1. Financial Due Diligence
In this category lie some of the following elements, which have to be audited and unaudited financial statements for a particular look-back period of normally 3 and 5 years for the firm’s performance, condition, and economic health. The reports
also indicate the cash flow, assets, liabilities, secured financing, and increasing or decreasing profitability.
Historical information retrieved in the financial due diligence list consists of the following:
- Outstanding debt
- Undisclosed liabilities
- Collateral for debt
- Depreciation and amortization methods scheduled for the last five years
- Gross margin and fixed and variable expenses analysis
- Internal control procedures, assets, and liabilities list
- Inventory, projections, capital budgets, and strategic plans
- General ledger, analyst reports, with a breakdown of sales and gross profits by geography, channel, and product
- Planned projection chart compared to actual sales
- Capital structure
2. Operational Due Diligence
Some of the operational things to be viewed are as follows:
- Agreements and any relationship with subsidiaries, partnerships, or joint ventures
- Copies of contracts between the company and directors, officers, affiliates, and minimum 5% shareholders
- Loan agreements, including promissory notes, financing details, and lines of credit
- All nondisclosure and noncompete agreements
- List of quotes, invoices, purchases, and warranty forms
- Options and stock purchase agreements that affect operations
- Off-balance sheet liabilities
- Description of supply chain and supply restrictions
- Agreements regarding power of attorney
3. Sales Enablement and Marketing Due Diligence
Sales enablement and marketing due diligence involve the following:
- Competitor profiles, with strengths, weaknesses, position, and structure of the competition
- The current ad programs, marketing budget, and other printed material
- Investigations into methods to obtain new business
- Channels, marketing opportunities, and marketing risks
- Surveys and market research on company products
- Comparison
- Coordination procedures between the sales and marketing departments
- Issues after the sale regarding retaining customers
- Company’s credit policies, purchasing policies, supply and service agreements
- Unfilled orders schedule
4. Human Resources Due Diligence
Human Resources due diligence is undertaken with the review of the following:
- Employee list and job details, along with current salary, year of service, and the total compensation package over the last three years
- The company’s salary philosophy, pay history, and freeze information
- Resumes, history, and experience of major employees, including senior-level management
- List of union affiliations and contracts
- List and description of all employee health and welfare insurance policies
- List of all independent or contract professionals that have worked with the company in the past five years
- Copies of stock purchase and stock option benefits for employees
- Worker’s compensation claims history
- Unemployment claims history
- Turnover data for the past two years
- Documents on pension plan funding and distributions
- Copies of all Occupational Safety and Health Administration (OSHA) examinations
- Results of formal and informal employee surveys
- Information regarding layoff and severance package.
- All nondisclosure, noncompete, and nonsolicitation agreements between employees and the company.
5. Intellectual Property Due Diligence
Intellectual property due diligence entails the study of the following:
- List of foreign and domestic patent applications
- All licensing revenue and expenses
- Copyright, trademarks, and trade names both domestic and abroad
- Description of methods used to protect trade secrets and all technical information in the company
- Patent clearance documents
- Work-for-hire agreements
- Summary of claims or threatened claims on intellectual property
- Copies of all consulting agreements, invention agreements, and licenses of intellectual property to and from the company
6. Legal Due Diligence
Critical legal insights due diligence documents include:
- List all pending litigation, unsatisfied judgments, injunctions, settlement documents, insurance policy copies covering litigation, regulators’ letters/contacts such as SEC and IRS and board minutes, shareholders’ minutes, and audit minutes.
- License, permits, and consent to do business in the State and locality
- Article of incorporation and all amendments
- Company bylaws and amendments and assumed names.
- All states or countries where the company does business
- Annual reports for the last three years
- An organizational chart
- All shareholder’s names and percentages owned
- Certificate of Good Standing from where the company does business
- Active status reports in the state of incorporation.
- Agreements on voting trusts, subscriptions, puts, calls, options, and convertible securities
7. Property/Real Estate Due Diligence
Property and real estate due diligence necessitates a review of the following.
- UCC Filings
- Equipment that is leased
- Major Equipment sales and purchases for the past three years
- Schedule of fixed assets with locations
8. IT Due Diligence
The critical takeaway and framework to understand a due diligence company are the following:
- IT roadmap
- Software Licensing Agreements
- Network and Physical Security Strategies
- Data architecture and strategy
- Security breach history and management
- Compliance standards
- Cybersecurity protocol
- Business Continuity and disaster recovery plans
- Security audits and penetration testing
- Requirements Compliance and Operating Systems Code audit, market standards for operating systems, and anti-virus systems
- Training of Employees and QA Processes
Due Diligence Best Practices
Conducting due diligence entails having the appropriate intelligence and resources on your side, a means to not miss any piece of information, and access to deeply comprehensive, relevant insights that guide decisive action, drive sound recommendations, and leverage opportunities.
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