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01 Sep, 2017

DD Check List

DD Check List

Due diligence is an investigation in to the affairs of a company prior to its acquisition.

There are no hard and fast rules of what the due diligence process involves, and each engagement will be individual to the specific transaction. Due diligence is a bridge that must be crossed in nearly all transactions, without it, the risk of problems or failure along the journey are increased.

The scope of a due diligence engagement depends on the clients view of their needs, the nature of the transaction and the perceived risk associated with the target entity.

Due diligence typically falls in to the following check list:

I. Corporate Information

1. Articles of Incorporation as amended and currently in effect.

2. Copy or review of board or stock book, minutes, by-laws, and charter as amended and currently in effect.

3. Schedule of any partnerships, joint ventures or affiliates.

4. Schedule of stock ownership and listing of all outstanding options, warrants or other rights.

5. Schedule of directors and officers, including age, term of office and description of duties.

6. Schedule of any copyrights, trade names, trademarks, patents and applications.

7. Schedule of any related parties transactions or outside interests.

8. List of all subsidiaries.

II. Business/Operational Information

1. Memo describing the history of the Company.

2. Description of product lines and individual business segments, including but not limited to the following:

  • Revenue contribution by business segment.
  • Description of commission schedule for permanent placement services.

3. Names of principal competitors and respective market position.

4. Copy of all customer and supplier agreements.

5. List of top five suppliers, what they supply, current pricing, and most recent year purchases.

6. Marketing and advertising activities, including but not limited to the following:

  • Number of people dedicated to marketing and advertising; general rolesof each.
  • Nature and extent of use of external contractors/advertising agencies.
  • Money spent on advertising by product line.
  • External vs. internal marketing or advertising efforts.
  • Copies of promotional and advertising material used during the past two years.

7. Sales activities, including but not limited to the following:

  • Description of sales force.
  • Sales force compensation arrangements.

8. Any relevant industry or market data that you believe would be beneficial to us in understanding your business.

  • Insurance.
  • Provide copies of all current insurance policies or if unavailable, provide broker summaries.

III. Financial Information

1. Copies of the Company’s audited (reviewed) year-end and monthly financial statements for the most recent five years.

2. Copies of the Company’s income tax returns for the most recent five years.

3. Provide the names, addresses and contact personnel of accountants and principal bankers along with last three years bank statements.

4. Revenue and gross margin analysis by product line for each of the last three years and estimates for the upcoming years.

5. List of year to date and most recent two fiscal years capital expenditures along with next fiscal year projected capital expenditures. List any deferred maintenance requirements.

6. General Ledger trial balances (in summary form, not inclusive of individual transactions) for the most recent year-end and the prior year.

7. Schedule of detailed trade accounts receivable aged trial balance.

8. Schedule of detailed trade accounts payable aged trial balance.

9. Schedule of detailed aged inventory report.

10. List any receivables from stockholders, officers and employees (with copies of related notes) for the three most recent fiscal years.

11. Documents related to any tax audits for last 5 years.

12. Audit reports for last 5 years.

13. Any memoranda or correspondence prepared or received in connection with any material tax issues.

14. List of all banks with which the corporation has a relationship, including description of accounts and account numbers.

15. All contracts related to the borrowing of money by the corporation.

16. All contracts related to the lending of money by the corporation.

17. All material guarantees of indebtedness or performance by the corporation.

18. Schedule of bad debt provisions, write-offs and recoveries.

19. Schedules of pre-paid expenses and other assets for the three most recent fiscal years.

20. Listing of leased fixed assets showing location, annual rentals, expiration dates, renewal options and age. Also provide copies of the significant lease agreements.

21. Listing of idle or obsolete fixed assets.

22. Description of capitalization policy and listing of capital expenditure requirements through the end of the current fiscal year.

23. Schedules of fixed assets and accumulated depreciation for the three most recent fiscal years. In addition, please provide the following:

  • Listing of capital expenditures for the last three years.
  • Any recent appraisals of company’s properties or equipment.

24. Schedules of aged accounts payable and accrued liabilities for the three most recent fiscal years.

25. Schedule of notes and loans payable (with copies of all notes and agreements) for the three most recent fiscal years including:

  • Any of all outstanding bonds, notes, debentures, trust indentures, loan agreements, bank credit lines (whether or not drawn upon), guarantees, or other indebtedness, and all amendments, consents and waivers related thereto, as well as a list of the lenders or holders and certificates to the lenders or the holders during the past three years.
  • Any and all documents and agreements, evidencing other material financing arrangements, such as sale and leaseback arrangements, capitalized leases and installment purchases.
  • Schedule of all guarantees, indemnification arrangements or loans made or entered into by the Company, any of its subsidiaries or stockholders.

26. Schedule detailing the nature and amount of owner benefits, such as automobiles, insurance, and other discretionary items paid by the Company for the most recent five fiscal years.

27. Description of the Company’s credit policy, terms of sale (both normal and any special terms), policy related to returns and method of calculation for any reserves for bad debts or return of product.

28. Summary of inventory by major product line.

29. Description of policies for physical inventory counts, costing of inventories and excess or obsolete inventories.

30. Most recent reconciliation of physical inventory count to general ledger balances.

31. Listing of consigned or off-site inventory.

32. Listing of any obsolete or slow moving inventory.

33. Provide a comparative summary of accrued expenses at the most recent yearend and the prior year with explanations of significant differences. Also provide explanations of the methods used to accrue significant costs and copies of the calculations at both periods. The accruals should include the following:

  • Salaries and wages.
  • Employee benefits.
  • Commissions (internal and external).
  • Customer advances, credit balances or deposits.
  • Warranty.
  • Customer returns.
  • Any insurance which is self-insured or includes retroactive premium adjustments
  • Dividends declared.
  • Environmental or legal liabilities.
  • Description of any stock options or warrants outstanding with copies of any relevant agreements.
  • Listing of non-recurring income statement items for the most recent year-end and the prior year with copies of supporting documentation.

IV. Legal Information

1. Listing of all litigation or administrative or governmental proceedings, investigations or inquiries pending, or to the knowledge of the Company, threatened or for which ground exist, involving the Company, its operations or assets, affiliates, officers or directors, or by which any of same may be affected, including current status and name of attorney (s) assigned to the matter.

2. Any and all decrees, judgments, orders and settlement agreements to which the Company or any subsidiary of the Company is a party or is bound.

3. Any and all memoranda of counsel with respect to any of the above matters.

4. Copies of all material governmental approvals, authorizations, and licenses required in the conduct of the corporation’s business and whether they are in full force and effect.

5. All joint venture or partnership agreements to which the corporation is a party.

6. Were any significant transactions conducted during the most recent two years with entities in which a stockholder, director, officer or his/her immediate family held an interest? If so, describe the nature of the transaction (s) and the amounts involved. Provide copies of any contracts.

V. Human Resources

1. Organization chart.

2. Provide or describe the company’s policies regarding vacation and sick pay.

3. Copy of all employee benefit plans.

4. Provide current pension plan valuation report.

5. Copy of any employment or consulting contracts and agreements.

6. Schedule of all employees, including:

  • Name.
  • Length of service and age.
  • Experience.
  • Current annual salary or hourly rate (last five years for key employees).
  • Annual bonus, if any (last five years for key employees).
  • Discretionary expenses for key employees (last five years).
  • Detail of staff turnover.

Read also: Mandate F. A. Q., DD Check List

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