Due Diligence Checklist

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Due Diligence Checklist

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So, you have decided to purchase a business. Regardless of whether the deal is structured as an asset transaction, a stock transaction, or a merger, make sure you know what you are getting into by requiring detailed information from the seller regarding the business operations and finances. The following is a checklist of information and documents you should review. Note: Please consult with your professional advisors as to what other information may be needed in your specific situation.

Business Information
Reasons business is for sale Amount of business for sale (all or part) History of business Description of products and/or services Address of business Date and state of incorporation States in which the company is qualified to do business Minute books, bylaws, certificate of incorporation, and stock certificate book Shareholder agreements Any special restrictions on the sale Shareholders and their holdings Rights of each class of stock and other securities Capitalization Fiscal year Accountants- name, address for each Attorneys- name, address for each Location of company records Credit rating Bank depositories Bank references
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Operations
Description of business, including manufacturing, distribution, and marketing activities Manufacturing history and agreements Distribution history and agreements Marketing history and agreements Advertising history and agreements Public relations history and agreements Principal vendors and terms Government contracts Seasonal factors Branch offices and associated operations Subsidiaries, associated operations, and intercompany dealings Documentation on systems & processes
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Sales
Description of the market Relative size in the industry Major competitors Industry trends and recent developments Industry advantages and disadvantages Long-range industry prospects Client names and address Number of customers Principal customers

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Customer repeat business Pricing policies and fluctuations in the past three years Sales backlog Sales materials Sales personnel compensation Effectiveness of advertising and other sales promotion programs Gross and net sales for the past three years and for the last twelve months Sales comparison with the industry for the past three years and for the past twelve months
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Personnel
Organization chart Number of employees and their positions Employee contracts Independent contractor agreements Condition and accuracy of employee records Union contracts Morale and human resource issues Consultants - terms and payments Pension, profit-sharing, insurance, stock bonus, deferred compensation, and severance plans Accident history, worker's compensation costs Industry comparison as to wage rates and number of employees
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Intellectual Property
Status of patents Status of trademarks Status of copyrights Status of trade secrets Status of domain names Use of name issues Intellectual property ownership- company or individual Licensing agreements Infringement and other intellectual property litigation Protection policies United Sates/ international strategies Brand management strategies Research and development strategies
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Business Facilities
Location Status of leases Assignability of leases Land owned or leased - description, value, taxes, future plans Buildings owned or leased - description, value, taxes, future plans, depreciation Furniture, fixtures - description, value, condition, depreciation, useful life Insurance coverage Ownership of title All Uniform Commercial Code(UCC) filings
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Computer Systems
Network system - type, setup Computers networked - how many, description Computers- condition, value, depreciation- owned or leased Computer programs installed - owned or leased Vendor and service arrangements
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Financial and Related Data

Tax returns for the past three years Annual and quarterly statements, including balance sheets, income statements Earnings record, including gross and net profit margins Earnings record compared to the industry Break-even analysis Payroll - federal and state(s) Annual and quarterly payroll report

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Due Diligence Checklist

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Sales tax payments - proper filings Nonrecurring income and expenses Earnings forecast Pro forma balance sheet Chart of accounts Cash and working capital requirements Interest charges Annual depreciation and capital additions Inventory turnover and policies Market and book value analysis Accounts payable and receivable analysis Accounts receivables Notes payable and receivable analysis Bad debts - collectibility and policies Analysis of investments or other assets Deferred expense analysis Analysis of short-term, long-term debenture and mortgage debt Existing and potential liens Status of leases Insurance coverage Contingent liabilities Status of any litigation Status of licenses or franchises Accounting procedures and practices Review of all legal counsel opinion letters related to the business
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State and Federal Laws and Regulations

Current federal, state, and local tax status Qualifications for doing business Certificate of good standing in all states Regulatory agency consents and issues Antitrust problems Blue-sky laws SEC filings and problems Stock exchange information, if any Environmental issues
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Comparison Analysis/ Common Ratio Comparisons

Earnings/book value Price/book value Price/earnings Price/fixed assets Sales/accounts receivable Sales/fixed assets
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Structure of Sale
Sale of corporate stock - unforeseen liabilities, taxation, corporate liquidation Sale of assets - purchase price, allocation, taxation, bulk sales laws, corporate liquidation Reorganization- mergers
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Acquisition Issues
Purchase price Purchase terms Financing Allocation of acquisition price Taxation issues Default issues and return of business considerations Brokerage fees Reasons for buying or selling
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http://www.littlebiztrader.com/due-diligence/

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