Due Diligence

An acquirer must be prepared to adapt his due diligence based on the availability and quality of documentation provided. Depending on a vendor, and for various reasons such as confidentiality or simple practicality, the access to certain documentation may range from being limited to strictly viewing and taking notes to having complete copies made available. Certain due diligence elements are repeated under different headings.

Due Diligence Checklist

Organization

1. Detailed corporate organizational chart showing all parents and subsidiaries.
2. History of the business and predecessor companies.
3. Names, addresses and contacts of professional advisors including attorneys, auditors, and lenders.
4. List of all provinces, states or countries in which the Company
   a) is authorized to do business;
   b) currently conducts business operations, either directly or through other parties or representatives.
5. Articles of incorporation and any amendments thereto.
6. List of shareholders and number of shares owned.
7. Access to the Minute book, including all minutes and resolutions of shareholders and directors.
8. Copies of any shareholders’ agreements, option agreements, voting agreements, pledges affecting shares or any other similar agreements affecting shareholdings.
9. List of officers and directors indicating seniority and short bio.

Financial

10. Audited (consolidated and non-consolidated) financial statements for previous (5) years.
    
11. Monthly (consolidated and non-consolidated) unaudited internal financial statements for most recent twenty-four (24) months.
12. Financial statements by product line with volumes for previous three (3) years including gross margin.
13. Cost of sales breakdown.
14. Detailed breakdown of selling, distribution, marketing and administrative expenses.
15. Description of any common costs (shared by more than one business operation) and how they are allocated.
16. Current internal financial projections, order/ backlog information and supporting documents.
17. Provide current budget and/or business plan for current year and beyond (i.e. 5-year plan or forecast).
18. Provide capital expenditure history for the past five (5) years, current capex budget and commitments by class of assets.
19. List of the ten (10) largest customers by sales volume.
20. Current accounts receivable aging by customer.
21. Historical bad debt experience for the past 5 years.
22. Describe inventory accounting method.
23. Current inventory aging by category (raw materials, work in progress, finished goods and spare parts).
24. Provide detailed lists of inventory by location (including consignment inventory, if any, on customers premises) indicating unit cost, total cost and days sales in inventory. For inventories held off-site, indicate if location is self-owned or belongs to a 3rd party.
25. Identify any raw materials on consignment.
26. Current information on obsolete finished goods, waste, excess inventory, rework material.
27. Current analysis of prepaid expenses.
28. List of fixed assets (reconciled to the financial statements) detailing original cost, accumulated depreciation, net book value and fair market value.
29. Analysis of any investments.
30. Analysis, as may be applicable, of current and long-term other assets.
31. Current accounts payable aging (by supplier).
32. Current list of accruals.
33. List of any off-balance sheet liabilities not appearing in most recent financial statements e.g. operating leases, loan guarantees, swaps, hedges, etc.
34. List and describe any reserves for litigation or contingent liabilities
35. Auditors’ reports (“management letters”) and management’s replies.
36. Summary of accounting policies to the extent not disclosed in financial statements.

Sales & Marketing Due Diligence

37. Provide a complete product and service list (current and discontinued products).
38. Provide current price lists for all products.
39. Summary of sales volume to principal customers (percent of sales to top twenty (20) customers) for past three (3) years.
40. Describe general credit terms offered to customers and list and describe any discounts or other volume/credit arrangements offered to customers;
41. Summary of sales by volume, dollar and gross margin for last three (3) years by product and service and by geographic segment.
42. Backlog information for most recent three (3) years.
43. Copy of catalogues and sales literature for key products, including sample price lists.
44. Copies of any sales contracts.
45. List of all sales representatives, brokers or distributors for the company’s products. Provide copies of any contracts or a summary of existing arrangements with any such sales representative, brokers or distributors.
46. List of any products sold to affiliates. Provide volumes for the past three (3) years and current terms of sale.
47. Furnish copies of all warranty forms used and relevant warranty claim data.
48. Describe provisions for product warranties and claims/returns history for past three (3) years.
49. Note any unusual pending returns.
50. Current product research and development plans and respective budgets if any
51. Describe extent of sales planning, market research and marketing activities.
52. Describe current business development and marketing activities.
53. Details of budget for advertising & promotion for past three (3) years and current year budget.

Manufacturing Due Diligence

54. Descriptions of manufacturing processes (or business process) and facilities.
55. List of all material machinery and equipment including date acquired and accumulated depreciation.
56. List of all material leased machinery and equipment, including descriptions, terms of leases, options, annual costs, etc. Provide copies of Leases.
57. Plant layouts, blueprints, etc.
58. Process flow diagrams.
59. Production volumes, actual capacity utilization and potential to incrementally expand.
60. Production statistics by product, by process, by piece of equipment for past three (3) years by facility including waste rates (i.e. production yields) and waste disposal overview and costs.
61. List of all raw materials and key suppliers. Copies of material purchase contracts including three (3) year raw material price trend.
62. Description of procurement arrangement and copies of any current contractual arrangements as well as any other arrangements associated with the raw material supply.
63. Are any raw materials currently on allocation?
64. Three (3) year history of any raw material disruptions or material substitutions.
65. Summary of Safety, Health and Environmental issues/ compliance record.
66. Overview of any current toll production, copies of contracts.
67. Contracts for storing product and shipping.
68. List of utilities suppliers and copies of contracts.
69. List of any utility disruptions over the past three (3) years. Are there any concerns about future disruptions or adequacy of supply?
70. Does the company receive any raw materials, services, utilities, or supplies from affiliates? Under what terms?
71. Does the company provide any raw materials, services, utilities or supplies to affiliates? Under what terms?
72. How are the company’s products distributed? Provide three (3) year transportation cost trend. Copies of any transportation contracts.
73. Provide details as to any cost reduction programs.

Human Ressources

74. Provide an organization chart, manpower staffing charts, and a head count breakdown by operation and function, including any employees located outside Canada.
75. Provide copies of collective bargaining agreements.
76. Schedules of salaried and hourly employees showing their current compensation rates and breaking out employees by function, age, years with company, unionized vs. non-unionized, participation in employee benefit plans and vacation.
77. Schedule showing number of employees for past two (2) years.
78. Provide a description of the compensation arrangements for employees outside the country.
79. List of accidents over the past five (5) years and any other Health & Safety Issues.
80. Provide copies of any notices or communications received within the last five (5) years from any governmental authority or agency re: employees.
81. Training programs and procedures manuals.
82. Employment agreements (including, but not limited to, contracts with management personnel or entities affiliated with management personnel) and details of compensation.
83. Management agreements.
84. List of labor disputes, requests for arbitration of mediation, grievance proceedings, over the past three (3) years.
85. Employee handbooks, summaries, guidelines and bulletins.
86. Description of workers compensation program.
87. Descriptions of benefits including: pension, insurance, retirement, stock options, severance, incentives, profit sharing, executive compensation, bonus, vacation, disability, sick pay and any other employee benefit plans (and any related trust agreements and insurance or annuity contracts).
88. Provide copies of all confidentiality, non-competition, non-solicitation and invention agreements signed by employees and independent contractors.

Legal, contracts & agreements

89. List of all pending or threatened litigation, arbitration, administrative or other proceedings involving the company, any subsidiary or any officer or director (including parties, remedies sought and nature of legal action).
90. Provide copies of any opinions/correspondence received from counsel with respect to pending litigation and copies of the letters from the Company’s lawyers to auditors for the most recent three (3) years concerning litigation and other legal proceedings.
91. Letters from lawyers to auditors for most recent five (5) years concerning litigation and other legal proceedings.
92. List of any violations of governmental laws or regulations pending and for the most recent five (5) years.
93. Provide copies of any partnership agreements.
94. Provide copies of any joint venture agreements.
95. Contracts relating to material business acquisitions or dispositions during the last five (5) years (by transfer of capital stock or assets) including any separate tax or environmental agreements.
96. Provide copies of any confidentiality and trade secret agreements.
97. Agreements limiting the ability to compete with any other person or to engage in any line of business.
98. Corporate transactions with management or directors of affiliates.
99. Any other material contracts not in the ordinary course of business.

Real property

100. Description, location, and character of all real property owned.
101. Deeds, surveys and other real property title documents.
102. List of any real property mortgages.
103. List of all leased real property, including descriptions, terms of leases, options, annual costs, etc.
104. Amount of current real estate taxes and copies of recent tax bills.
105. Are any special assessments pending or threatened?
106. Are restrictions upon use posed by zoning laws or restrictive covenants?
107. Provide any appraisals conducted within the past 5 years.

Financing

108. Provide a detailed list of all bank accounts (indicate branches, bank account numbers and signing officers).
109. List, describe and provide copies of documentation for any outstanding bank loan, line of credit or other debt financing, capital leases (i.e. term sheet, lending agreement, etc.) including repayment schedules and interest rates.
110. Copies of all hedging agreements.
111. Copies of all grants received in the past five (5) years.

Intellectual property

112. Furnish copies of:
     (a) all patents and applications owned by and/or used in the course of business;
     (b) all registered Canadian, foreign or state trademarks and pending trademark applications owned by and/or used in the course of business;
     (c) all registered copyrights and pending applications owned by and/or used by the Company in the course of business.
     (d) all registered business names and pending applications for business names owned by and/or used by the Company in the course of business.
113. Where any of the above properties may have been licensed to third parties, provide detailed list of licensors, life and terms, royalty or similar payment calculation methods, etc.
114. Furnish copies of, and identify and describe, all licenses, sublicenses, confidential disclosure, non-competition and other agreements relating to patents, trademarks, copyrights, technical assistance, know-how, inventions, trade secrets and similar intellectual property arrangements to which the Company is a party, including copies of agreements evidencing assignment to the Company of all inventions and other intellectual property rights of past and present employees.
115. Where any of the above requires royalty or similar payments, provide details as to calculation methods, payment history, life and terms, etc.
116. Provide full information on any claim of any employee that technology belonging to, or claimed by, such employee has not been transferred to the Company.

Insurance

117. Furnish copies of insurance policies carried by the Company.
118. Furnish a summary of any claims made under each policy and a analysis of the premiums paid for each separate policy during the period(s) in which any claims occurred.
119. Provide three years of claims history for any Workmen’s Compensation claims.

Taxes

120. Furnish copies of all federal, provincial, municipal and foreign income tax returns for the past three (3) fiscal years including GST, PST and deduction at source. Include copies of assessments received.
121. List of tax-loss carry forwards by type and provide expiry dates.
122. Provide detailed analysis of any available tax credits (i.e. research and development).
123. Furnish copies of any correspondence pertaining to any tax deficiencies proposed or assessed or of any waivers of any statute of limitations on assessment or collection of any tax which the Company has executed over the past 5 years.
124. Identify and describe any pending tax audits and furnish estimated assessments with respect to such audits, including but not limited to, sales tax, income tax, GST, PST, deduction at source, worker’s compensation, and custom and duty audits.

Environmental Due Diligence

125. Provide a description of the current and previous use of the property and buildings.
126. Have any environmental site assessments (Phase I or Phase II) of the facility been conducted? Provide copies of assessments.
127. List all permits or authorizations held by the Company necessary for the ownership and operation of the activities of the business and the transportation, transfer, recycling, storage, use, treatment, manufacture, investigation or removal of any hazardous material. Describe any circumstances, which could cause any such permit to be revoked, modified, or rendered non-renewable.
128. Provide description of environmental incidents reported over the past 10 years.
129. Describe any Federal, provincial or municipal investigation evaluating whether any remedial action is required of the Company to respond to a release of any hazardous or toxic waste, materials, substance or constituent, or other contaminants or substance, in to the environment, in violation of law. Provide information with respect to such investigations currently pending or concluded.
130. Provide all correspondence with the Ministry of Environment, Environment Canada including inspection reports, notices of infraction, orders and statements of offence.
131. Provide copies of any environmental impact reports, environmental reports, environmental studies and asbestos surveys, hazardous waste reports relating to any of the Company’s real property, whether leased or owned, operations or activities including any reports prepared by company insurers.
132. List any equipment containing PCB’s.
133. Indicate if any asbestos is present on the Company’s property.
134. Identify the existence of any hydrocarbons and other toxic materials and describe how they are used, stored and disposed of.
135. Give a list and describe all underground storage tanks or surface impoundments on the premises of the Company. With respect to tanks, provide their capacity, age, and copy of any integrity testing.
136. Describe any exposure by the Company of persons to, or the receipt of any notice of any claim of injury due to exposure of any person to, hazardous materials manufactured, stored, used, distributed, disposed of, released or controlled by the Company.
137. Describe any claim, complaint, action or proceeding brought or currently pending or threatened against the Company relating to any liability which may exist with respect to environmental matters and particularly to hazardous or toxic waste, substances or as to the investigation or remediation of hazardous or toxic waste, substances or constituents.

Electronic data processing

138. Provide a description of information systems, including descriptions of major hardware, operating systems, local area network configuration and capabilities, PC’s utilized, application software and telecommunications systems utilized.
139. Indicate which software systems are vendor-supplied or internally developed?
140. List major software licenses and indicate transferability.
141. Is hardware owned or lease? Copies of leases.

Please feel free to print this due diligence checklist by clicking on the “Print this page” link at top of this page; you may print it to a printer or save it as a PDF. Alternatively, you may copy paste the list to a spreadsheet and adapt it to your needs.

You may also wish to refer to our related Day-1 checklist and Post Merger Integration white paper, two supplemental topics which go hand-in-hand with an acquisition due diligence review.  In our Vendor Due Diligence newsletter, we discuss the merits for a prospective vendor to initiate his own due diligence review prior to starting a sale process.