A due diligence checklist is an organized way to analyze a company that you are acquiring through sale, merger, or another method. By following this checklist, you can learn about a company's assets, liabilities, contracts, benefits, and potential problems. Due diligence checklists are usually arranged in a basic format. However, they can be changed to fit different industries.
A due diligence checklist is also used for:
The main reason you need a due diligence checklist is to make sure you don't overlook anything when acquiring a business. Having a due diligence checklist allows you to see what obligations, liabilities, problematic contracts, intellectual property issues, and litigation risks you're assuming. Most of the documents and information on your due diligence checklist is available on request. Once you have the information, it's up to you to analyze it and decide whether it's a good investment.
Another reason a due diligence checklist is important is that the buyer needs to know if the company is a good fit for its business. If the selling company provides a service the buyer doesn't, it becomes beneficial. It also provides a way to measure the length and cost of integration, as well as potential revenue.
Company sales, mergers, and acquisitions should all follow the same checklist to avoid unforeseen issues. Sellers might also create a reverse diligence checklist to analyze the buyer.
Most due diligence checklists involve 19 categories about a company:
With this comprehensive list, you leave nothing to chance. It covers all the company's major operations, leaving you with detailed, unbiased information.
Once you have all the information, you must analyze it thoroughly to see the potential for:
After reviewing your due diligence checklist, you have the option to buy all the shares or assets.
Advantages of buying shares:
Things to consider when buying shares:
Advantages of buying assets:
Things to consider when buying assets:
A long list of documents and correspondence from the company you wish to buy is not always enough. You must ask questions about the sale or the business. You might also need answers the documents don't offer.
You must ask this question before buying a business. If a seller doesn't have a good answer, it's a red flag. Most often, the business is being sold to raise funds for another business venture, divorce, estate tax, or retirement. Some are sold because of poor business practices or operating at a loss.
Sellers are reluctant to tell about failed sales. However, it might shed light on the company's underperformance.
A business plan is important to see how a business operates. Without one, must find out on your own. You can also use this document to compare projections to actual sales.
This question helps you find out how hard or easy it is to start the business. If competitors leave and enter freely, you might be able to start a project on your own.
Every business has many moving parts. If there are too many subsidiaries or the model is too complex, managing it could be difficult.
An organizational chart shows you the departments within a company. It lets you see which managers deal with certain parts of the organization. A legal organizational chart helps you see subsidiaries, incorporations, and minority and majority investors hidden within the company.
If the organization operates in many regions, knowing the geographic structure is important. This shows how regions are carved up. In addition, it shows if there are enough sales, marketing, and distribution to support each region. If not, you can see where to improve from within.
Knowing if there have been any other sales of companies in the industry lets you see trends. If there's a period of consolidation, this might affect the price you're willing to pay.
Online data rooms allow you to find the information you want quickly and easily. A good seller will make this room available to you as soon as you start negotiations. Quality data rooms make it easy to search via an index, table of contents, or search bar. If possible, you should be allowed to print documents.
Anything not covered in the due diligence checklist must be included on a disclosure schedule. This document should make sure everything is covered. If something isn't, you can add it to your list of demands.
Buying a business isn't easy. It requires planning and a thorough analysis of your due diligence checklist. Even with experience, you'll probably have questions along the way. That's why you should post your legal need at UpCounsel. These lawyers know the ins and outs of business sales, mergers, and acquisitions.