DUE DILIGENCE CHECKLIST

1. GROUP STRUCTURE AND CONSTITUTION

RESP:
Deadline:

1.1. Has the company any subsidiaries? If so, please specify, giving particulars of outside
interests where the subsidiary in question is not wholly owned.

1.2. List all names under which the company or any of its subsidiaries trade.

1.3. Diagram of the group structure (showing in particular the shareholding for each company in
the group).

1.4. Details of all branches and agencies of each company in the group, including the address, a
brief description of the type of business carried on and the numbers of personnel
employed at each location.

1.5. Name all companies (other than the subsidiaries of the company) of which the company or
any of its subsidiaries is a member or debenture holder or in which any of them has
agreed to subscribe for any shares or stock including loan stock. Supply a copy of any
agreement relating to such company to which the company or its subsidiaries is a party.

1.6. Supply copies of all certificates of incorporation and certificates of change of name in
respect of the company and its subsidiaries.

1.7. Supply an up-to-date copy of the Memorandum and Articles of Association of the company
and each of its subsidiaries.

1.8. Minutes of the Board Meetings and General Meetings of each company in the group for the
last five full financial years and the current financial year.

1.9. Supply audited accounts of the company and of each of its subsidiaries for the last three
financial periods.

1.10. Confirm that the statutory books of the company and each of its subsidiaries are written up
to date and advise the location at which they can be inspected.

1.11. Copies of the current share transfer register entries and the address of shareholders of
each company in the group.

1.12. Names and addresses of the directors of each company in the group.

1.13. Details of bonds issued by the companies in the group : names and addresses of the
holders of these bonds.

1.14. In relation to the shares and bonds of the company group :

 Any securities, encumbrances or other claims relating to them;

 Any outstanding or unexercised contracts, warranties pre-emption rights, subscription

rights (with details on the guarantees, exercise price, duration and the consideration
for the option) or any conversion right in respect of the subscription or purchase of
shares in or bond issued by each company in the group; and
  Details of any right to the allotment, issue, sale or transfer of shares of or bonds
issued by the companies in the group, whether on a change of control or at any other
time.

1.15. Details of any bonus issues or repayments of capital (or any proposed).

1.16. Same information as above in relation to any other securities issued by the companies in
the group.

1.17. In relation to the company and its subsidiaries, supply details of the membership of any
Trade Union of employees of the company and any of its subsidiaries and the existence
of any disputes (if any) with such Trade Union.

2. EMPLOYEES

RESP:
Deadline:

2.1. In relation to the company and each of its subsidiaries, please supply:

2.1.1. an up-to-date list of staff (including directors and consultants and persons who have
accepted but not yet begun employment) showing :

 name;
 age
 detailed job description (eg sales to include whether outbound or desk bound)
 date of commencement of service
 length of service
 salary and commission (if any)
 bonus entitlement (if any)
 benefits including company cars
 notice period
 leave entitlement per annum
 qualifications
 courses attended
 location

2.1.2. supply copy of latest monthly payroll

2.1.3. where applicable identifying those persons to whom payments are made without any
deduction for PAYE; and

2.1.4. copies of all service agreements, consultancy agreements and an example of any
particulars of employment issued to employees.

2.1.5. employment contracts of directors and other officers of the companies in the group
and of any employees whose basic remuneration exceeds RANDS200,000 per annum

2.1.6. standard employment contracts and internal regulations and collective agreements
for the companies in the group.

2.1.7. are employees of each company in the group employed exclusively by that
company?

2.1.8. details of any recent redundancy arrangements (in progress or planned) in relation to
any company in the group and the cost of any planned redundancies.

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 2.1.9. details of employees made redundant or dismissed in the last twelve months or any
redundancy or dismissal in respect of which a claim has been made.

2.1.10. proceedings currently being brought by any former or current employee in excess of
RANDS50,000.

2.1.11. loans (or subsidies paid in relation to loans) to employees of each company in the
group.

2.1.12. any code of ethics or statements of business practice drawn up or published by any
company in the group (either internally or in its annual accounts) for the attention of its
employees, customers or clients.

2.1.13. inspections and controls (carried out recently, in progress or pending) in respect of
employment, working conditions, social security or health and safety. Penalties and
measure taken by the company in the group following these controls.

2.1.14. all documents relating to controls by Social Security Authorities.

2.2. Is there any liability to, or claim likely to be made by, any ex-director or ex-employee ?

2.3. In relation to every pension or retirement benefit scheme of the company or its subsidiaries,
provide :

 a copy of the trust deed and rules;

 the name, age, sex and current salary of each member;
 a list and value of the assets of the scheme;
 a copy of the most recent actuaries’ report.

2.4. Supply particulars of any other schemes whereby benefits are provided to any of the
employees (e.g. healthcare, life assurance and permanent health insurance) or any
compulsory/statutory deductions (other than employees’ taxation) that have to be made (eg
national insurance).

2.5. Supply a copy of any trade union recognition agreement.

3. BANKING

RESP:
Deadline:

3.1. Supply copies of all charges, guarantees, indemnities, facility letters and all other loan and
banking documents which relate to the company or any of its subsidiaries.

3.2. Confirm that no notice requiring repayment has been served and that there has been no
breach of any covenant contained in any charge, debenture, guarantee or other banking
document.

3.3. In respect of each bank account maintained by the company or any of its subsidiaries,
supply :

 the account name and number;

 the bank’s name, branch and branch sort code;
 a copy of the current mandate relating to the operation of the account;
 and state whether an overdraft facility exists and, if so, its limit and whether or not
it is secured.

4. TRADING ARRANGEMENTS

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 RESP:
Deadline:

4.1. Supply copies or details of all licences or consents and agency agreements relied upon in
connection with the respective businesses of the company and of each of its subsidiaries.

4.2. Supply schedule detailing supplier, terms, rebates, co-op, purchase commitments, funded
heads, price protection, product rotation, duration of contract, contact details.

4.3. Supply details of any credit facilities negotiated or under negotiation in respect of such
creditors.

4.4. Agreements which will be contravened or which could be terminated or materially modified
because of the proposed acquisitions.

4.5. General conditions of sale.

4.6. Supply details of any credit facilities negotiated or under negotiation in respect of such
creditors.

4.7. Confirm that no notice withdrawing such credit has been given to the company or any of its
subsidiaries.

4.8. Supply schedule of all hire purchase, credit sale or leasing agreements entered into by the
company or any of its subsidiaries.

4.9. Supply copies of all factoring agreements, agreements for services, agency agreements,
licence or distribution agreements or know-how agreements to which the company or any
of its subsidiaries is a party.

4.10. Supply copies of all long-term contracts and of contracts for the acquisition of any capital
asset entered into other than in the ordinary course of the business of the company or any
of its subsidiaries as now carried on, or any contract containing any abnormal provisions
material to a purchaser, or containing any provision whereunder the company or any
subsidiary has paid or will pay or has been or will be paid a consideration other than cash
or other than market value negotiated on an arms’ length basis.

4.11. Are any goods supplied to the company or any of its subsidiaries on terms that the supplier
retains ownership pending payment?

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5. INSURANCE

Supply details of all insurance’s (including product liability insurance) effected by the
company or any of its subsidiaries. Please confirm that all premiums due thereon have
been paid and that the Vendors are not aware of anything which could vitiate any of these
policies.

6. TAXATION

6.1. In relation to the company and each subsidiary, supply :

 the address of its local Receiver;

 the name and address of its tax advisers;
 its VAT, PAYE and other taxation registration numbers;
 the date to which tax returns for each company have been made; and
 the date to which tax returns for each company have been settled.

6.2. Are there any matters in dispute or under discussion with any Revenue authorities?

6.3. To what date has tax deducted under the PAYE / VAT provisions been accounted for and
paid over?

6.4. To what date have shortfall clearances been obtained?

6.5. Obtain copies of the last three tax computations :

 Note any unusual items; and

 schedule any tax losses (capital or revenue) carried forward or any relief’s not yet
claimed.

6.6. Give copies, by company, of the last three assessments received by the company.

6.7. Are provisions or computations not yet agreed by the Inland Revenue reasonable?

6.8. Reconciliation of overall tax charge with accounts and confirm that the charge in the profit
and loss account is properly stated.

6.9. Reconcile the effective and statutory tax rates.

6.10. If the company is in an assessed loss position, consider the extent to which this has been
assessed or merely estimated and the chances of the assessed loss being challenged by
the Revenue authorities.

6.11. Copies of all recent correspondence with the Inland Revenue detailing any unusual
enquiries, contentious areas or possibilities for reassessment.

6.12. Detail all important matters in dispute and the extent of any potential liabilities indicated
whether provided or not.

6.13. Enquire as to whether the company might be subject to potential penalties for failure to file
required informational tax returns, failure to withhold required taxes, etc.

6.14. Are there any tax consequences which may arise as a result of the
acquisition/disposal/reorganisation, etc. (e.g. loss of tax losses due to change in nature or
conduct of trade).

6.15. Where there are overseas subsidiaries, confirm that there are no local tax liabilities arising
on the profits which are not provided for in the accounts.

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 6.16. Are there any large recurring disallowable items (including a revaluation increment), which
will have to be provided out of taxed profits.

6.17. If there are foreign sources of income, are there any double tax relief implications.

6.18. Any warranties and indemnities which should be specifically included in any vending
agreement.

6.19. Are there any extraction of profits or funds from the company which may give rise to a
backdated investigation.

6.20. Copies and results of any Revenue investigations, eg. RSC levies, VAT, etc.

6.21. If any assessed loss will it still be available post acquisition (section 103 (2)).

6.22. Any recent changes in the tax law that may affect the company?

6.23. Other taxes.

 Is the company collecting and remitting Value Added Tax?

 Are all payroll taxes that have been withheld from employees paid over
accordingly?

 Does the company have any significant foreign taxes problems relating to its
foreign operations, such as :

(a) Exposure to denial of foreign tax credits because of potential allocation of

expenses to foreign source income?
(b) Inter-company pricing and reallocation of income or expenses between related
entities?
(c) Any transfers of intangible property to a foreign corporation?

 Is there a possibility of any significant increases in local property tax rates or

assessed valuations in the normal course of business or as a result of the proposed
transaction.

7. PROPERTY

7.1. Supply full addresses of all premises occupied or in which any interest is owned by the
company or any subsidiary.

7.2. Supply a copy of all leases and licences relating to premises to which the company or any
subsidiary is, or is contracted to be a party.

7.3. Summarise terms of all leases including location, monthly rental, period, options to renew,
operating costs, etc.

7.4. If any premises referred to are not occupied exclusively by the company or a subsidiary
please provide details of all other present occupiers and the terms of occupation.

8. INTELLECTUAL PROPERTY

8.1. Details of trademarks, patents, designs and models or other intellectual property rights used
and/or filed by a company in the group including the following details :

 date, place and number of filing;

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  date and number of registration;
 where there are applications for registration of these rights, the status of the
application procedure.

8.2. Copy of all contracts to which the companies in the group are parties which concern any
one of these intellectual property rights.

8.3. Copy of any licences or transfers authorising the companies in the group to use any
intellectual property right which they do not own or have not created.

8.4. For software, designs and models and any other intellectual property rights which can be
protected by intellectual property law : date of creation; place of creation, place of first use
or first publication; names of the natural persons who participated in their creation; capacity
of these natural persons vis-a-vis the company and a copy of the contracts linking them to
the company (employment contract, orders, etc.).

8.5. Copies of any contracts to which the companies in the group are parties and which have as
their object the creation, development or improvement with a third party of any intellectual
property right.

8.6. Details of any disputes involving the companies in the group which concern any of the
intellectual property rights referred to above or a matter of unfair competition.

8.7. Details of any trademark infringement or acts of unfair competition which the companies in
the group are aware of and which have not led to a legal action.

8.8. Details of any acts by the companies which are likely to interfere with the intellectual
property rights of a third party, but have not yet led to a legal action.

8.9. Is the company or any of its subsidiaries the registered owner or exclusive licensee of any
patent, trade or service mark or registered design? If so, please supply particulars (e.g.
copy patent or mark certificate).

8.10. What arrangement exists to ensure that any intellectual property rights (e.g. copyright)
deriving from work done by outside parties or employees accrue for the benefit of the
company or any of its subsidiaries?

9. LITIGATION

9.1. Provide details of the title and nature of any litigation (civil or criminal) or arbitration to
which the company or any subsidiary is party.

9.2. Are the directors of the company aware of any claim made by or against the company or
any subsidiary likely to lead to litigation (civil or criminal) or arbitration?

9.3. Investigations (recent, underway or threatened) made by any administrative authority in

respect of any company in the group.

10. LOANS AND CONNECTED PARTY CONTRACTS

10.1. Supply details (including interest, repayments terms, security etc.) of any loans made by
the company or any subsidiary.

10.2. Provide copies of any agreements not referred to above made between the company or
any of its subsidiaries and any member of the company or any person connected with any
such member.

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 10.3. Transfers of assets during the previous five years between a company in the group and
any director of a company in the group or a member of a director’s family or a company in
which he is a director, shareholder or member.

10.4. Outside business activities of the directors having any connection with the business of a
company in the group.

11. GENERAL

11.1. Supply a copy of any report made since 1 January 1995 by financial or management
consultants on the company or any of its subsidiaries or any aspect of their respective
businesses?

11.2. Supply copies of any current powers of attorney granted by the company or any of its
subsidiaries.

11.3. Contracts and agreements relating to the acquisition or disposal of shares, businesses or
assets, entered into in the last five years. Any related warranty agreements granted by or
in favour or any of the companies in the group.

11.4. Rights to subscribe to shares or bonds in a third party company.

11.5. Joint venture, company or partnership to which a company in the group belongs and any
other profit-sharing agreement between a company in the group and a third party.

11.6. Copies of any powers of attorney granted to or by a company in the group.

12. NATURE OF BUSINESS AND PRODUCTS

12.1. General description of business per division

12.2. Description of principal products (promotional brochures)

 Domestic (if any)

 Foreign

12.3. Distribution rights

 Exclusivity and transferability

 Duration
 Pricing and terms of supply (e.g. LC’s)

12.4. Substitute products

12.5. Risk of obsolescence

12.6. Patents, trademarks, licences, royalties

12.7. New products/initiatives

 What are they

 Cost of introduction
 Expected impact

12.8. Product warranties / customer claims

 History

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  How handled
 Insurance
 Financial implications: adequate reserves?

13. THE MARKET AND CUSTOMERS

13.1. General description of market

13.2. Current / potential size of market for principal products

 Market size (source)

 Market share (source)
 Historical growth
 Projected growth
 External factors that might change forecasts

13.3. General description of customers

 Customer profile (type e.g. corporate, dependence on a few major customers)

 Revenue and gross profit for top 20 customers for last three financial years
 geographic location

13.4. Seasonality

13.5. Cyclicality

13.6. General economic indicators which correlate well with industry

14. MARKETING AND SALES

14.1. Distribution channels

14.2. Sales system

14.3. Compensation of salespeople and/or reps

14.4. Sales terms : compare with competition

14.5. Policy for returns, allowances, warranties

14.6. Pricing : compare with competition

14.7. Advertising and promotion

14.8. Marketing strategy

15. FIXED ASSETS

15.1. General description of nature of fixed assets

15.2. Capital expenditures (if material) - past and future per annum

15.3. Supply copy of latest fixed asset register

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16. RESEARCH AND DEVELOPMENT

16.1. R & D outlays - historical and projected

16.2. Proprietary technology : is it a real advantage ?

16.3. Importance of R & D in defending existing products and/or creating new ones
16.4. R & D versus competitors

17. COMPETITION

17.1. Description of major competitors - domestic and foreign

 Size eg. turnover, profits, assets, number of employees

 Financial strength
 Particular competitors in each product or market segment

17.2. Relative market shares (source of data)

17.3. Competitive trend

17.4. Price leader

17.5. Competitive advantages, disadvantages (of company and major competitors). What does
competition do differently?

17.6. Barriers to entry

17.7. Relative strength versus customers or suppliers

17.8. On what basis does the company compete (quality, price, service, brand loyalty) and how
does it compare with competition

18. FINANCIAL CONTROLS

18.1. Financial reporting

 Responsibilities
 Quality and timing of financial reporting

18.2. Auditors - who, how long, clean opinions?

18.3. Most recent audit

18.4. Disagreements with auditors eg. revenue recognition, reserves, etc.

18.5. Accounting policies

18.6. Auditor’s management letters for the last three years

18.7. Internal audit procedures or reviews

18.8. Budgets
 when prepared
 accuracy when compared to actual results (i.e. reliability)

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19. FINANCIAL (GENERAL) - PER DIVISION

19.1. Historical management accounts per month for past three years

19.2. Budgets for next two financial years per month

19.3. Explanation of past and projected trends

20. FINANCIAL (SPECIFIC) - PER DIVISION

20.1. Detailed monthly income statements

20.1.1. Revenues for past three financial years

 By major product lines (Rand and unit volume)

 Intercompany transactions
 Revenue recognition
 Credit notes passed and reasons therefor

20.1.2. Gross profit analysis (by major product line)

20.1.3. Costing of products -what it includes (e.g. financing costs re LC’s)
20.1.4. Other income
 Rebates received and given
 Marketing co-op
20.1.5. Extraordinary expenses
20.1.6. Foreign exchange translation
 gains / losses
 foreign currency hedging
20.1.7. Tax (sustainable tax rate)
20.1.8. Salaries and related costs
 Salaries (basic)
 Pensions
 Commission arrangements
 Bonuses
 Other benefits
20.1.9. Depreciation

20.2. Detailed monthly balance sheet for past three financial years

20.2.1. Cash management system

20.2.2. Accounts receivable
 Current age analysis
 Credit policy
 List of debtors written-off over last three years
 Terms - consistent with industry?
 Schedule detailing ageing for last three years per month (eg current, 30, 60, 90
and over)
 Supply list of debtors considered to be bad or doubtful
 Provision for bad or doubtful debts at end of each financial year for last three
years
 Monthly charge for bad or doubtful debts.

20.2.3. Inventory
 Inventory controls
 Method (LIFO/FIFO)

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  Turnover - consistent with industry?
 Obsolescence policy
 Current stock age analysis
 Schedule detailing ageing for past three years per month
 Outstanding orders
 Provision for obsolete or slow moving stock at end of each financial year for last
three years
 Monthly charge for obsolete or slow moving stock.

20.2.4. Other provisions/reserves at end of each financial year for last three years
 Monthly charge for these provisions/reserves
20.2.5. Other current assets -description
20.2.6. Other assets - description
20.2.7. Working capital (levels required)
20.2.8. Accounts payable
 Terms - consistent with industry
 Current creditors age analysis
 Schedule detailing ageing for past three financial years per month
20.2.9. Purchase from top 20 creditors over past three years
20.2.10. Other current liabilities - description
20.2.11. Contingent liabilities, guarantees
20.2.12. Other liabilities - description
20.2.13. Deferred taxes (if any)
20.2.14. Translation adjustment - description
20.2.15. Pension fund fully funded?

20.3. Funds flow (monthly for past three financial years)

20.3.1. Capital expenditures

20.3.2. Disposal of assets
20.3.3. Working capital needs
20.3.4. Ability to generate cash
20.3.5. Dividend policy

21. GENERAL

21.1. Any significant fundamental changes (prices, wages, customers, personnel vacancies) not
reflected in financial statements.

21.2. Effect of economy, political risk on company and what is likelihood of occurrence

21.3. Strategic direction

 Discuss most recent 2 year plan

 Review budget process
 Diversification plans

22. SYSTEMS

Description of various systems (accounting and operational).

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