Buyer's due diligence is the investigation you will engage in after the seller has accepted the offer to purchase or letter of intent, to ensure that the business is worth the investment and has no substantive risk factors. Your business broker or M&A intermediary, accountant, and business lawyer can assist you with this process so you do not miss anything important.
During the due diligence process, you will look into all aspects of the company, including its history, the management team and other staff, products and services, procedures and processes, and financial, accounting, and legal records. This may be done by examining all documentation, looking at the physical assets, talking to those involved in operating the business and getting third-party confirmation of the information provided by the seller.
Remember that the information you learn is confidential. You will have to sign a confidentiality agreement and adhere to its conditions.
How Long Do I Have to Perform Due Diligence?
You can take as much time as you need to perform due diligence but do make the timeframe reasonable for your sake and the seller's sake. We will do everything we can to work within your timeframe. We encourage you to see us sooner rather than later to make sure there are no delays.
Due Diligence Checklist
The following checklist should be adequate for most small and medium-size businesses. The items you want to investigate will depend on the size of the business you are buying. The larger the business, the more due diligence is typically required.
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