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Business Seller’s Due Diligence Preparation

The due diligence process is the investigation the potential buyer will engage in after you have accepted the offer to purchase to ensure that your business is worth the investment. Many deals fall apart during due diligence, often because the buyer finds something unexpected that, even if it is easily resolved, turns the buyer off the idea of purchasing.

Be aware that the due diligence process can be a little unnerving. The buyer will be looking closely at every aspect of your business and asking questions that can seem intrusive. Remember that due diligence is the buyer’s obligation. Staying calm and providing requested information in a timely manner will keep the deal flowing smoothly to a successful closing.

Due Diligence Checklist for Business Sellers

To ensure you’re prepared for the due diligence process, review the following checklist. Some or many of the items may not apply to your business, but it will give you a good idea of the information the buyer may want, and it’s a good idea to start a file or online data room containing all necessary information as early as possible. This will save you a lot of stress during the process.

Corporate Matters

  • Articles of Incorporation and amendments, company by-laws, minute book, and annual returns
  • Organizational chart
  • Organizational structure, list of shareholders and their holdings, and any shareholder agreements
  • Related companies and strategic alliances
  • A list of all jurisdictions where the company conducts business and/or owns or leases property
  • A list of all of the company’s registered names and proof of registration
  • Industry and association memberships and affiliations
  • Litigation: past, pending, & threatened

Financial Information (3-5 years)

  • Financial statements, preferably audited or reviewed
  • Year-to-date financial statements
  • Credit report, credit and security agreements, debts, and contingent liabilities
  • Financial projections, budgets and forecasts
  • Description of internal controls, accounting methods (including depreciation and amortization), and recent changes in methods
  • Accounts receivable, accounts payable, and inventory schedules
  • Work in Progress

Taxes (3-5 years)

  • All federal, provincial, and foreign income tax returns
  • Sales tax returns
  • Audit or revenue agency reports
  • Tax settlement documents
  • Payroll filings
  • Excise tax filings

Intellectual Property

  • Patents
  • Copyrights and trademarks
  • Domain names
  • Trade secrets
  • Licenses and licensing agreements
  • IP litigation and claims
  • IP liens or encumbrances

Fixed Asset Schedules & Appraisals

  • Real estate
  • Furniture, fixtures, & equipment
  • Inventory
  • Debts or liabilities against the assets

Information Systems

  • Hardware and software description and capabilities

Management, Employees & Consultants

  • Employee list: job titles, salaries, bonuses
  • Turnover statistics
  • Key employees: thorough description of duties and responsibilities
  • All agreements related to employees or consultants
  • Policies, benefits, profit sharing, retirement plans, and stock options
  • Description of any employee past and current disputes or issues
  • Workers’ Compensation rating and claims history
  • List of all professional service providers

Licences & Permits

  • Government & Regulatory
  • Environmental

Contracts, Agreements, & Guarantees

  • Officers, directors, shareholders
  • Customers, suppliers and service providers
  • Distributors, dealers, sales, and marketing agencies
  • Partnerships, subsidiaries, joint ventures
  • Equipment leases
  • Settlements
  • Non-disclosure, non-competes, and exclusivity
  • Licensing
  • Franchising

Clients (3-5 years)

  • Revenue by client
  • Major clients lost
  • Characteristics, demographics of typical clients
  • Description of major clients, number of years as a client, and nature of relationships

Market & Competition

  • Number of competitors
  • Description of major competitors

Products & Services

  • Thorough description of all product lines and services
  • Key suppliers, contractors and sub-contractors
  • Key products, materials, services and availability
  • Purchasing terms, frequency, and payment terms
  • Production or fulfillment processes
  • Quality control
  • Job or project costing
  • Inventory control procedures
  • Purchasing policies
  • Complaints and warranty claims

Marketing, Business Development, & Sales

  • Marketing plan
  • Target market group
  • Sales, distribution and pricing strategies
  • Guarantees or warranties offered
  • Invoicing terms, frequency, and collection terms
  • Installment sale agreements
  • Standard quote, purchase order, invoice, and warranty forms
  • Credit policy

Operations

  • Operations, systems, and safety manuals
  • Current business plan
  • Plan for growth: industries, markets, products and services, and clients
  • Distribution channels
  • Supply chain channels
  • Strategic alliances, partnerships or other relationships

Environmental Matters

  • Environmental audits for properties owned
  • Hazardous substances and disposal methods
  • Contingent environmental liabilities

Insurance

  • General liability
  • Personal and real property
  • Product liability
  • Key-man, directors, and officers
  • Insurance claims history