Valuing and Selling Your Business: A Quick Guide to Cashing In (2014)

APPENDIX B. Sample Due Diligence Request

The following is a list of documents and other information that a buyer may request during the due diligence process. Each buyer and transaction is unique, and what is requested will differ among buyers. This sample is only intended to provide you with a general idea of items that may be requested from you in an M&A transaction and should not be considered as a complete list.

Organization and Records

· A staff organization chart, listing all employees with titles and grade levels and any open positions.

· Biographies and resumes for all company executives.

· Employee Handbook (including new employee orientation documents). Provide the human resources policies relating to sexual harassment, background investigations, and drug testing.

· Copy of articles or certificate of incorporation and any amendments.

· Copy of by-laws or code of regulations and any amendments.

· Copy of all resolutions and minutes of board of director meetings.

· List of states where the company conducts business and a list of states where the company has obtained a Certificate of Good Standing.

· List of stockholders and their stock ownership (include stock options or similar rights, if applicable).

· All stockholders’ agreements and other agreements relating to transfer restrictions or voting rights with respect to any equity securities.

· Any agreements relating to partnerships or a joint venture that the company is part of.

· Copies of the company’s documentation retention or destruction policy.

Financial Statements and Records

General

· Annual financial statements from an outside accountant for the past five years.

· Internal financial statements for the most recent year to date and a comparison statement for the similar period of the prior year.

· Auditor’s review letters and management letters for the last five years.

· Operating budgets and capital expenditure budgets for the most recent year, the current year, and any future periods.

· Description of any changes in accounting methods during the past five years.

Assets

· List of all bank accounts (including name of bank, owner of the account, the account number, current balance, and authorized signatories).

· Accounts receivable aging report as of the most recent month end.

· List of accounts in dispute or collection proceedings.

· Total of credit balances owed to customers as of latest month end.

· Fixed-asset detail listing with depreciation schedules as of the latest fiscal year.

· List of actual capital expenditures for past three years and year to date.

· List of all real property used by the business by location, including street address, county, and state. Indicate whether such real property is owned or leased.

· Inventory aging report as of the most recent month end. Identify all inventories that are greater than 180 days.

· UCC searches for all assets, together with a description of all liens or security interests.

· Schedule and copies of all leases (both capital and operating) and installment purchase contracts with annual minimum commitments in excess of $10,000.

· All material deeds, leases (for real estate or personal property), or options to purchase personal property.

· All reports, surveys, studies (including environmental reports), and independent appraisals of all land or other property that is either owned or leased by the company.

Liabilities

· Schedule of all outstanding long-term and short-term debt (other than normal trade payables) including payee, origination date, due date, interest rate, monthly payment, security and current balance.

· All loan agreements and credit instruments, debt instruments, indentures, security agreements, mortgages, promissory notes, guarantees and letters of credit, and other similar instruments evidencing borrowings and any related security documents.

· All other material agreements with creditors, including any documentation with respect to representations given to creditors in connection with obtaining credit.

· List of all mortgages, liens, and security interests in properties belonging to the company.

· All agreements or other documents relating to any loans or advances to, or investments in, other entities.

· Computation demonstrating compliance with financial covenants in existing financing documents.

· List of all obligations that are not listed on the balance sheet in excess of $10,000.

Salaries and Benefits

· List of all employees, together with job descriptions, actual compensation for prior year, and targeted compensation for current year.

· Written description of compensation formula (i.e., salary plus incentive compensation plus anything else), related pay dates, and the pay periods covered.

· Year-to-date and prior-year quarterly payroll tax returns (Form 941).

· IRS Form 5500 for prior three years. Include the summary annual reports for qualified pension or 401(k) plans, profit sharing plans, and health & welfare plans.

· Current plan documents and all amendments since inception of plan(s) pertaining to qualified pension/401(k) and profit sharing plans, including summary plan descriptions and a summary of material modifications.

· Current plan documents and all amendments for any deferred-compensation plans.

· Most recent favorable determination letter and copy of IRS Form 5300 and supporting documents.

· Copy of the investment management agreement and plan administration agreement with record keeper, including latest invoice for services.

· Notices from Department of Labor and IRS since inception of plan, including any notices concerning Form 5500 reporting deficiencies related to late filings and plan audit matters.

· Plan investment records for most recent plan year pertaining to qualified pension and profit sharing plans.

· Contribution history for prior three years pertaining to qualified pension and profit sharing plans.

· Copies of discrimination test results for prior three years pertaining to all retirement plans and cafeteria plans.

· Current plan documents, amendments, and summary plan descriptions pertaining to health care plan.

· Copies of insurance contracts and service agreements, including most recent invoices, pertaining to health care plan.

· A summary of the vacation policy.

· A summary of other paid time-off policies (sickness, holidays, and jury duty).

· List of vacation hours accrued but not yet taken for each employee as of the most recent year end.

· Copies of workers’ compensation filings and a list of all claims that have occurred during the past five years.

Tax-related Items

· Copies of federal, state, and local tax returns for the past five years.

· Copies of any settlement documents, correspondence from taxing authorities, currently pending tax disputes, proceedings, or issues for the preceding five years.

· Information regarding extension of statutes, if applicable.

· Any private letter rulings or other correspondence about specific tax issues with the IRS.

· Status and list of any audits in progress (federal, state, and local).

· Copies of any special tax elections filed by the company.

· Copies of sales-and-use tax returns for last three years.

· Copies of property tax returns for last three years.

· Description of any tax abatement or incentive agreements.

Employee Matters

· Copies of all contracts or commitments for the employment of any employee, independent contractor, consultant, or advisor.

· Copies of all agreements, contracts, or commitments relating to any bonus, deferred compensation, pension, profit sharing, stock option, employee stock purchase, retirement, medical life insurance, disability, or other employee benefit plan.

· Copies of covenants not to compete and secrecy agreements with any employee or former employee, which are still valid.

· Description of past labor disputes, requests for arbitration, strikes and other labor disruptions, complaints, or other claims of unfair labor practices and material grievance proceedings.

· Copy of the current union agreement and status of current negotiations.

· Description of any material, oral agreements, or understandings with employees.

· Statement of the licensure status of all professional employees.

Market and Sales Overview

· Description of the size of the market and how the market is segmented.

· Any forecast of the market’s projected growth.

· Detailed summary of the profitability by product, customer, and segment.

· List of new products in the pipeline and estimates of the remaining time and expense required to launch each new product.

· List of sales to the top ten customers for the past three years and a description of how long the company had sales relationships with the top ten customers.

· Description of the sales process through the Internet.

· Description of any customer contracts that are coming up for renewal and any likely changes to the key terms of those agreements.

· Details of history of complaints from customers and a list of any customers who have indicated that they will no longer be a customer in the future.

· Results of any customer satisfaction surveys.

Material Contracts and Other Documents

· List of all vendors or suppliers.

· List of purchases by vendor for the ten largest vendors for the latest two fiscal years and year to date.

· Web site hosting and connectivity agreements.

· Copies of all contracts and agreements for the future purchase of materials, supplies, equipment, or services that calls for or could result in payments of more than $10,000.

· Copies of all current and future contracts and agreements for the sale of products or services that exceed $10,000.

· Copies of noncompete or similar agreements which restrict or limit the company or its representatives from engaging in any type of business.

· Copies of any contracts, instruments, judgments, or decrees that might reasonably be expected to adversely affect the business practices, operations, or condition of the company or any property.

· Description of any material oral agreements or understandings.

· Copies of all documents and agreements evidencing other material financing arrangements including sale-and-leaseback arrangements and installment purchases.

· Copies of all secrecy, confidentiality, and nondisclosure agreements to which the company is a party.

· Copies of all contracts or agreements to which directors, officers, or shareholders of the company (or members of their families) are parties.

· Copies of all material permits, licenses, or governmental consents required to conduct the business of the company as it is now conducted.

· Copies of all reports filed and significant correspondence with any state or federal regulatory agency during the past three years.

· Description of the company’s use of and policies regarding independent contractors and the amount of payment in current and prior year.

Legal and Litigation Matters

· Schedule of all litigation, administrative, regulatory, or judicial proceedings or governmental investigations pending or threatened by or against the company, including the name of the case, nature of the suit, amount sought in the complaint, name and location of the court in which the case is pending, and estimated amount of potential judgment.

· Schedule and summary of all litigation or other proceedings settled or otherwise resolved within the past five years.

· Documentation regarding any litigation or other proceeding involving any officer or director of the company concerning bankruptcy, crimes, securities, or business practices.

· Copies of all consent decrees, judgments, other decrees or orders, settlement agreements, and other agreements to which the company is a party.

· Copies of all notices or demand letters regarding or relating to any material claims by or against the company with respect to which no litigation has yet been filed.

· Copies of all notices, citations, and other communications received in the past three years from any governmental agency filed in regards to the company in its business operations, or compliance with any applicable governmental regulations.

· Copies of insurance company loss runs for all coverages, including auto liability, and general and professional liability coverage for the past five years.

· Copies of any open charges of discrimination, complaints, or related litigation, or any such cases that have been closed within the past five years.

· Schedule of warranty claims.

· Copy of all legal invoices for the past three years.

Intellectual Property

· List of all patents, patent applications, trademarks, service marks, trade names, copyrights, know-how, and trade secrets owned or used by the company with the status of each.

· Itemized list of all potential patents that have not been applied for.

· All unregistered trademarks and service marks used by the organization.

· All copyright registrations.

· Copies of all material license agreements pertaining to software or other intangible assets.

· Product documentation and manuals for the company’s software, databases, and networks (or other description of primary capabilities).

· Copies of all licenses of intellectual property in which the company is the licensor or licensee.

· List of the company’s Internet sites and newsgroups.

· Copies of any royalty agreements (whether the company pays or receives the royalty).

· Summary of research-and-development expenditures over the last five years.

Miscellaneous

· Description of any earn-outs or contingent consideration related to any completed acquisitions.

· Schedule of all transactions with related parties (or their families) and future obligations.

· List of all outside consultants and the services performed during the past five years. Copies of any reports received from any consultants, including environmental, human resources, and marketing.

· Description of the backup systems in place with offsite storage, both for the corporate-level databases and for individual computers.

· Any other document or information that is significant with respect to the business of the company.