DUE DILIGENCE CHECKLIST
Unless otherwise indicated, documents should be made available for all periods
subsequent to [date] and should include all amendments, supplements or other ancillary
documents related to the documents requested. Please provide for each predecessor and
subsidiary of __________________ (the “Company”), all of the documents requested
below with respect to the Company.
0. Preliminary Analysis
(a).
Review the transaction offering memorandum and other available background
information (overview of the company's history, structure and operations) to
identify preliminary tax and accounting issues and risk areas for further
consideration.
(b).
With an emphasis on the implications for cash flows, earnings, and income and
other taxes, inquire about the general history of, current operations and recent or
planned changes in, the company's business, including:
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Products or services
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Environment in which the company operates, markets served, and
competitive conditions
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Customers
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Suppliers and raw materials
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Support functions (information technology, human resources, finance,
treasury, risk management, tax, etc.)
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Any unusual business practices inherent within the industry or the
locations where the company operates, such as arrangements with labor
organizations, local authorities, distributors, major customers and
suppliers, tax holidays, etc.
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Any contemplated acquisitions, sales of subsidiaries, or similar
transactions
(c).
Review strategic plans and similar planning documents; inquire as to key
assumptions and significant matters identified.
(d).
Inquire about procedures and controls over operating and capital budgeting and
forecasting.
(e).
Review and analyze business unit projections of revenues, expenses (excluding
interest and income taxes), earnings and cash flows and inquire about the
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consistency of underlying assumptions and the basis of presentation vs. historical
periods.
1. Corporate Records
(a).
The corporate charter (certificate or articles of incorporation) and by-laws for the
Company.
(b).
Minutes of meetings and Actions by Written Consent of the board of directors of
the Company and all committees thereof since the date of incorporation.
(c).
Minutes of meetings and Actions by Written Consent of the shareholders of the
Company since its date of incorporation.
(d).
An organizational chart or written description indicating each legal entity owned
by or affiliated with the Company and identifying for each entity the jurisdiction
of incorporation and approximate date of incorporation, and a brief description of
all mergers, acquisitions or other reorganizations of each entity since inception.
(e).
List of states and foreign countries in which the Company owns or leases assets,
employs people (including consultants or distributors) or has material contractual
relationships. List of all states and foreign countries in which the Company
contemplates undertaking business operations.
(f).
List of any parties or entities whose consent to the proposed transaction will be
required and copies of relevant documents.
(g).
Any stockholder, buy-sell or similar agreements which may relate, directly or
indirectly, to the proposed transaction.
(h).
Copies of all securities of the Company presently outstanding (including options,
warrants, and securities convertible or exchangeable into common stock) and the
number of shares, units, or principal amount thereof outstanding as of a recent
date.
(i).
A list of all of the security holders of the Company (including option and warrant
holders and others entitled to purchase the securities of the Company) as of a
recent date, indicating the class and number of securities held by each such
holder.
(j).
A copy of the stock transfer ledger of the Company showing all transactions in its
stock.
(k).
All outstanding agreements or other instruments that may in any way limit the
Company’s ability to declare and pay dividends.
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(l).
All documents known to the Company relating to outstanding proxies, powers of
attorney (with respect to any stock of the Company), voting trusts, or other
assignments of rights attaching to any of the stock of the Company.
(m).
A list of any capital stock or equity interest in any other entity or enterprise
owned by the Company.
2. General
(a).
Any partnership, joint venture, distributorship, franchise, licensing, management,
research and development or similar agreements or contracts to which the
Company is a party.
(b).
Any other agreements which prohibit or restrict (i) the Company’s ability to
compete in any business anywhere in any geographic area or (ii) the customers
with which the Company may do business or (iii) the prices the Company may
charge for its services.
(c).
List of twenty largest suppliers to the Company and copies of form of purchase
order and complete copies of any material supply or distribution agreements.
Include annual dollar amounts purchased in recent years and estimates for current
year.
(d).
List of twenty largest customers of the Company and copies of form of purchase
order and complete copies of any material agreements with any such customers.
Include annual dollar amounts sold in recent years and estimates for current year.
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Analyze customer and vendor trends and concentration.
(e).
List of material purchase and service or sales orders not yet fulfilled and details of
backlog at end of most recent fiscal year and fiscal quarter.
(f).
Any form engagement letters or other form agreements or contracts used in
connection with the Company’s business, including without limitation purchase
orders, sales orders, quotation forms and other standard forms.
(g).
List of significant acquisitions or dispositions of the Company’s assets, mergers,
equity financings and other material transactions completed, or proposed, within
the last three years and all documentation relating thereto.
(h).
Any contracts or agreements with competitors or governmental agencies and any
agreements containing termination or other provisions triggered by a change in
control.
(i).
Any other contract or agreement (or forms of related or similar contract) that:
(i) involves payments by or to the Company of in excess of [$100,000] in 200__
or is likely to involve payments to the Company in excess of [$100,000] in any
one year including or after 200__ or (ii) is significant to the Company’s business.
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(j).
Any written agreements and summaries of any unwritten arrangements or
understandings between the Company and any of its officers, directors, affiliates
and associates within the last three years, whether or not currently in effect.
(k).
Describe guaranty/warranty/return policies and procedures. Include any related
written materials and any documents creating any expenses or implied warranties
with respect to products manufactured or distributed by the Company.
(l).
Inquire about the nature of relationships and transactions with related parties
(including management, parent and affiliates, joint ventures and equity method
investments), with a focus on earnings and cash flows, whether all applicable
costs are reflected in the company's results of operations, the basis of
determining costs, and whether the relationships and costs will continue after
the proposed transaction.
3. Legal/Financial
(a).
Copies of current budget and long range and/or operation plans or projections for
the Company, including memoranda or other documents summarizing the
assumptions used in preparing such budgets, plans or projections.
(b).
A description of intercompany debt programs, arrangements and procedures.
(c).
All agreements pursuant to which the Company is or will be subject to any
obligation to provide funds to or to make investments in any other person (in the
form of a loan, capital contribution or otherwise).
(d).
Schedule of long-term debt including amounts, maturities and prepayment terms,
and copies of all instruments evidencing such debt, and any correspondence with
lenders relating to amendments and waivers.
(e).
Copies of any currently outstanding commitment letters or other correspondence
relating to proposed financings or borrowings which may involve in excess of
[$100,000] of indebtedness of the Company.
(f).
Letters of credit outstanding (amounts, terms) if any.
(g).
List of financial institutions and types of accounts maintained by or on behalf of
the Company, with copies of all material correspondence with and from lenders in
the past three years.
(h).
All documents purporting to create liens, mortgages, security agreements,
pledges, charges or other encumbrances on the stock of the Company, on any real
or personal property of the Company or in favor of the Company. Copies of all
Uniform Commercial Code (UCC) financing statements filed with respect to the
above.
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(i).
Copies of notes payable to or notes receivable from any employee, director,
affiliate, agent or shareholder of the Company outstanding at any time during the
past year. Copies of all other agreements relating, directly or indirectly, to the
Company or any person who is, or is proposed to become, an officer, director, key
employee or significant stockholder (including affiliates) of the Company
(including loans, leases, purchases and sales of property).
(j).
Copies of any and all agreements pursuant to which the Company either (i)
guarantees or otherwise supports the credit of any other person or entity or (ii)
indemnifies or has agreed to hold others harmless with respect to any liabilities
(whether in connection with acquisitions or otherwise).
(k).
Aged account receivables and unbilled cost and fee by customer. Schedule of
advance payments (customer advances) by customer - historical balances and
projected.
(k-1). Analyze a summary of inventories and supplies, including aging and writeoffs. Inquire about:
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Frequency and experience of physical inventory counts and reliance on
perpetual inventory records
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Costing methodology and treatment of variances
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Valuation and adequacy of reserves for excess, obsolete or slow
moving items
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Significant purchase commitments and product financing arrangements
with customers and/or suppliers
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Pledged inventories
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Idle capacity and the need to expense overhead as incurred
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Inventory sold on a consignment or bill-and-hold basis
(k-2). Analyze a summary of trade payables, including aging statistics. Inquire about:
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Normal and special credit terms (including rebates), significant past due
payables and any disputes with suppliers
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Trade payable payment policies
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Amounts and nature of used and unused letters of credit
(k-3). Analyze a summary of accrued liabilities. Inquire about:
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Basis for and adequacy of accruals for such items as advertising, bonuses,
deferred compensation, severance, workers compensation, commissions,
vacation pay, pensions/other post-employment benefits, litigation,
warranties, product liability, sales allowances and credits, environmental
matters, self-insurance, non-income taxes, etc.
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Nature, movements, and impact on earnings of significant accrued
liabilities and reserves
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Payment practices and timing of related cash outflows
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Repayment of any liabilities that may be accelerated or otherwise affected
by the proposed transaction
(l).
Most recent projected and historical financial statements (for last four years, by
month for current year, and projections for next five years) including supporting
assumptions. Include summary of significant accounting policies used by the
Company and provide details of any off-balance sheet financing. List all year-end
non-recurring adjustments made as of the end of the latest fiscal year, including
special reserves.
(m).
Copies of any and all tax returns filed (in whole or in part) by or on behalf of the
Company or in respect of the Company’s business since [date].
(n).
Current status or disposition of any tax audits pending or closed relating, in whole
or in part, to the Company or its business.
(o).
Schedule of tax liabilities or benefits that are not reflected on the Company’s
balance sheet.
(p).
Copies of any and all tax sharing or tax allocation agreements relating, in whole
or in part, to the Company.
(q).
Any regular internally prepared management reports regarding the Company’s
revenues, margins, personnel, real estate, leases, etc.
(r).
Reports or management letters provided to the Company by auditors and any and
all management responses thereto, to the extent that they relate, directly or
indirectly, to the Company.
(s).
Review internal audit reports and inquire of internal auditors as to the scope of
work performed, significant findings and status of management's corrective
actions
(t).
In connection with review of financial statements, inquire about:
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Internal accounting control environment, including any significant outof-balance conditions, unreconciled differences or reportable conditions
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Significant accounting policies, with a focus on revenue recognition,
cost capitalization and other areas for which guidance have recently
been issued or is currently being developed (e.g., derivatives, stock
compensation, barter transactions, gross vs. net presentation, multiple
element arrangements, vendor incentives, etc.)
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Significant differences between company accounting policies and U.S.
GAAP
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Changes in accounting or reporting practices or procedures that could
affect comparability or trends in earnings or cash flows
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Significant inter-company and intra-company transactions, including
corporate overhead allocations
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Nature of any services performed by corporate departments and the
potential effect of any organizational changes on future cash flows
(u).
Obtain monthly operating data.
(v).
Analyze monthly working capital trends (balances and turnover statistics),
with a focus on elements directly attributable to operations (excluding the
impact of cash, restructuring/purchase accounting reserves, significant
accruals for capital expenditures, debt, interest and income taxes). Inquire
about factors impacting the trends indicated (such as seasonality and
comparison to industry).
(w).
Analyze capital expenditure history and projections broken down between
maintenance vs. growth. Inquire about:
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Historical experience of actual to budgeted amounts
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Basis for projected amounts
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Individually significant capital projects
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Any related purchase commitments
4. Property
(a).
List of real property (owned or leased) used in the Company’s business, including
size, location and use of each parcel and number of employees employed at each
location. For leased properties, include term of lease.
(b).
All leases, subleases, deeds, mortgages, construction contracts and other
commitments and title insurance policies relating to real property owned or leased
in connection with the Company’s business.
(c).
Any appraisals of the Company’s real property obtained within the past three
years; copies of any Phase I Environmental Reports.
(d).
Inventory of personal property owned or leased, and copies of all purchase
contracts, leases (including, without limitation, automobile leases and computer
equipment leases) and security agreements, etc., relating to material equipment or
personal property or licenses regarding equipment usage.
(e).
Schedule of trademarks, trade names, service marks, copyrights, or patents owned
by, licensed to or applied for by or on behalf of the Company and correspondence
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files relating thereto, including dates of registration with state or federal agencies
along with identifying registration numbers, if any. Copy of all licenses,
assignments, royalty agreements and other contracts and instruments relating to
the foregoing. Name of contact person who handles patent, trademark or
copyright matters for the Company.
(f).
Description of policies to protect intellectual property rights owned by the
Company or otherwise used in the Company’s business. Documents relating to
any claims of infringement of intellectual property rights owned by the Company
or related to its business either (a) by the Company or any of its stockholders
against the rights of others or (b) by others against the rights of the Company or
its stockholders.
5. Management/Employees
(a).
All corporate policy manuals covering hiring, regulatory compliance, internal
controls, etc. Include number of employees by department or other relevant
classification. Affirmative action plans and current EEO-1 Report.
(b).
Copies of employment contracts, confidentiality agreements, noncompetition
agreements, management and consulting contracts, union contracts, collective
bargaining agreements, employee manuals, benefit plan summaries, etc.
(c).
Documents representing all profit sharing and savings plans, pension or
retirement plans, deferred compensation plans, medical, dental or other health and
welfare plans and any bonus, incentive, performance or similar plans or
arrangements and related agreements; materials describing any of the foregoing;
and the latest applicable trust accounting, actuarial reports and other applicable
financial statements. Summary plan descriptions for each of the foregoing, to the
extent available. For each qualified plan, provide a copy of the most recent IRS
favorable determination letter (including a copy of the request for such
determination) with respect to such plan. In addition, for each plan for which
Forms 5500 are required to be filed, please provide copies of the three most
recently filed Forms 5500 with schedules attached. Calculation of estimated
retiree medical liability (if any) and cash flow impact over next several years.
Schedule of pension liabilities and assets (if any).
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Determine current status
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Funding of pension plans
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Provision for post retirement
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IBNR
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Determine transition issues
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Ongoing costs of establishing and maintaining benefit plans
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Antidiscrimination issues
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Administrative duties: recordkeeping, trustees, audit
(d).
Copies of any other executive compensation plans or programs.
(e).
Any indemnification agreements with any directors, employees or agents.
(f).
Distribution, sales representative, agency and dealer agreements currently in
effect.
(g).
Commission agreements with non-employee salespersons, buyers or other agents.
(h).
Form of nondisclosure or proprietary information agreements used by the
Company and a list of any employees of the Company who are a party to such
agreement.
(i).
Description of any threatened or pending labor disputes, work stoppages, work
slowdowns, walkouts, lockouts or union organizing activities since inception,
indicating disposition thereof. Copies of NLRB or Department of Labor filings, if
any.
(j).
Description of employee turnover over the last three years. If information is
available, describe turnover relative to the industry. Disclose number of
voluntary resignations and involuntary terminations of employees.
(k).
Schedule of all compensation paid during the last fiscal year to officers, directors
and key employees showing separately salaries, bonuses and non-cash
compensation, including bonuses paid or accrued, direct or indirect benefits or
perquisites, and all benefits paid or accrued under all employee benefit plans.
6. Litigation
(a).
Current list of all litigation, administrative or regulatory proceedings,
investigations or governmental actions involving the Company or its business
with brief description of basis for each such matter. Include name of court or
agency in which the litigation proceeding is pending, date instituted, docket
number (if available) and principal parties thereto.
(b).
Description of currently threatened litigation, legal claims, regulatory actions or
other actions or proceedings, including any correspondence relating to any alleged
infringement of any patent, trademark or other intellectual property and any
correspondence relating any threatened governmental investigation or alleged
violation of law or regulation.
(c).
To the extent not duplicative with responses to 6.1 and 6.2, a description of all
actual and/or threatened litigation relating to the Company or its business or assets
for the past two years and current description of the disposition and status thereof.
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Summary of loss history for past five years by class of cases and schedule of
litigation reserves established by or on behalf of the Company setting forth all
relevant calculations and assumptions.
(d).
Any currently effective consent decrees, judgments, other decrees or orders,
settlement agreements and other similar agreements to which the Company is a
party or by which the Company or any of its assets is bound (or to which any
stockholder of the Company is a party or by which any such stockholder or any of
its assets is bound and which relates, directly or indirectly, to the Company).
(e).
Audit inquiry response letters from attorneys to the Company’s accountants for
the last five years, to the extent that they relate, directly or indirectly, to the
Company.
7. Insurance
(a).
A schedule of all policies or binders of insurance or self-insurance arrangements,
including medical, workers compensation, disability, automobile, general liability,
fire and casualty, products liability, professional liability, officers’ and directors’
liability and key-man life insurance, with deductibles, coverage limits and other
significant terms. Please indicate the name and address of all insurance agents,
brokers and companies.
(b).
A schedule of insurance claims in excess of [$50,000] over the last five years, and
summary of loss history for such period.
(c).
Analysis of premium payments for the past five years and details regarding any
cancellations or denials of insurance in such period.
(d).
Summary of self-insurance programs or other risk retention.
(e).
A schedule of threatened or potential claims.
(f).
A schedule of outstanding bonds (value and bonding company), current bonding
limits.
(g).
Any reports or correspondence concerning the adequacy of the foregoing or
denial of coverage.
8. Legal - Regulations and Filings
(a).
Reports filed and significant correspondence to and from any state or federal
regulatory agencies (including, without limitation, the EPA and state level
environmental regulators, OSHA and EEOC).
(b).
A schedule of all material governmental permits, licenses, etc. of the Company
and relating to the Company’s business, including, without limitation,
environmental permits, exemptions or proceedings.
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(c).
Description of any inquiries or known noncompliance with any laws or
regulations (including OSHA, EPA, EEOC, etc.), for the past five years and the
disposition and status thereof.
(d).
Any franchise filings and all material correspondence relating thereto.
(e).
Schedule of consent decrees and settlements with governmental authorities.
9. Miscellaneous
(a).
Copies of any finder’s fee or bonus compensation arrangements regarding the
proposed transaction.
(b).
All correspondence and documents relating to contingent liabilities exceeding
[$50,000], not otherwise duplicative with responses to items listed above.
(c).
All documentation related to the acquisition of the Company by the seller,
including all financing documentation, and a brief legal description of the form
and steps of the transaction.
(d).
Any other documents, information or data which are significant with respect to
the business of the Company or which should be considered and reviewed in
making disclosures regarding the business and financial condition of the
Company to prospective investors.
(e).
Accounting and Auditing Issues:
(f).
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Determine if division financial statements have been audited
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Internal or external auditors have not visited plant
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Division accounting functions vs. corporate accounting
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Corporate Support
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Payroll, fixed assets, tax, consolidations, accrual, plant and cost
accounting, invoice audit and payment (A/P), international accounting,
receivables
Overhead Allocations:
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What services are performed by corporate and what methodology is
used to allocate the costs to the Division
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Consider closing conditions regarding audited financial statements
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Determine SEC filing requirements
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Determine if assumptions used are determined by Corporate and have
not been communicated to Division (obsolescence, depreciation,
allocation of purchase, labor and overhead variances, benefit costs etc.)
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(g).
(h).
(i).
(j).
(k).
(l).
(m).
Benefit Plans and insurance issues:
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Review insurance needs on a go forward basis
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Review impact of historical data on future rates (assess transferability
of existing plan)
Computer Systems:
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Review current system, extent of support provided by parent, transition
period arrangements and controls
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Assess the needs of the business and the possibility of using cost effective
turnkey solutions
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Assess costs of maintaining MIS department vs. contracting out for
hardware and software maintenance
Purchasing and Distribution:
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Possible loss of purchasing and distribution negotiating power
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Relationship and knowledge lost as a cause of loss of purchasing or
distribution key personnel
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Shared warehousing facilities
Sales and Marketing:
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Key relationships must be preserved
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Long term contracts must be reviewed and large accounts must be
contacted in order to smooth out transition
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Brand names must be preserved and if conflict exists between Seller and
Buyer issue must be resolved
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Joint marketing programs/cross marketing programs
Production:
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Order taking and scheduling of jobs
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Research and development and process improvement
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Use of hourly vs. permanent labor (temporary layoffs)
Human Resources and Labor Relations:
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Establish HR function
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Communication with employees
Other Matters to consider:
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Shared facilities
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Treasury
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Credit and collection
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Legal
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Engineering
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Environmental Safety
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Maintenance
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