Due Diligence Checklist
(The Long Form)
The following checklist contains information the buyer must obtain about the seller before a comprehensive, accurate analysis of the business can be made.
- The company:
- Present legal name
- Date the company originated
- State of incorporation
- List of shareholders
- Number of shares owned by principals
- List of operating investments and amount
- List of any unusual situations or circumstances
- Name, address, phone number of company’s bank
- Name, address, phone number of company’s auditor
- Name, address, phone number of company’s attorney
- Name, address, phone number of other company advisors
- Historical summary:
- How the company was originally formed
- Reason for founding
- Names of founders and successors
- Brief review of sales progress
- Brief review of profit progress
- Brief review of product line history
- Financial considerations
- Income statements for the last 5 years
- A balance sheet for the latest fiscal year
- A balance sheet for the latest interim period
- A list of bad debt expenses for the last 5 years
- An inventory list and method
- An asset list which includes purchase date and accumulated depreciation
- A list of liabilities
- Are sales on track?
- Are profits on track?
- What is the expected price/profit erosion?
- What is their cost of good sold?
- What are their fixed and variable costs?
- What methods are used to allocate costs by product line?
- What is their average receivables aging?
- Management, personnel and policies:
- Number of employees by department
- Organizational chart
- List of officers
- Is there an operations manual? If so:
- Does it contain a list of all duties?
- Is it up to date?
- Are all work rules and regulations defined?
- Information about principals and key employees
- List and summarize employment contracts
- Are there new management requirements?
- Is secondary management strong?
- Will management stay if there is a change of ownership?
- What are the rates of compensation for management?
- List salaries of key executives
- Is there an incentive program?
- Are outside consultants used?
- Are office accommodations appropriate?
- How is morale?
- List fringe benefits to management
- Production labor (if manufacturing)
- Average hourly rate
- Names of Unions
- Past labor relations
- Present or future labor problems
- List of hourly rates and job classifications
- Payroll procedures
- Productivity experience
- General employee morale
- Procedures for hiring and firing
- Union contract expiration dates
- Number of hours in work week
- Advancement and promotion procedures
- Employee benefits
- Incentive plans
- Pension plans
- Vacation plans
- Number of paid holidays
- Medical, life insurance, dental
- Stock options
- Bonuses
- Profit sharings
- Recreational facilities
- Employee discounts
- Employee social functions
- The facilities:
- Land and buildings
- Location and zoning
- Legal description and ownership
- Mortgages (amount, terms and conditions)
- Description of lease(s)
- Appraisals (if owned)
- Plans and drawing
- Insurance
- Sprinklers
- Fire protection
- Police protection
- Condition
- Repairs needed
- Improvements
- Amount of square feet in buildings
- Amount of square feet in land
- Amount of rent
- Amount of property taxes
- Amount of office space in building
- Amount of warehouse space
- Number of shipping docks
- Type of electrical power
- Compliance with OSHA
- Compliance with Environmental Protection Agency
- Space for expansion
- Location of public storage facilities
- How long will existing facilities by appropriate?
- Where would the company move if it had to?
- What are comparable property costs?
- Are security systems adequate?
- Housekeeping
- Is location desirable?
- Labor
- Marketing
- Shipping
- Materials
- Transportation
- What are production and sales capacity of facilities?
- What percent of present facilities are being used?
- If retail facilities:
- Approximate size of trade areas
- Demographics of trade areas
- Location of nearest:
- Post office
- Airport
- Rail
- Port
- Is area serviced by common carriers and United Parcel?
- Equipment
- List of equipment which includes age, date purchased, cost, stock number and condition
- What additional equipment might be required to sustain production?
- What additional equipment is required in the future?
- Depreciation policy
- Value of all equipment
- Own vs. Lease
- Does equipment meet the requirements of regulatory agencies?
- Preventative maintenance policy
Ill. Production (if manufacturing)
- Production costs:
- Labor cost as a percent of sales
- Material cost as a percent of sales
- Manufacturing overhead as a percent of sales
- What methods are used to allocate costs by product line?
- Possible improvements and economics
- Future cost prospects for labor, material and manufacturing overhead
- Production costs and profits by product
- Production procedures:
- Are production schedules established and kept current?
- What is the minimum production required to reach break-even?
- Quality control and inspection
- List the production obstacles
- What is the maximum production capacity with existing equipment?
- Type of cost controls
- How often is physical inventory taken?
- What other types of controls are there?
- Is there proper coordination between sales and production?
- Engineering, research and development:
- R&D cost as a percent of sales
- Number of employees
- Explain market research program
- Furnish a list of patents, copyrights, trademark and all new applications
- What is the patent agreement with employees?
- Are there patent licensing arrangements?
- Is the current R&D budget sufficient to maintain the company’s competitive position?
- Marketing and products:
- Product lines
- List of principal products
- Brochures and price lists
- Competitors
- Seasonality
- Pricing
- What effect would an increase have?
- Are prices stable?
- Future pricing considerations
- Are there fair trade laws?
- How many different price lists?
- How complete is product line?
- What effect do general economic conditions have on product line?
- Stage of product life cycles
- Sales:
- Breakdown by model number last 3 years
- Breakdown by model number next 3 years
- What are non-U.S. sales in dollars?
- What is the percentage of repeat sales?
- Is the average resale price at or below suggested retail?
- How do their retail prices compare to the competition?
- How does their discount structure compare to their competitors?
- Who are their 10 largest customers and what is their percentage of sales?
- Methods of distribution:
- a) Are all markets being covered?
- b) Who are their reps?
- c) What is their rep structure and commission?
- d) Can methods of obtaining distributors or dealers be improved?
- e) Are customers considered faithful to company?
- f) Are other methods of distribution being considered?
- g) Do customers have a good attitude toward company? How can it be improved?
- h) What are sales methods?
- i) List top 20 customers and sales volume for last year
- j) Sales figures for the 10 largest customers for the last 3 years
- k) How are salesmen paid?
1) Types of sales incentive programs
- m) Nature of sales expenses
- n) What is being done to obtain new business?
- o) Flow can existing customer sales be increased?
- p) What is the policy on service and returns?
- q) Are sales forecasts and budgets kept current?
- r) How accurate have they been?
- s) How does the company develop new products?
- Marketing share:
- What is the percentage of U.S. versus world manufacturers?
- What is their ranking for world sales?
- How does their discount structure rate when conipared to their competitors?
- Advertising and sales promotion:
- Name and address of advertising agency
- Is the advertising budget on target?
- What is the dollar amount of the advertising budget?
- What percentage of sales is the advertising budget?
- What trade shows are attended?
- Purchasing:
- Who are key suppliers?
- What % of COG are the top 5 vendors
- Availability and cost behavior of supplies
- Unusual agreements with suppliers
What are their purchasing restraints?
- Inventory
- How many inventory locations are there?
- What is the historical inventory accuracy?
- Has the inventory been audited and if yes, in what detail?
- Are inventory turns appropriate?
- What inventory obsolescence issues exist?
(Does it pass the depth of the dust test?)
VII. Legal Considerations:
- A list of pending lawsuits
- A copy of all contracts (supplier, customer, union, etc.)
- Labor considerations:
- Union rights
- Pensions
- Safety and working conditions
- Minimum wage
- Maximum hours
- Overtime
- Child labor
- Racial and sexual discrimination
- Patents:
- a) License agreements
- b) Trade secrets
- c) Trademarks
- d) Copyrights
- e) List of patents with numbers
1) List of patents pending
VIII. Did we review all former checklists?
- Did we learn something new or conflicting?
- After analyzing the information gathered in the due diligence process, should we:
- Walk away?
- Renegotiate parts of the Letter of Intent?
- Continue to the Agreement phase?