BUYING A BUSINESS
CHECKLIST: DUE DILIGENCE

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Buying a business involves either:

• Purchasing the the assets owned by business.


• Purchasing the company that owns the business

In either case a purchase agreement is recommended that give the buyer the opporunity to conduct a due diligence investgation with the opportunity to terminate the contract for any reason during a specified period of time.

Regardless of whether the deal is structured as an asset transaction, a stock transaction, the purchase of an LLC's membership interests or a merger, the buyer must sure you know what he or she is getting into by requiring detailed information from the seller regarding its business operations and finances.  The following is a checklist of information and documents you should review:

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Due Diligence Checklist

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A.   Organization and Good Standing.

• The Company's Articles of Incorporation (if an LLC, the Articles of Organization) and all amendments thereto.


• If the Company is a corporation it Bylaws (or if an LLC, its Operating Agreement), and all amendments thereto.


• If a corporation, the Company's minute book, including all minutes and resolutions of shareholders and directors, executive committees, and other governing groups.


• The Company's organizational chart.


• If a corporation, a list of Company's shareholders and number of shares held by each (or is an LLC, a list of the members and the percentage of ownership of each).


• Copies of agreements relating to options, voting trusts, warrants, puts, calls, subscriptions, and convertible securities.


• A Certificate of Good Standing from the Secretary of State of the state where the Company is incorporated.


• Copies of the company's annual reports in the state of incorporation for the last three years (in Florida these reports can be viewed on sunbiz.org).


• A list of all states where the Company is authorized to do business and annual reports for the last three years.


• A list of all states, provinces, or countries where the Company owns or leases property, maintains employees, or conducts business.


• A list of all of the Company's assumed names and copies of registrations thereof.


• List of all subsidiaries and affiliates of the company
  

B.   Financial Information.

• Audited financial statements for three years, together with Auditor's Reports.


• The most recent unaudited statements, with comparable statements to the prior year.


• Auditor's letters and replies for the past five years.


• The Company's credit report, if available.


• Any projections, capital budgets and strategic plans.


• Analyst reports, if available.


• A schedule of all indebtedness and contingent liabilities.


• A schedule of inventory.


• A schedule of accounts receivable.


• A schedule of accounts payable.


• A description of depreciation and amortization methods and changes in accounting methods over the past five years.


• Any analysis of fixed and variable expenses.


• Any analysis of gross margins.


• The Company's general ledger.


• A description of the Company's internal control procedures.
  

C.   Physical Assets.

• A schedule of fixed assets and the locations thereof.


• All UCC. filings.


• All leases of equipment.


• A schedule of sales and purchases of major capital equipment during last three years.
  

D.   Real Estate.

• A schedule of the Company's business locations.


• Copies of all real estate leases, deeds, mortgages, title policies, surveys, zoning approvals, variances or use permits.

E.   Intellectual Property.

• A schedule of domestic and foreign patents and patent applications.


• A schedule of trademark and trade names.


• A schedule of copyrights.


• A description of important technical know-how.


• A description of methods used to protect trade secrets and know-how.


• Any "work for hire" agreements.


• A schedule and copies of all consulting agreements, agreements regarding inventions, and licenses or assignments of intellectual property to or from the Company.


• Any patent clearance documents.


• A schedule and summary of any claims or threatened claims by or against the Company regarding intellectual property.
  

F.   Employees and Employee Benefits.

• A list of employees including positions, current salaries, salaries and bonuses paid during last three years, and years of service.


• All employment, consulting, nondisclosure, nonsolicitation or noncompetition agreements between the Company and any of its employees.


• Resumes of key employees.


• The Company's personnel handbook and a schedule of all employee benefits and holiday, vacation, and sick leave policies.


• Summary plan descriptions of qualified and non-qualified retirement plans.


• Copies of collective bargaining agreements, if any.


• A description of all employee problems within the last three years, including alleged wrongful termination, harassment, and discrimination.


• A description of any labor disputes, requests for arbitration, or grievance procedures currently pending or settled within the last three years.


• A list and description of benefits of all employee health and welfare insurance policies or self-funded arrangements.


• A description of worker's compensation claim history.


• A description of unemployment insurance claims history.


• Copies of all stock option and stock purchase plans and a schedule of grants thereunder.
  

G.   Licenses and Permits.

• Copies of any governmental licenses, permits or consents.


• Any correspondence or documents relating to any proceedings of any regulatory agency.

H.   Environmental Issues.

• Environmental audits, if any, for each property leased by the Company.


• A listing of hazardous substances used in the Company's operations.


• A description of the Company's disposal methods.


• A list of environmental permits and licenses.


• Copies of all correspondence, notices and files related to EPA, state, or local regulatory agencies.


• A list identifying and describing any environmental litigation or investigations.


• A list identifying and describing any known superfund exposure.


• A list identifying and describing any contingent environmental liabilities or continuing indemnification obligations.

I.   Taxes.

• Federal, state, local, and foreign income tax returns for the last three years.


• States sales tax returns for the last three years.


• Any audit and revenue agency reports.


• Any tax settlement documents for the last three years.


• Employment tax filings for three years.


• Excise tax filings for three years.


• Any tax liens.

J.   Material Contracts.

• A schedule of all subsidiary, partnership, or joint venture relationships and obligations, with copies of all related agreements.


• Copies of all contracts between the Company and any officers, directors, 5-percent shareholders or affiliates.


• All loan agreements, bank financing arrangements, line of credit, or promissory notes to which the Company is a party.


• All security agreements, mortgages, indentures, collateral pledges, and similar agreements.


• All guaranties to which the Company is a party.


• Any installment sale agreements.


• Any distribution agreements, sales representative agreements, marketing agreements, and supply agreements.


• Any letters of intent, contracts, and closing transcripts from any mergers, acquisitions, or divestitures within last five years.


• Any options and stock purchase agreements involving interests in other companies.


• The Company's standard quote, purchase order, invoice and warranty forms.


• All nondisclosure or noncompetition agreements to which the Company is a party.


• A list of all insurance policies held by the company and any claims made or threatened over the past 3 year


• All other material contracts.

K.   Product or Service Lines.

• A list of all existing products or services and products or services under development.


• Copies of all correspondence and reports related to any regulatory approvals or disapprovals of any Company's products or services.


• A summary of all complaints or warranty claims.


• A summary of results of all tests, evaluations, studies, surveys, and other data regarding existing products or services and products or services under development.
  

L.   Customer Information.

• A schedule of the Company's twelve largest customers in terms of sales thereto and a description of sales thereto over a period of two years.


• Any supply or service agreements.


• A description or copy of the Company's purchasing policies.


• A description or copy of the Company's credit policy.


• A schedule of unfilled orders.


• A list and explanation for any major customers lost over the last two years.


• All surveys and market research reports relevant to the Company or its products or services.


• The Company's current advertising programs, marketing plans and budgets, and printed marketing materials.


• A description of the Company's major competitors.

M.   Litigation.

• A schedule of all pending litigation.


• A description of any threatened litigation.


• Copies of insurance policies possibly providing coverage as to pending or threatened litigation.


• Documents relating to any injunctions, consent decrees, or settlements to which the Company is a party.


• A list of unsatisfied judgments.

N.   Insurance Coverage.

• A schedule and copies of the Company's general liability, personal and real property, product liability, errors and omissions, key-man, directors and officers, worker's compensation, and other insurance.


• A schedule of the Company's insurance claims history for past three years.

O.   Professionals.

• A schedule of all law firms, accounting firms, consulting firms, and similar professionals engaged by the Company during past five years.

P.   Articles and Publicity.

• Copies of all articles and press releases relating to the Company within the past three years.