Although the subjects involved in the due diligence process can change based on the situation, they often include the following.
General Company Information
A history of the company, its original and any succeeding business plans, the company's mission statement, and short-term and long-term goals and objectives should all be made available for your review.
Company Management and Employees
Who is in charge of the company? What are their credentials? What experience do they have? Are they honest and trustworthy?
Try to get an organization chart. Get the resumes of executives and board members as well as copies of any employment contracts. Information about company advisors—legal, financial, insurance, and other—should be disclosed. Background checks should be performed on all top executives and board members.
The employee handbook and other documents relating to employee pay and benefits should be reviewed, as well as employment tax reports including Forms 941, Form 940, and others for both federal and state taxing authorities. Check the status of independent contractors to make sure they're correctly classified.
Legal Matters*
An investigation of the legal structure of the business might include viewing copies of the articles of incorporation, bylaws, minutes of meetings, and other formation documents that have been filed with the state. Other legal documents would include copies of contracts and agreements that bind the company, warranties/service agreements on company products, and any product liability documents.
A discussion of current or pending litigation should also be undertaken, as well as any relationships with regulatory agencies like OSHA for worker safety law, Americans with Disabilities law, or industry-specific organizations.
*For legal services please contact our legal partner Counselhouse.
Products and Services
If the company sells products, you'll need a catalog or listing along with information regarding the competitiveness of these products. Brochures and price listings for products and services must also be reviewed. Pricing strategies, service availability, and terms of service are necessary. Documents relating to company patents, copyrights, and trademarks must be provided, as well as licenses owned by the company and agreements with licensees.
Marketing and Competition Information
These documents include the company's marketing plan, market analysis, growth opportunities, a SWOT analysis, and purchase agreements. Information about the competition might include lists of major competitors and an analysis of the competition, present and future.
Customers: Information about customers includes a review of agreements with major customers and accounts receivable aging reports.
Operations: Review fixed assets, facilities, equipment, product quality assurance and safety, suppliers, and contracts. Inventory is often taken and inventory costing LIFOand FIFO should be considered.
Financial matters: Most important to the due diligence process are the company's financial records. These include balance sheets and income statements for past years, projected financial statements, insurance coverage, tax filings, and sources and uses of funds statements.
Verify profitability and check company financial data against common financial ratios. Check owner income against business profits.
