The due diligence process is one of the key requirements of an M&A, investment, or any other transaction to successfully move to the next stage and complete the transaction process. Both sellers and buyers need to be thoroughly prepared for it, as both parties need to know what they need to review or access as much useful information about the company as possible. To systematize this process, M&A lawyers create due diligence lists.
What is due diligence?
Due diligence is an extensive and comprehensive evaluation of a company that a potential buyer wants to acquire or where a potential investor wants to invest. First, representatives of the interested party, namely M&A experts, will look at the target company’s structure, assets, liabilities, and major operational and business relationships. With all this information, the experts can learn and assess the seller’s commercial potential, risks, and projections, compare this to the buyer’s business and determine the actual benefit of this acquisition. If all is well, you move on to the next stage of the transaction. A virtual data room can help make the due diligence process smoother and safer. It makes it easy to manage large streams of documents, search them quickly, and protect them securely.
What should be included in an M&A due diligence checklist?
The due diligence checklist differs based on the nature of business being sold, but there are some issues that experts review as a must-have, and we will highlight this comprehensive list below.
-Corporate structure documents and general questions
- Lists of security holders
- Corporate Articles of Incorporation
- Organizational chart
- Share option plans and agreements
- Founding documents
- Warranties
- Restructuring and recapitalization of data
- All minutes of board, shareholder, and executive committee meetings
- Agreements to buy or sell a business
- Share appreciation plans.
Financial information of the companies is also subject to obligatory examination. Among the financial documents that are often examined are various financial projections for the next five years and loan agreements, debts, and contingent liabilities for the past five years.
-Taxes
- All available income and sales tax returns for the last five years
- Correspondence from any taxing authority
- Information from state audits
- Tax sharing agreements
- Net operating losses
-Strategic compliance
The buyer needs to understand how the company being acquired will fit strategically into their existing business and how the combined companies can work together in the future. To understand this, the seller must provide data on human resources, overall work culture, integration and transition, technology, and marginal costs.
-Intellectual Property
- Commercial secrets
- Trademarks
- Patents
- Copyright
- Licenses
- Litigation and intellectual property claims
-Tangible assets
- Real Estate
- Equipment
- Technology
- Inventory
- Research and development
The purchaser must review the overall cost of assets and losses or obligations thereunder.
-Contracts
This part of the documents usually takes the most effort and time for due diligence examiners. The checklist usually includes:
- Contracts with customers and suppliers
- Warranties, loans, and credit agreements
- Equipment leases
- Debt schedules (accounts payable or receivable)
- Non-competition agreements
- Labor contracts
- Promotional, sales, and dealer agreements
-Employees and management
The buyer must identify the company’s core values to ensure they match his own. To do this, experts check employee contracts, benefits, and policies. This also helps them decide which employees they will keep after the merger and what problems existed in the management structure and employee base.
-Litigation
A due diligence lawyer should review any pending, settled, litigated, or threatened litigation.