Due Diligence

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.

 

1. The company:
   1. Present legal name
   2. Date the company originated
   3. State of incorporation
   4. List of shareholders
   5. Number of shares owned by principals
   6. List of operating investments and amount
   7. List of any unusual situations or circumstances
   8. Name, address, phone number of company’s bank
   9. Name, address, phone number of company’s auditor
   10. Name, address, phone number of company’s attorney
   11. Name, address, phone number of other company advisors
2. Historical summary:
   1. How the company was originally formed
   2. Reason for founding
   3. Names of founders and successors
   4. Brief review of sales progress
   5. Brief review of profit progress
   6. Brief review of product line history

• Financial considerations
  1. Income statements for the last 5 years
  2. A balance sheet for the latest fiscal year
  3. A balance sheet for the latest interim period
  4. A list of bad debt expenses for the last 5 years
  5. An inventory list and method
  6. An asset list which includes purchase date and accumulated depreciation
  7. A list of liabilities
  8. Are sales on track?
  9. Are profits on track?
  10. What is the expected price/profit erosion?
  11. What is their cost of good sold?
  12. What are their fixed and variable costs?
  13. What methods are used to allocate costs by product line?
  14. What is their average receivables aging?

1. Management, personnel and policies:
   1. Number of employees by department
   2. Organizational chart
   3. List of officers
   4. Is there an operations manual? If so:
      1. Does it contain a list of all duties?
      2. Is it up to date?

• Are all work rules and regulations defined?

1. Information about principals and key employees
2. List and summarize employment contracts
3. Are there new management requirements?
4. Is secondary management strong?
5. Will management stay if there is a change of ownership?
6. What are the rates of compensation for management?
   1. List salaries of key executives
   2. Is there an incentive program?
7. Are outside consultants used?
8. Are office accommodations appropriate?
9. How is morale?
10. List fringe benefits to management
11. Production labor (if manufacturing)
    1. Average hourly rate
    2. Names of Unions

• Past labor relations

1. Present or future labor problems
2. List of hourly rates and job classifications
3. Payroll procedures

• Productivity experience
• General employee morale

1. Procedures for hiring and firing
2. Union contract expiration dates
3. Number of hours in work week

• Advancement and promotion procedures

1. Employee benefits
   1. Incentive plans
   2. Pension plans

• Vacation plans

1. Number of paid holidays
2. Medical, life insurance, dental
3. Stock options

• Bonuses
• Profit sharings

1. Recreational facilities
2. Employee discounts
3. Employee social functions

 

1. The facilities:
2. Land and buildings
3. Location and zoning
4. Legal description and ownership
5. Mortgages (amount, terms and conditions)
6. Description of lease(s)
7. Appraisals (if owned)
8. Plans and drawing
9. Insurance

1. Sprinklers
2. Fire protection
3. Police protection
4. Condition
5. Repairs needed
6. Improvements
7. Amount of square feet in buildings
8. Amount of square feet in land
9. Amount of rent
10. Amount of property taxes
11. Amount of office space in building
12. Amount of warehouse space
13. Number of shipping docks
14. Type of electrical power
15. Compliance with OSHA
16. Compliance with Environmental Protection Agency
17. Space for expansion
18. Location of public storage facilities
19. How long will existing facilities by appropriate?
20. Where would the company move if it had to?
21. What are comparable property costs?
22. Are security systems adequate?
23. Housekeeping
24. Is location desirable?
25. Labor
26. Marketing
27. Shipping
28. Materials
29. Transportation
30. What are production and sales capacity of facilities?
31. What percent of present facilities are being used?
32. If retail facilities:
    1. Approximate size of trade areas
    2. Demographics of trade areas
    3. Location of nearest:
    4. Post office
    5. Airport

• Rail

1. Port
2. Is area serviced by common carriers and United Parcel?

 

1. Equipment

 

1. List of equipment which includes age, date purchased, cost, stock number and condition
2. What additional equipment might be required to sustain production?
3. What additional equipment is required in the future?
4. Depreciation policy
5. Value of all equipment
6. Own vs. Lease
7. Does equipment meet the requirements of regulatory agencies?
8. Preventative maintenance policy

 

Ill.        Production (if manufacturing)

 

1. Production costs:

 

1. Labor cost as a percent of sales
2. Material cost as a percent of sales
3. Manufacturing overhead as a percent of sales
4. What methods are used to allocate costs by product line?
5. Possible improvements and economics
6. Future cost prospects for labor, material and manufacturing overhead
7. Production costs and profits by product

 

1. Production procedures:

 

1. Are production schedules established and kept current?
2. What is the minimum production required to reach break-even?
3. Quality control and inspection
4. List the production obstacles
5. What is the maximum  production capacity with existing equipment?
6. Type of cost controls
7. How often is physical inventory taken?
8. What other types of controls are there?
9. Is there proper coordination between sales and production?

 

1. Engineering, research and development:

 

1. R&D cost as a percent of sales
2. Number of employees
3. Explain market research program
4. Furnish a list of patents, copyrights, trademark and all new applications
5. What is the patent agreement with employees?
6. Are there patent licensing arrangements?
7. Is the current R&D budget sufficient to maintain the company’s competitive position?

 

1. Marketing and products:

 

1. Product lines

 

1. List of principal products
2. Brochures and price lists
3. Competitors
4. Seasonality
5. Pricing
6. What effect would an increase have?
7. Are prices stable?
8. Future pricing considerations
9. Are there fair trade laws?
10. How many different price lists?
11. How complete is product line?
12. What effect do general economic conditions have on product line?
13. Stage of product life cycles

 

1. Sales:

 

1. Breakdown by model number last 3 years
2. Breakdown by model number next 3 years
3. What are non-U.S. sales in dollars?
4. What is the percentage of repeat sales?
5. Is the average resale price at or below suggested retail?
6. How do their retail prices compare to the competition?
7. How does their discount structure compare to their competitors?
8. Who are their 10 largest customers and what is their percentage of sales?
9. Methods of distribution:
10. a) Are all markets being covered?
11. b) Who are their reps?
12. c) What is their rep structure and commission?
13. d) Can methods of obtaining distributors or dealers be improved?
14. e) Are customers considered faithful to company?
15. f) Are other methods of distribution being considered?
16. g) Do customers have a good attitude toward company? How can it be improved?
17. h) What are sales methods?
18. i) List top 20 customers and sales volume for last year
19. j) Sales figures for the 10 largest customers for the last 3 years
20. k) How are salesmen paid?

1)      Types of sales incentive programs

1. m) Nature of sales expenses
2. n) What is being done to obtain new business?
3. o) Flow can existing customer sales be increased?
4. p) What is the policy on service and returns?
5. q) Are sales forecasts and budgets kept current?
6. r) How accurate have they been?
7. s) How does the company develop new products?

 

1. Marketing share:

 

1. What is the percentage of U.S. versus world manufacturers?
2. What is their ranking for world sales?
3. How does their discount structure rate when conipared to their competitors?

 

1. Advertising and sales promotion:

 

1. Name and address of advertising agency
2. Is the advertising budget on target?
3. What is the dollar amount of the advertising budget?
4. What percentage of sales is the advertising budget?
5. What trade shows are attended?

 

1. Purchasing:

 

1. Who are key suppliers?
2. What % of COG are the top 5 vendors
3. Availability and cost behavior of supplies
4. Unusual agreements with suppliers

What are their purchasing restraints?

1. Inventory

 

1. How many inventory locations are there?
2. What is the historical inventory accuracy?
3. Has the inventory been audited and if yes, in what detail?
4. Are inventory turns appropriate?
5. What inventory obsolescence issues exist?

(Does it pass the depth of the dust test?)

 

VII.      Legal Considerations:

 

1. A list of pending lawsuits
2. A copy of all contracts (supplier, customer, union, etc.)
3. Labor considerations:
4. Union rights
5. Pensions
6. Safety and working conditions
7. Minimum wage
8. Maximum hours
9. Overtime
10. Child labor
11. Racial and sexual discrimination
12. Patents:
13. a) License agreements
14. b) Trade secrets
15. c) Trademarks
16. d) Copyrights
17. e) List of patents with numbers

1)        List of patents pending

 

VIII.     Did we review all former checklists?

 

1. Did we learn something new or conflicting?

 

1. After analyzing the information gathered in the due diligence process, should we:

 

1. Walk away?
2. Renegotiate parts of the Letter of Intent?
3. Continue to the Agreement phase?

 

 

 

Due Diligence