Due diligence of a company is usually performed before the business sale, private equity investment, bank loan funding, etc., In the due diligence process, the financial, legal and compliance aspects of the company are usually reviewed and documented.
Before you go out fundraising it is important to have all the due diligence items organized in folders so that you are not the bottleneck in the event investors express interest and want to dig deeper into the business.
Each of these items should be prepared as part of your due diligence package so you can quickly hand this information over to potential investors without wasting any time:
Business Due Diligence
A business due diligence is usually performed prior to the purchase of a company or investment in a company by the acquirer or investor (“Buyer”). It is the responsibility of the seller of the business or shares (“Seller”) to provide the documents and information necessary for performing a due diligence on the company to the buyer. A due diligence helps the buyer take an informed investment decision and mitigate risks associated with a business purchase transaction. Both parties usually enter into a non-disclosure agreement prior to starting a business due diligence as sensitive financial, operational, legal and regulatory information would be divulged to the buyer during the due diligence process.
1) Due Diligence – Organisation
1.01 Certificate of Incorporation (or equivalent) and all amendments and restatements
1.02 By-laws (or equivalent), as currently in effect
1.03 List of all business names used by or registered for use by the Company
1.04 List of any and all subsidiaries and affiliates of the Company and jurisdiction of formation
1.05 List of all jurisdictions in which the Company owns or leases (either as lessor or lessee) assets or has done so since incorporation
1.06 List of all jurisdictions in which the Company is qualified as a foreign entity, has applied for such qualification or has substantial contacts
1.07 Minutes, including minutes of meetings of the board of directors, board committees or the shareholders (or any equivalents); written consents of any of the foregoing in lieu of a meeting; and all materials distributed to the board, board committees and the shareholders (or any equivalents) at any meeting
1.08 List of any business acquisitions or dispositions made by the Company
1.09 List of all persons who have been or who currently are officers or directors (or equivalent)
2) Due Diligence – Capitalisation and Security holders
2.01 List of Company securities authorised and outstanding that indicates the holders, amounts and classes or series of such securities and copies of securities transfer books and stock ledgers
2.02 Agreements to issue and/or register securities
2.03 Agreements relating to voting of securities, preemptive rights, restrictions on transfers, rights of first refusal and any other grants of rights in respect of the Company’s securities
2.04 All warrants, options or other agreements relating to rights to acquire securities of the Company or requiring the issuance and/or registration of such securities
2.05 All plans and grant or award documents for any stock option, stock bonus, stock purchase or other equity-based compensatory programs for employees, consultants, advisors and/or directors (or equivalent)
2.06 Any agreements with “finders” or which purport to obligate the Company to compensate any person or entity in connection with a financing transaction
2.07 Private placement memoranda, investment letters, questionnaires and other documents relating to any offering of securities of the Company
2.08 Copies, front and back, of all stock certificates and stock powers
2.09 List of any copies of closing binders of each and every prior equity financing (including debt convertible into equity)
3) Due Diligence – Financial Statements and Audits
3.01 Financial statements for the last three years
3.02 Schedule of liabilities (contingent or otherwise) not reflected in the most recent financial statements
3.03 List of any change in accountants and/or auditors since incorporation
3.04 Copies of audit letters from counsel to auditors since incorporation
4) Due Diligence – Taxes
4.01 List of all domestic and foreign jurisdictions in which the Company remits sales, use, income, franchise, property or other taxes
4.02 Tax returns (federal, state and local) of the Company since incorporation
4.03 Reports filed and material correspondence with any and all tax authorities, including the IRS since incorporation
5) Due Diligence – Employees, Salaries and Labour Disputes
5.01 All collective bargaining agreements, employment agreements, offer letters, consulting agreements, severance agreements, non-compete or non-solicit agreements, change-in-control agreements and intellectual property transfer agreements, non-disclosure or confidentiality agreements to which the Company is a party and list of any of the foregoing agreements currently contemplated or about to be entered into by the Company
5.02 Summary of labour disputes, requests for arbitration, organisational proceedings, grievance proceedings and similar matters and history of recent union negotiations
5.03 List of all employees indicating each employee’s division, title, function, industry experience and earnings and whether each such person is an officer and/or director (or equivalent) of the Company
5.04 List of all employees terminated since incorporation and the reason for such termination, and indicate whether each such employee has signed a release (and provide a copy of signed release)
5.05 Termination procedures, policies and a sample termination letter
6) Due Diligence – Employment Policies and Employee Benefits
6.01 All personnel manuals, employee handbooks and documents relating to employment policies and procedures
6.02 Any affirmative action plan(s)
6.03 Policies and practices regarding compensation for all employees not earning a straight salary (i.e., bonuses, commissions, overtime, premium pay, shift differentials, etc.)
6.04 Policies for fringe benefits, perquisites, holidays, vacation and severance pay
6.05 Incentive, bonus, deferred compensation, profit-sharing and nonqualified pension plans
6.06 Employee health and welfare plans, whether insured or self-insured, including most recent Summary Plan Description for each
7) Due Diligence – Financial Commitments
7.01 All indentures, loan and note agreements (whether demand, term, instalment or other) and line of credit arrangements, whether bank loans, industrial revenue bonds, mortgages or other and whether secured or unsecured, and all documents evidencing other material financing arrangements, including sale and leaseback arrangements, instalment purchases, letters of credit, capital and leveraged leases and receivables securitisations
7.02 Summaries of compliance with the instruments described in 7.01 above (including indication of whether defaults are presently anticipated for future periods) and all communications with lenders
7.03 Guarantees for the benefit of or by the Company
7.04 List of loans to or from securityholders, employees, officers, directors (or equivalent) or any of their immediate family members
7.05 Contractual obligations relating to termination of employment
7.06 List of all outstanding indebtedness of the Company detailing amount and effective interest rates of such indebtedness
7.07 Schedule of all liens and encumbrances to which the property and assets of the Company are subject
8) Consents
8.01 List of all material consents required to be obtained by or on behalf of the Company to complete the proposed transaction, specifying the name of the entity or individual from whom consent is required and the agreements under which required and the reason why such consent is required
9) Due Diligence – Permits and Licences; Compliance
9.01 All material permits and licences (including, without limitation, environmental permits and licences) needed by the Company
9.02 Description of any regulatory and compliance issues the Company has faced, currently faces, or anticipates to face
9.03 Information related to potential regulatory or product liability claims or actions that the Company may face
9.04 If applicable, written policies and guidelines regarding protection of personal health information and related privacy policies
10) Due Diligence – Insurance
10.01 All insurance contracts (including director-and-officer liability (or equivalent), automobile, general liability, environmental liability, key person (whether or not owned by the Company) and products liability; list of and summaries of insurance claims, disputes with insurance companies or denials of insurance coverage which are currently pending or have occurred since incorporation; and list of insurance claims paid against occurrence policies
10.02 Workers’ compensation documentation
10.03 Vendor liability endorsements
10.04 List of any time the Company has ever been declined for a policy or of any time an insurance company has declined to provide a key person policy requested by or on behalf of the Company (whether the policy was to be owned by the Company or not.
11) Due Diligence – Litigation
11.01 List of and status of pending and threatened claims, litigation, administrative or other proceedings and governmental investigations involving the Company or, to the extent that they relate to performance of corporate duties (whether for the Company or any third party), any of the directors (or equivalent) or officers or relating to any product manufactured or distributed by the Company and list of counsel presently and previously handling such matters
11.02 List of outstanding judgments or decrees against the Company and, to the extent that they relate to performance of corporate duties, any of the directors (or equivalent) or officers
11.03 List of all consent decrees, settlement agreements, injunctions and similar matters involving the Company and, to the extent that they relate to performance of corporate duties (whether for the Company or any third party), any of the directors (or equivalent) or officers
11.04 List of all pending and threatened claims, litigation, administrative or other proceedings and governmental investigations involving any Key Person (defined to mean any founder, officer or director or key employee of the Company) during the last five years
11.05 List of any and all bankruptcies and licence revocations or suspensions or censures or prohibitions on involvement in the sale or trading of securities or commodities in which any Key Person has been involved if in effect during the last five years
12) Due Diligence – Intellectual Property
12.01 Patents, trademarks, service marks, copyrights, trade names, trade secrets and other intangible assets owned or used by the Company (including domestic or foreign applications, registrations, licences and assignments)
12.02 Opinions relating to patents (including right to use, patentability, blocking patents, infringement and validity) and opinions relating to trademarks (including registrability, infringement and validity) and opinions relating to other intellectual property
12.03 List of all software programs owned by the Company that are (a) used internally by the Company in its business operations or (b) made available by the Company for use by customers
12.04 List of all software programs owned by third parties that are (a) used internally by the Company in its business operations (other than non-custom, mass-marketed software products licensed under a “shrink wrap” agreement) or (b) made available by the Company for use by customers, indicating in each case the owner of and nature of the Company’s right to use such intellectual property
12.05 Licence agreements relating to intellectual property under which the Company is licensor or licensee (including “shrink wrap” software products to the extent related to the products developed by the Company) and list of any obligations to pay or rights to receive royalties.
12.06 Documentation alleging infringement of third-party intellectual property by the Company or relating to alleged or actual third-party infringement of the Company’s intellectual property
12.07 Secrecy, confidentiality, nondisclosure and assignment of inventions agreements with employees, consultants or independent contractors and list of any employees, consultants or independent contractors not covered by such agreements
12.08 Written policies and guidelines distributed to employees regarding protection of proprietary items, technical data, marketing data or confidential information used by the Company in its business operations
12.09 Documentation relating to third-party development and testing of the Company’s products, services and proprietary products and information
12.10 List of any open source or community source code incorporated into any of the Company’s software products or products under development
12.11 List of all liens and encumbrances upon the Company’s intellectual property
13) Due Diligence – Property, Plant and Equipment
13.01 List of all real property currently and formerly owned by the Company
13.02 List of all real property currently and formerly leased to or by the Company
13.03 All leases and subleases regarding real property and material amounts of personal property leased to or by the Company
13.04 All material agreements encumbering real or personal property of the Company, including, without limitation, mortgages, deeds of trust and security agreements
13.05 All material equipment leases involving the Company, including capitalized or financing leases
14) Due Diligence – Environmental Matters
14.01 All notices of violation or enforcement activity relating to any domestic or foreign environmental laws received since incorporation or otherwise unresolved at present
14.02 All “potentially responsible party” notices, Section 104(e) (i.e., 42 U.S.C. §9604(e)) requests or other documents relating to possible liability under CERCLA, on-site or off-site
15) Due Diligence – Other Contracts
15.01 All contracts, agreements or arrangements restricting the nature or geographic scope of the Company’s business
15.02 All contracts, agreements or arrangements between the Company and any officer, director (or equivalent), securityholder or any of their immediate family members
15.03 All contracts, agreements or arrangements between the Company and management or key personnel
15.04 All secrecy, confidentiality and nondisclosure agreements between the Company and employees or third parties and list of any employees not covered by such agreements
15.05 All indemnification contracts, agreements or arrangements for officers and directors (or equivalent)
15.06 All contracts, agreements or arrangements between the Company and any of its subsidiaries or affiliates
15.07 All commission, brokerage and agency contracts, agreements or arrangements to which the Company is a party
15.08 All joint venture, partnership, corporate alliance, collaboration and similar contracts, agreements or arrangements to which the Company is a party
15.09 All executed closing documents relating to any merger, acquisition or disposition by the Company (whether consummated or not)
15.10 All marketing contracts, agreements or arrangements, including sales agent, representative, dealer, distributor, consignment, consultant, pricing and advertising agreements, to which the Company is a party
15.11 All material supply, requirements, purchase or sales contracts, agreements or arrangements to which the Company is a party
15.12 All material licensing and royalty contracts, agreements or arrangements to which the Company is a party
15.13 All government contracts, agreements or arrangements to which the Company is a party
15.14 All contracts, agreements or arrangements relating to the Company’s securities to which the Company is a party, including, without limitation, subordination agreements, standstill agreements, stock option plans, forms of stock option agreements and agreements pursuant to which the Company has agreed to issue or to register securities
15.15 All contracts relating to the operation of the Company’s website
15.16 All other contracts, agreements or arrangements that provide for the aggregate payment or receipt by the Company of $10,000 or more
15.17 All other material contracts, agreements or arrangements
16) Due Diligence – Miscellaneous
16.01 All other documents and information that are significant with respect to any portion of the Company’s business or that should be considered and reviewed by prospective investors in the Company
FAQs
What is due diligence in the context of a company?
Due diligence is a comprehensive investigation or audit of a company before entering into a transaction, such as a merger, acquisition, or investment. It involves examining various aspects of the company to assess its financial health, legal standing, and operational status.
Why is due diligence important?
Due diligence helps identify potential risks, liabilities, and opportunities within a company, allowing stakeholders to make informed decisions before proceeding with a transaction.