Potential buyers want to know as much as possible about the target company before closing the deal.  The buyer will send the seller a “due diligence request list” detailing what they want to see.  Frequently a new client will send me the due diligence list with a frantic, “We’ve got to get all this stuff to the buyer by the end of the week!”

But sometimes much of that documentation doesn’t even exist.  In these cases, it can take weeks – if not months – to go back and document things that took place years ago.  This can jeopardize the deal because (a) the buyer gets the impression that the business is disorganized, and/or (b) the buyer finds another company to buy, while the seller is scrambling to get its house in order.

The following outline lists some of the main items the buyer will request.  Although not a complete due diligence request list, if most of the information listed is assembled by the time the request is received, the seller will be ahead of the game.

Corporate Records

• The company’s articles of incorporation and any amendments.

• The company’s bylaws and any amendments.

• The names and addresses of all shareholders and number of shares owned by each.

TIP:  You should also have clear documentation of all shares issued, including board authorization, and either the original stock certificates or copies.

•  Minutes of all meetings of the board of directors and shareholders since inception, and any written consents in lieu of meetings.

Financials

• Professional-looking financial statements for at least the last three years. Typically, this will include P&L, balance sheet, and statement of cash flows for the last 3-5 fiscal years, plus interim statements through the end of the most recent quarter.

TIP:  If you don’t have well-organized financial statements, bring in an out-sourced CFO and/or CPA to help you get them in order. 

TIP: Put yourself in the buyer’s shoes. Make sure you have a solid explanation for any questions the financial statements might trigger.

• An accounts receivable report (including aging schedule) and list of accounts payable.

Employees

• A list of all employees and independent contractors, including job titles, length of time with the company, and salaries.

• Any employee-related complaints or claims filed against the company.

Insurance

• A list of all employee benefit programs, including health insurance, pension or retirement plans, life insurance, disability, etc., including copies or documentation of all programs/plans.

• A list of all insurance policies (e.g., E&O, EPLI, cyber, workers comp, general business, key man), including the name of the insurance company, policy number, term and extent of coverage, and annual premium.

Customers, Suppliers, Contracts

• List of all customers/clients, including percentage of sales to each customer/client for the last five years.

• List of major suppliers to the company for the last five years.

• Copies of all major contracts and agreements, including your lease, customer agreements, distributor agreements, sales representative agreements, etc.

TIP:  Review the “assignment” provisions of these contracts and create a list of contracts that require the other party’s consent to an assignment or change of control.

Tax & Compliance Issues

• Copies of all business tax returns for at least the last five years.

• Make sure all tax returns and other reports have been filed and that you are ready to answer any questions they may raise.

• Make sure all governmental permits and licenses required to conduct your business are current.

TIP:  Stay in good-standing with the Franchise Tax Board and Secretary of State.  File your Statement of Information with the Secretary of State every year (biennially if an LLC).  You can check your status at http://kepler.sos.ca.gov/.

• Obtain a Phase 1 environmental site assessment, if there is any possibility of environmental issues. Follow up with a Phase 2, if necessary.  Take steps to resolve any environmental issues now.

TIP:  Be aware that copies of the assessments must be provided to a potential buyer, who will ask for evidence that any issues flagged in the assessment were resolved.

A well-prepared seller is in a much better position to negotiate the terms of the transaction. Avoid the last-minute scramble and get a head start on compiling the information about your company that a qualified buyer will want to review.

This article is not intended and should not be relied upon as legal or tax advice pertaining to any specific matter.  You are encouraged to seek competent legal and tax counsel before proceeding with any transaction involving any of the matters discussed above.