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A comprehensive checklist yielding absolute certainty might be unobtainable. The business Judgment required to interpret due diligence information inevitably uncovers areas of uncertainty. However, fundamental due diligence investigation practices should mitigate risk and at least identify critical assumptions, key risks, and areas of uncertainty to assess them as manageable or deem them unmanageable. This checklist comprises nine (9) fundamental areas of due diligence for most businesses. If comfortable, feel free to check only those areas which are relevant to the acquisition in question.
Once complete, the investigation mea must apply experienced business Judgment against due diligence information to assist the acquirer with business decision making. If this master list can be refined, improved or clarified for purposes of best practices, let us know by sending feedback to www. pioneerbusinessventures. Com. Good luck with your due diligence and business venture! CORPORATE OVERVIEW A. Corporate Organization: Review Incorporation Documents of the Company. Obtain Certificate of Status/Good standing for the Company. Review by-laws of the Company. Conduct a corporate review of the minute books of the Company.
Focus on validity of ajar corporate actions. Obtain a list of countries and states where the Company is or should be qualified to do business Review partnership or Joint venture agreements, if any. Perform asset searches in Jurisdictions where principal assets are located. B. Corporate Development Overview: What are the company’s core competencies? Does the company maintain any strategic alliances? When and where was the company founded, and by whom? What is its history of product development? What is the history of the management team? Has the corporate location changed?
Have there been ownership changes? Have there been acquisitions or divestitures? What is its financial history? Obtain and review copies of all o acquisition agreements; o filings with government agencies made in connection with the acquisition; Copyright Pioneer Business Ventures 2006-2011 Page 2 of 19 o Other closing documents for the acquisition. C. Public Document Review: Review all publicly filed documents of the Company. Perform Internet searches in respect of the Company. Review all press releases and media articles relating to the Company and the industry. Review all management speeches.
D. Synergies: Itemize the synergies that will be created by the acquisition. Split the synergies list into those that are based on identifiable cost reductions, and those based on possible revenue increases. How well do the products, personnel, and geographic coverage of the acquirer and acquired fit together? II MARKETING & SALES A. Industry & Market Overview: How is the market segmented? What are the factors affecting growth and profitability? What are the trends in the number of competitors and their size, product innovation, distribution, finances, regulation, and product liability?
Estimate the size of the industry, present and projected, in each significant product line, and ampere Business growth projections with anticipated market size for consistency. Review government and trade reports and trade literature regarding the market segments of the Business. Analyze competitors’ SEC and other filings for unanticipated trends or developments. Review any internal or outside studies of the Business, the market and the products. Interview trade association personnel concerning trends of relevance. Assess the effect of macroeconomic trend (e. . , interest rate fluctuations, inflation rates, economic growth rates). Assess the comparative strengths and a weakness of competitors in terms of the dominant nominative factors in the industry (e. G. , price, service, performance, etc. ) Determine whether research and development (R&D) expenditures are consistent with industry practice. B. Brands: Review any branding strategy documents. Does the company have a long-term plan for brand support? Review budgeted and actual expenditures for customer support, marketing, and quality assurance related to branding.
What types of advertising and promotion are used? Page 3 of 19 Ensure that the company has clear title to any branded names. How well is the brand supported on the company Web site? Note the amount and trend of any legal fees added to stop brand encroachment. C. Customers: How concentrated are sales among the top customers? What is the distribution of sales among the various products and services? What is the current sales backlog by customer? What is the seasonality of sales? Are sales unusually subject to changes in the business cycle? What is the financial condition of key customers?
Does it appear that their businesses are sufficiently robust to continue supporting purchases from the company? How long has the company had sales relationships with its key customers? Which new customers is the company actively pursuing, and how much potential revenue and refit do they represent? How profitable is each of the key customer accounts? Do any customers require a disproportionate amount of servicing, or require special terms and conditions? Itemize any customer contracts that are coming up for renewal and likely changes to the key terms of those agreements. Is there a history of complaints Trot any customers?
How profitable are ten customers won appear to De ten most dissatisfied? Obtain a list of all customers who have stopped doing business with the company in the last three years. Marketing and Distribution: Evaluate the importance of original equipment manufacturers (Memos), present and future. Analyze each significant contract regarding contingencies, extent of warranties and other service obligations, rights of cancellation, etc. Check material contracts with customers for completeness, to determine existence of side written or oral commitments, or other terms that materially vary Business contracts.
Evaluate the extent to which the Company finances any customer purchases from the Business and obtain a coy of documentation. Review model sales contract, sales representative agreements and dealer agreements used by the Business. Evaluate the adequacy of the distribution network, the degree of control over distribution, etc. Evaluate the effectiveness of marketing personnel. For new products, estimate the cost of introduction, and determine whether the cost is adequately reflected in cash flow projections. Assess the likelihood of discontinuation of products or services.
E. Sales Activity: Determine the amount of ongoing maintenance revenue from standard products. Copyright O Pioneer Business Ventures 2006-2011 Page 4 of 19 D. Obtain copies of all outstanding proposals, bids, and offers pending award. Obtain copies of all existing contracts for products or services, including warranty and guarantee work. What is the sales strategy (e. . , add customers, increase support, increase penetration into existing customer base, pricing, etc. ). How does the company promote its products and services (advertising, trade shows, etc. )?
What is the structure of the sales organization? Are there independent sales representatives? Obtain the sales organization chart. How many sales personnel are in each sales position? What is the sales force’s geographic coverage? What is the sales force’s compensation, split by base pay and commission? What were the sales per salesperson for the past year? What was the sales expense per salesperson for the past year? What is the sales projection by product for the next 12 months? Into what category do customers fall – end users, retailers, Memos, wholesalers, and/or distributors?
How many customers are there for each product, industry, and geographic region? What is the average order size? Does the company have an Internet store? Does the site accept online payments and orders? What percentage of total sales come through this medium? What is the structure of the technical support group? How many people are in it, and what is their compensation? Does the company use e-mail for marketing notifications to customers? What are the reapportions of sales by distribution channel? How many customers can the company potentially market its products to? What would be the volume by customer?
What is the company’s market share? What is the trend? Are there new markets in which the products can be sold? F. Product Development: Which products are nearing the end of their useful lives, and how much revenue is attached to them? Obtain a list of development projects in the product pipeline. What is the estimated remaining time Ana expense required to launch can one? Want attributes make ten company’s new products unique? Have any products been in the development pipeline for a long mime, and have no immediate prospects for product launch? Who are the key development personnel?
What is their tenure and educational background? Does the company primarily use incremental product improvements, or engage in major new product development projects? Page 5 of 19 How much money is invested annually in development? As a proportion of sales? How does this spending compare to that of competitors? Does the company have a history of issuing inadequately engineered products that fail? Is this finding supported by warranty claim records? Is there a product development plan? Does it tend to target owe-cost products, ones with special features, or some other strategy?
How closely does the development team adhere to it? Does the company use target costing to achieve predetermined profitability targets? Does it design products that avoid constrained resources? Assess the threat of obsolescence for each significant product line. Review new product and service plans and development progress. Compare the products with those of competitors, and assess the threat from new competitors. Perform an analysis of unproven technology, using experts if necessary. Ill HUMAN RESOURCES A. Culture: What type of command structure is used?
Does it vary by apartment? Is there a set of standard policies and procedures that govern most processes? How closely do employees adhere to it? What practices does the company use to retain employees? What types of social functions do employees engage in as a group? Does the company generally promote from within, or from the outside? What types of training does the company require of its employees? What types of indoctrination programs are used for new employees? What types of awards and ceremonies are used to recognize employee achievements?
What level of customer service is the company accustomed to provide? Does it support “above and beyond” bevels of support, and publicize these efforts? What dress code does it allow? Does this vary by location? What type of feedback mechanisms are used to discuss issues about employee performance? How does the company disseminate information to its employees? Is it a more formal method, such as a monthly newsletter, or more informal employee meetings? What is the physical environment? Does the company emphasize low costs with cheap furnishings, or more expensive surroundings?
Is there a sense of urgency in completing tasks, or is the environment more relaxed? B. Management & Employees: Obtain a list of all employees, their current insemination, compensation for the prior year, date of hire, date of birth, race, sex, and Job titles. Copyright Pioneer Business Ventures 2006-2011 Page 6 of 19 Obtain a list of all inactive employees, stating the reason for their inactive status and ten prognosis Tort tenet return. Totals copies AT ten I-Y Dorms Tort all active employees. Obtain copies of any employment agreements. Obtain copies of performance evaluation criteria and bonus plans.
Obtain copies of any non-compete, intellectual property, and/or confidentiality agreements. Also obtain copies of non-compete agreements that currently apply to terminated employees. Obtain copies of any salesperson compensation agreements. Obtain copies of any director compensation agreements. Summarize any loan amounts and terms to officers, directors, or employees. Obtain any union labor agreements. Determine the number of states to which payroll taxes must be paid. Obtain a copy of the employee manual. Conduct background investigations on principal employees.
Summarize the names, ages, titles, education, experience, and professional biographies of the senior management team. Obtain copies of employee resumes. What has been the employee turnover rate for the past two years? Obtain a list of all involuntary terminations within the past year, stating the reason for termination and the age, sex, race, and disability status of each person terminated. Obtain a copy of the organization chart. Investigate the prior experience of management and directors in the same industry and the same size company, their experience with large firms etc.
Also investigate their reputation in the industry. Review prior transactions between the Business and insiders for fairness, propriety, full disclosure, etc. Determine whether any significant defections from management are imminent and assess their effect on competitiveness. Obtain copies of all personnel policies. Obtain copies of all employee handbooks. Obtain a complete employee list of the entire Business, setting out names, Job titles, addresses, age (where available), salary and length of service.
Analyze written employment contracts with regard to: o name of employee; o description of position; o term of agreement; o salary; o special benefits; o severance obligations of the employer; Obtain copies of any agreements which employees are required to sign: o confidentiality agreements; o invention assignment agreements; o conflict of interest declarations; o non-competition agreements; o non-solicitation agreements; Copyright Pioneer Business Ventures 2006-2011 Page 7 of 19 agreement with governments or government agencies, including military procurement contracts; o agreements with competitors; o and any other agreements with employees, such as loan agreements, consulting agreements. Obtain a description of all pending labor disputes or disputes within past five years. Obtain copies of all current labor contracts, including any collective bargaining agreements. Obtain copies of any pending applications for union certification, labor board proceedings, outstanding grievances or arbitration awards. Obtain copies of any outstanding complaints under the Human Rights legislation. Obtain sample employment applications.
Obtain copies of forms used for evaluation of applicants including written instructions to all persons who interview applicants. Obtain copies of pre-employment tests. Obtain copies of any complaints, proceedings or orders under applicable affirmative action or pay equity legislation. Obtain copies of most recent affirmative action plan. Obtain copies of material safety sheets. Obtain sample copies of educational material distributed to employees in compliance with Health Ana estate Act legislation. Totals copies AT Health Ana estate reports overspent authorities in the last 12 months. Obtain a summary of all workers’ compensation claims in last 12 months.
Obtain summary of current: o vacation plan o paid holiday o bonus plans o commission payment plan o overtime pay o shift differentials o sick pay o personal days o paid funeral or bereavement leave o work clothing benefits o housing arrangement o other Consider whether the transaction is likely to result in the loss of key employees to retirement. Assess the adequacy of the labor supply for each operation division. O C. Benefits: Review accrued 401 k benefits. What is the company contribution percentage? What is the level of employee participation? Obtain copies of all pension plan documents, amendments, and letters of determination. Obtain copies of the pension assets, liabilities, expenses, and audits for the past three years.
Copyright Pioneer Business Ventures 2006-2011 Page 8 of 19 Determine the funding status of the company pension plan, and the ten year projected cash expense associated with it. Itemize all fringe benefits, along with current and projected employee eligibility for and participation in each one. Obtain a list of all former employees using COBRA coverage, and the dates on which their access to COBRA coverage expires. Itemize all executive perquisites above the standard benefits package, and the extent of these expenses for the past two years. Review management, employment, incentive, deferred compensation, and bonus agreements. Review employee health and welfare plans, whether insured or uninsured.
Review each tax-qualified retirement plan and any related trust or insurance contracts including but not limited to any fully funded noncontributory employee pension plan, any key management incentive plan and any investment savings and profit sharing plan (as amended to date). Review the two most recent actuarial valuation reports. Review the most recent Summary Plan Description for each employability plan. Review the three most recent Annual Financial Reports and summary annual reports (including all supporting schedules and audit reports) for each employee-benefit plan. Review documents relating to union employees’ participation in any multi-employer pension plan.
Ascertain the amount of capital replacements needed in the near future. Determine the periodic maintenance cost of existing equipment. Determine he maximum sustainable production capacity by production line. Estimate the cost of modifications needed to increase the capacity of each production line or facility. B. Production Process: Does the company have a push or pull manufacturing system? Does the company practice constraint management techniques? Does the company use work cells or continuous assembly lines? Is there an adequate industrial engineering staff? Does it have an ongoing plan for process improvement? What is the production area safety record?
What types of problems have caused safety failures in the past? What issues have caused shipping delays in the past? What is the history of product rework, and why have rework problems arisen? Copyright O Pioneer Business Ventures 2006-2011 Page 9 of 19 Assess ability of production facilities to handle anticipated volumes, and whether the cost of new plant and equipment is consistent with anticipated cash flow. Evaluate product and process obsolescence, and compare production facilities to those of industry competitors to determine future competitiveness, both technical and economic. Inquire into anticipated plant closings as well as plans for new facilities.
Evaluate adequacy of management information systems and inventory control programs. Assess exposure from single source suppliers, and evaluate the contingency plans of the Business for responding to interruption of supplies. Contact major suppliers to determine their satisfaction with the Business, and their plans to retire, reduce, or raise the price of, key supplies and components. Review material contracts with suppliers. Review agreements, subcontractors and manufacture of the Company’s products; any “private label” supply or purchase contracts.