accounts receivable financing agreements, factoring agreements and other relevant documents. The description should include the I) name of lender and borrower, ii) amount outstanding as of a recent date, iii) collateral or property mortgaged and iv) repayment terms, rate of interest and when payment due.
9.2 Copies of any mortgage, security interest, lien or any other impediment or encumbrance on any of the assets of the Company or any subsidiary.
9.3 Copies of all correspondence with the lenders who are parties to the debt instruments listed in 9.1 above.
9.4 List of all bank accounts and safe deposits and authorized signatories used by the Company or any subsidiary.
9.5 Description of export credit arrangements, if any, to which the Company or any subsidiary is a party.
10 EMPLOYEES AND COMPENSATION; UNION AGREEMENTS
10.1 A list of all employees of the Company or any subsidiary, together with a schedule setting forth, with respect to each such employee, his or her name, date of hire, position, current compensation and most recent compensation increase, background, qualifications and experience both within and prior to joining the Company or any subsidiary. Include number of full time employees by functional area and list any with PhDs.
10.2 List and copies of all welfare plans and arrangements covering any employee of the Company or any subsidiary, including life, health and disability insurance, severance and Section 501c) trust plans.
10.3 List and copies of all pension plans and arrangements covering any employee of the Company or any subsidiary, including retirement, profit-sharing, thrift and savings plans.
10.4 With respect to each plan listed in response to items 10.2 and 10.3 above, a) the most recent annual actuarial valuation report, if any the last filed Form 5500 or 5500-C and Schedules A and B thereto, the most recent annual and periodic accounting of related plan assets, all rulings of the Internal Revenue Service IRS) and the most recent IRS determination letter and b) a description of any changes which are being made to these plans or which are under consideration.
10.5 Copies of all compensation plans, including bonus, deferred compensation, stock option, stock purchase and annuity plans of or covering any employee of the Company or any subsidiary.
10.6 List of all employees of the Company or any subsidiary receiving long or short term disability payments, and a description of any arrangements for salary continuance currently in place.
10.7 Description of the Company’s and each subsidiary’s policy with respect to accrued vacations and sick leave for employees and the provisions for the payment thereof.
10.8 Description of all other benefits not included above, involving any employee of the Company or any subsidiary.
10.9 Copies of all handbooks and employee manuals relating to the Company’s and each subsidiary’s benefit plans or compensation policies.
10.10 Description and copies of all written and oral employment agreements other than union contracts) between the Company or any subsidiary and any employee of the Company or any subsidiary.
10.11 Copies of all consulting and management agreements, arrangements and understandings to which the Company or any subsidiary is a party.
10.12 Copies of all union contracts and collectible bargaining arrangements covering any employee of the Company or any subsidiary.
10.13 Description and copies of any pending or threatened arbitration, grievance proceeding or labor dispute involving any employee of the Company or any subsidiary.
10.14 List of any unusual labor relationships, strikes or work stoppages during the past three years.
10.15 Copies and/or description of any other relevant matter with respect to the employees of the Company or any subsidiary.
10.16 Copies of all EEOC compliance files for the last three 3) years and a description of any violation under any laws relating to EEOC or any other employment related or anti-discrimination laws during the last three years involving any employee or the Company or any subsidiary.
11 INSURANCE
11.1 Copies and description of all policies of insurance including, without limitation, insurance for property, fire, officers’ liability, fidelity, workers’ compensation, products liability and any other types of insurance, together with a schedule setting forth with respect to each such policy the name of the insurance company, policy number, property or risk covered, appraised value of covered property where appropriate), extent of coverage, annual premium, insurance brokers and all endorsements. Description of all self-insurance or similar programs.
11.2 Copies of all key person life insurance policies relating to any employee or the Company or any subsidiary,
11.3 Summary of all insurance claims of the Company or any subsidiary for the past three years, including date of claim, nature of loss, payment or reserve, and description of expenses under worker’s compensation, including cost.
11.4 Summary of any claims or lawsuits pending or contemplated by the Company or any subsidiary and the extent of insurance coverage.
12 LITIGATION
12.1 List and summary of each pending or threatened litigation, claim, arbitration proceeding or investigation whether or not covered by insurance which occurred at any time during the last three years, together with copies of all material documents relating to such actions, including a) litigation involving alleged violations of laws or regulations relating to the protection of the environment or the health or safety of employees or others and b) governmental or administrative proceedings within the past five years.
12.2 List and summary of all judgments, decrees and order to which the Company or any subsidiary is presently or during the past five years has be subject in connection with its operation of their respective business. Exclude monetary judgments which have been satisfied and which were in an amount not exceeding $5,000.00 unless such judgment was in the nature of a fine or penalty, in which case specify the nature of such fine or penalty.
12.3 Summary of all product liability claims pending or threatened against the Company or any subsidiary during the last six years indicating the disposition thereof.
12.4 Copies of any and all court papers filed in connection with any of the foregoing.
13 AFFILIATED TRANSACTIONS
13.1 If any director, officer, employee or stockholder of the Company or any subsidiary or a member of his or her immediate family has an interest in any of the assets of the Company or any subsidiary or is a party to any contract with respect of the Company or any subsidiary, provide a brief description thereof an a copy of any agreement binding on the Company or any subsidiary.
13.2 Statement of amounts and other essential terms of any indebtedness or other obligations of or to the Company or any subsidiary to or from any officer, director, stockholder or employee of the Company or any subsidiary.
14 ENVIRONMENTAL MATTERS
14.1 Copies of all existing licenses, registrations, governmental approvals and permits related to the environment or to environmental matters issued to or on behalf of the Company or any subsidiary or regarding each property listed in item 4.1 or 4.3 at any time by a foreign, federal, state or local authority.
14.2 Copies of the applications pursuant to which the licenses, registrations, governmental approvals and permits were issued to the Company or any subsidiary.
14.3 Copies of all pending applications for foreign, federal, state or local licenses, registrations, governmental approvals and permits related to the environment or to environmental matters with respect to the Company or any subsidiary.
14.4 Copies of all compliance schedules, consent orders, judgments, waivers or variances associated with compliance with any program related to the environment or to environmental matters for the Company or any subsidiary.
14.5 Copies of all notices, citations and fines for, and civil or criminal suits associated with, any actual or alleged violation related to the environment or to environmental matters by the Company or any subsidiary.
14.6 Copies of all written communications, and documents memorializing oral communications between the Company or any subsidiary or any stockholder of the Company or any subsidiary and any governmental body foreign, federal, state or local) regarding or in connection with compliance with laws related to the environment, alleged or actual violations of laws related to the environment, including, without limitation, discharges, spills, leaks or releases – such communications, include, without limitation, data, reports, inspection reports, test results, correspondence and memoranda.
14.7 Copies of all documents related to or referring to any generation, transportation, storage, treatment or disposal of industrial, toxic or hazardous substances or solid or hazardous wastes by the Company or any subsidiary.
14.8 A copy of each spill control plan maintained by the Company or any subsidiary.
14.9 A copy of all written notices to governmental agencies and third parties relating to the Company or any subsidiary respecting, without limitation, the presence and emission of hazardous and toxic chemicals and substances known to cause cancer or reproductive toxicity.
14.10 A copy of the process layout for the facility of the Company or any subsidiary please include past process layouts, if different).
14.11 A copy of all environmental audit or assessment reports for a facility of the Company or any subsidiary prepared for any purpose, including internal, insurance or governmental.