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Due Diligence Checklist - Being Acquired

When you're selling or closing your small business, you have a lot to do. You have just as much to do when you are merging with another small business. The process of acquiring your assets, stocks, or entire business is a long process. It requires you to act in good faith and comply with a due diligence investigation of your company's finances and operations. You need to follow state laws, contract laws, and internal procedures, too.

Every industry has its own set of due diligence requirements and how to conduct the due diligence process. Make sure you reach out to a business attorney in your state before taking action. Failing to act in good faith and with due diligence can void the acquisition and open your business up to fraud lawsuits, which come with hefty penalties.

In the meantime, the following is a checklist of information and documents you can typically expect the acquirer will want to review.

A. Organization and Good Standing

  • Articles of Incorporation and all amendments
  • The company's bylaws and all amendments (this is only for corporations or nonprofits)
  • Operating Agreement and all amendments (this is only for limited liability companies or LLCs)
  • The minute book, including all minutes and resolutions of shareholders and directors, executive committees, and other governing groups
  • Organizational chart
  • List of shareholders and the number of shares held by each (corporations only)
  • List of members and the percentage of ownership held by each (LLCs only)
  • Agreements relating to options, voting trusts, warrants, puts, calls, subscriptions, and convertible securities
  • Current certificate of good standing from the secretary of state of the state of incorporation
  • Active status reports in the state of incorporation for the last three years
  • List of all states where the business does business and associated annual reports for the last three years
  • List of all states, provinces, or countries where the business owns or leases property, maintains employees, or conducts business
  • List of all of the assumed names and copies of registrations for the business

B. Financial Information

  • Audited financial statements for three years, together with auditor's report
  • The most recent unaudited statements, with comparable statements to the prior year
  • Auditor's letters and replies for the past five years
  • Balance sheets for the last three years
  • 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, if applicable
  • 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
  • Your general ledger
  • Description of the internal control procedures of the business

D. Physical Assets

  • schedule of fixed assets and their locations
  • All Uniform Commercial Code (UCC) filings, usually called UCC filings
  • All equipment leases
  • A schedule of sales and purchases of major capital equipment during the last three years

E. Real Estate

  • A schedule of the Company's business locations
  • Copies of all real estate leases
  • Deeds
  • Mortgages
  • Title policies
  • Surveys
  • Zoning approvals
  • Variances
  • Use permits

F. 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, licenses, or assignments of intellectual property to or from the business
  • Any patent clearance documents
  • A schedule and summary of any claims or threatened claims by or against the Company regarding intellectual property

G. Employees and Employee Benefits

  • A list of employees, including positions, current salaries and bonuses paid during the last three years, and years of service
  • All employment or consulting between the business and any hired workers
  • All nondisclosure, nonsolicitation, or noncompetition agreements between the business and any of its employees
  • Resumes of key employees
  • Personnel handbook
  • Schedule of all employee benefits and holiday, vacation, and sick leave policies
  • Summary plan descriptions of qualified and nonqualified 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

H. Licenses and Permits

I. Environmental Issues

  • Environmental audits, if any, for each property leased by the Company
  • A listing of hazardous substances used in operations
  • A description of disposal methods
  • A list of environmental permits and licenses
  • Copies of all correspondence, notices, and files related to the Environmental Protection Agency (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

J. Taxes

  • Federal, state, local, and foreign income tax returns for the last three years
  • State 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

K. 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 business and any member, officers, director, five-percent shareholders, or affiliates
  • All loan agreements, bank financing arrangements, lines of credit, or promissory notes to which the business is a party
  • All security agreements, mortgages, indentures, collateral pledges, and similar agreements, including guaranties to which the business is a party
  • Any installment sale agreements
  • Any distribution agreements, sales representative agreements, marketing agreements, and supply agreements
  • Any letters of intent (LOI), contracts, and closing transcripts from any mergers, acquisitions, or divestitures within the last five years
  • Any options and stock purchase agreements involving interests in other companies
  • Standard quote, purchase order, invoice, and warranty forms
  • All nondisclosure or noncompetition agreements to which the business is a party
  • All other material contracts

L. 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

M. Customer Information

  • A schedule of the twelve largest customers in terms of sales, along with a description of sales 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
  • Printed marketing materials
  • Description of the company's major competitors

N. 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

O. 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, workers' compensation, and other insurance
  • A schedule of the company's insurance claims history for the past three years

P. Professionals

  • A schedule of all law firms, accounting firms, consulting firms, and similar professionals engaged by the Company during the past five years

Q. Articles and Publicity

  • Copies of all articles and press releases relating to the company within the past three years

Getting Legal Advice for the Sale of Your Business

As you prepare to sell or merge your business, you'll want to ensure you are complying with all laws and performing your due diligence. Have an experienced business and commercial law attorney on your side during the process.

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