Buying a Business: Due Diligence Checklist

What to Consider When Buying a Company

Thinking about buying a business? It can be a great idea if you do your homework. Buying a business is huge decision and requires a lot of analysis of the business, it’s documents, it’s real estate, it’s relationships, and it’s finances. There are many advantages to buying and already existing business; you are buying an established relationship with customers and suppliers, and your operations can begin right away.

There are also some disadvantages of purchasing a business; the cost of purchasing a business is going to sometimes be higher than building your own business because you are buying the “goodwill” of the company, and some problems with the business could be hidden until after you have purchased the company.

That is why it is important for any purchaser of a company to do their due diligence. Below are examples of some the information and documents that you should review and collect prior to purchasing a business.

First Priority Items

Some first priority items are going to include organizational records, general financing, accounting information, and other material agreements.

Some of the organizational records that a buyer will need are going to be copies of the businesses charter documents; this includes a copy of the current charter of the company. Some examples of charter documents would be a certificate of incorporation, a shareholders agreement, etc. Additionally, a list of any modifications to that current charter as well as a certificate of good standing issued by the secretary of state are essential.

A buyer will also want to review minutes of the shareholders meetings and of the board of directors for at least the last five years. A buyer will also want evidence of authorizations necessary to rent businesses in foreign jurisdictions, if applicable, as well as any other required filings.

The buyer will also want to be aware of the management of the company; they should get a list of all of the board members of the board of directors, daily management, executive committees or any other committees with terms of office. The information should also include a list of persons who are granted daily management powers and a list of any proxies which would include persons having powers to represent the company.

As for general finance and accounting information, the buyer should get documents evidencing borrowings of the company such as loan and credit agreements, promissory notes, mortgages or lines of credit; any bank letters or agreements confirming lines of credit, any pledges liens or other security interests on any assets of the company, any subsidies, premiums, investment incentives or other grants from national municipal or government authorities; any commitments of the company for the benefit of third parties which would include loans or guarantees and/or security interests.

It is also important to note documents that have evidence of any advances or loans made by the company to its shareholders or directors.

Material Agreements

There will be other material agreements that are going to be essential to deciding whether a buyer will want to purchase a company. Some of those material agreements would include contracts and arrangements between the company and any present or former affiliates including officers or directors.

A buyer will want information on all contracts that last at least one year, or cannot be terminated without penalty, or having a value or requiring the expenditure of at least $10,000. A buyer will also like a list of the top 20 major customers and the top 20 major suppliers of the company, copies of all contracts/forms used by the company as standard service or purchase contracts, all agreements entered into the company through their ordinary course of business, agreements under which any person has registration rights for any securities of the company.

A buyer will also want all insurance policies, casualty, liability, title and workers compensation insurance, as well as all marketing sales, distribution and franchise agreements, and a list of any independent sales persons or distributors. Non-compete agreements and confidentially agreements that the company has entered into, all material supply or requirements contracts to which the company is a party.

A buyer will also want to find copies of agreements of all independent contractor consulting, agent service, purchase marketing, broker advertising contracts to which the company is a party. The company should also be able to provide standard form purchase orders, sales agreements or invoices.

Second Priority Items

Moving on from first priority items, there are some second priority items that any purchaser of a company should review. Those documents include any kind of litigation, employment matters, commercial arrangements, real estate, equipment permits, and intellectual property; as well as federal and local taxes and a number of other miscellaneous items. With regards to litigation, a buyer should get a copy of all pleadings and other documents relating to litigation or arbitration involving the company for the last five years.

For employment matters a buyer will want all applicable collective bargaining agreements, copies of the company’s standard employment contract for each category of employment, copies of bonus, profit sharing, and deferred compensation plans; as well as material employment contracts and standard employment related agreements which include a confidentiality agreement, invention assignment agreements, conflicts of interest, declarations and non-compete agreements.

A buyer should also acquire knowledge of all pending or threatened legal actions that were filed on behalf of employees during the last three years and any significant correspondence with labor and social security authorities for the last three years.