If you are thinking of acquiring another company, there are quite a few factors that you must consider in your decision making. The best way to consider all factors and elements of your business is by conducting due diligence. This is your way of finding out the health of the company; is it really worth your while? You want to buy a company that is open and has full disclosure about their situation, good and bad. To conduct due diligence, you will need to collect a number of important documents. Here is a list of the documents we highly suggest you collect and review before making a final decision:
To begin the process of due diligence, collect the following documents:
- A list of the company’s shareholders (and how many each owns)
- A list of all states and locations the company is allowed to do business; this includes any place they own or lease property, has employees, or does business.
- List of the company’s advertising, marketing, and budget plans.
- Collect all press releases or publications from the last three years
In the same web of documents, you will need to collect their real estate information:
- List of physical locations and copies of all real estate leases, deeds, zoning approvals, use permits, mortgages, etc.
Next, you will need to collect the company’s financial information. This will allow you to assess their financial situation, and give you a better idea of who the company owes money to, and to assess whether or not it will be beneficial to pay it off or leave it out of the deal. You should collect:
- Financial statements for the last three years
- Credit report
- Complete list of inventory (if applicable)
- Any strategic planning documents
- List of all debts owed and liabilities
- List of accounts payable/receivable
- The company’s tax information is vital in the process of gathering their information. We recommend gathering the following:
- Federal and state income tax returns for the last three years.
- State sales tax information and returns for the last three years.
- Tax settlement documents for the last three years.
- Any and all tax liens.
- Audit reports
- Contact information for the CPA or accountant the company receives services from
You will need to know of all physical assets the company has acquired. Collect documents that will tell you about their:
- Fixed assets and their locations
- Leases of equipment
- Sales and purchases of major equipment from the last three years.
Most businesses have employees, and they are an extremely important part of the company to consider in your purchasing. You must review:
- Description of all employee benefits (health, welfare insurance policies)
- Complete list of all employees, their salaries and bonuses for the last three years.
- Non-disclosure agreements
- Schedule of employee holiday, vacation and sick leave policies.
- Retirement or benefits plan description and procedures
- List of labor disputes and problems (harassments, worker’s compensation and unemployment)
Next, you will need to collect contract information:
- Partnership, subsidiary or joint venture agreements
- Contracts between shareholders
- Loan agreements, finance agreements, line of credit agreements.
- Installment sale agreements
- All non disclosure or non-competition agreements the company is a part of
- Security agreements
You will need to know the types of products and services the company offers. In order to do this, you should collect:
- List of all existing products/services whether they are in service or still in development stages
Summary of complaints/warranty claims
It is important that you know the customer information of the company. With this information you will be able to decide if these companies are ones that you would like to continue working with.
- List of the company’s largest customers (in sales) for the last three years.
- Service agreements
- List of tasks still needing to be complete for customers.
- Explanation of major customers/clients lost from the last three years.
Collect the company’s legal information; this includes:
- Documentation about any liens
- Description of current legal action, and past legal action
- Contact information of the lawyer or law firm the company receives services from
Insurance is one of the most important aspects of a business, so without question you will need to gather all information regarding their coverage:
- List of company’s insurance claim history
- Description of company’s insurance provider and their limitations.
- Contact information for insurance agent.
You want to buy a business that is profitable and has potential to “stick around” in their industry in the future. By finding out all of these important factors, you will give yourself the peace of mind to know that this is a wise decision, or help you to realize that perhaps this isn’t the company for you. Stay tuned for next month’s post about what to do once you’ve gathered all of the information and are ready to buy.
Click here to download this checklist for future or current use, we hope it’s helpful in your buying decision making!
If you have any questions, set up a meeting with us to discuss your needs, or for more tips and information, check out our blog posts.
