Get Ready for Due Diligence Long Before a Sale or Merger

It may seem odd, but as soon as you start up a business, you should begin preparing the documentation needed to sell or merge with another enterprise. It may be years down the road but the records often required in today’s M&A environment can be overwhelming. If your recordkeeping has been shoddy, it can be difficult or impossible to compile the information wanted by a potential buyer or partner.

You don’t want to forgo opportunities just because you didn’t have the necessary paperwork in order.

So what kind of information will you be asked for in the due diligence process? Here’s a list of some common items.

Corporate Documentation

• Articles of incorporation, bylaws, minutes, subscription agreements, shareholder agreements (and similar documents for an LLC and other formations).

Tax Returns

• Copies of properly filed federal and state income tax, employment tax, state and local sales/use tax, property tax and other returns.
• If you do business in other countries, compliance with foreign tax requirements.

Financial Information

• Income statements, balance sheet (audited, if available), deferred revenue, working capital, bank account information, revenue recognition policies, accounting procedures, debt, loan information and balances.

Management Team

• Bios, employment contracts, salaries, management incentive plans and stock options. (Be aware that background checks and Internet searches about executives may be conducted.)
• Have managers signed non-compete agreements?

Operations

• Computer systems and IT security;
• Business equipment and related outstanding loans;
• Maintenance of equipment, vehicles, facilities;
• Distribution systems;
• Strategic relationships, key vendors, suppliers;
• Contracts with vendors and independent contractors;
• Research and Development;
• Facilities, including parking; and
• Anticipated space needs in the future.

Human Resources

• Salaries, overtime, bonuses, profit sharing;
• How your business handles employee evaluations, discipline and terminations;
• Do any employees work remotely or from home?;
• Compliance with federal, state and local laws;
• Employee handbook; and
• Offer letters, contracts and non-compete agreements with employees.

Employee Benefits

• Retirement plans, including vesting and employer match programs; and
• Health insurance programs, including whether you have any former employees under COBRA.

Government Regulations

• Licenses, permits, and required correspondence with government entities.
• Are you up to date on all public filings?

Sales and Marketing

• Pricing of products and services;
• Per customer revenue;
• Customer retention statistics;
• Competitors;
• Commission structure for sales people;
• Lead generation and tracking of leads in the pipeline; and
• Advertising/ marketing programs and attendance at trade shows.

Products and Services

• Inventory (cost, value and average levels);
• Obsolete or slow moving items; and
• Pending products under development.

Legal Matters

• Pending litigation, claims, major disputes;
• Ownership and protection of intellectual property; and
• Compliance with the Sarbanes-Oxley Act; the Patriot Act, Occupational Safety and Health Act; the Fair Labor Standards Act, the Consumer Product Safety Act and all other federal and state relevant laws.

Real Estate

• Leases, terms;
• Mortgages and equity in real property;
• Environmental concerns; and
• Tax liens and other liens against properties.

Insurance

• Policies including business liability insurance, life, auto; product liability, directors and officers, casualty, Workers’ Compensation; and
• Accident/ injury reports.

Valuation

• Have you had a professional valuation done?
• Does the value include intangibles such as goodwill?

As you can see, the information that may be requested in M&A transactions can be quite detailed. Potential buyers and partners want full disclosure about operations so there are no surprises. Compile and update documentation so you are as prepared as possible.

This checklist only contains some of the items you may be asked to produce. The exact information depends on the business, the potential buyer and the industry involved. If you have questions about how to prepare for a sale or merger, consult with your attorney.

This article appeared in Walz Group’s April 10, 2023 issue of The Bottom Line e-newsletter, produced by Checkpoint Marketing. This content is for informational purposes only.