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Mergers & Acquisitions · May 3, 2021 · by Roy Banerjee

2021 Due Diligence Checklist for M&A

› Mergers & Acquisitions › 2021 Due Diligence Checklist for M&A

book that has due diligence checklist sitting on counterWhen making a business acquisition, the importance of due diligence cannot be overstated. In the year 2021, M&A activity will likely be high due to the distressed businesses affected by the COVID pandemic. Already, there are signs that investors are seeking to capitalize on opportunities presented by struggling businesses. Proper due diligence will be more critical than ever.

Importance Of The Due Diligence Process

Due diligence is vital to ensuring that a business’s decision to go through with an acquisition (or not) is based on the best factual information available. Due diligence helps avoid a bad deal by identifying problem areas that would not have known about until after the sale closed.
Yes, the cost of conducting a thorough due diligence can be high, but it is justified compared to the high degree of risk without it. It will help establish the fair value of the business.
The parties can negotiate who bears the expense, but all parties should expect to pay for their own teams of experts composed of professionals who have experience performing due diligence.
Buyers usually perform due diligence, but it’s a good idea for sellers to conduct their due diligence before offering the company up for sale to both identify deficiencies that may be corrected, and be prepared to respond to questions raised by the buyer.

Checklist For Due Diligence In 2021

When performing due diligence, use a good checklist to help conduct it comprehensively. Many detailed lists are available, but an experienced team of experts can provide one that is up to date based on current laws and tailored to the investment or business to be acquired.
Generally, the items to examine are documents and information in the following categories and associated business operations:

Corporate Organization and Management

  • Articles of Incorporation, bylaws, and all amendments.
  • Minute book, including all minutes and resolutions of shareholders, directors, executive committees, and other governing groups.
  • Organizational chart.
  • Certificate of Good Standing from the Secretary of State.
  • Active status reports in the state of incorporation for the last three years.
  • List of all states, provinces, or countries where the Company owns or leases property, maintains employees or conducts business.

Securities Ownership and Shareholder Information

Due Diligence Checklist checking things off of a list

  • List of shareholders and number of shares held by each.
  • Agreements relating to options, voting trusts, warrants, puts, calls, subscriptions, and convertible securities.

Taxation

  • Federal, state, local, and foreign income tax returns for the last three years.
  • States sales tax returns for the last three years.
  • Audit and revenue agency reports.
  • Tax settlement documents for the last three years.
  • Employment tax filings for three years.
  • Excise tax filings for three years.
  • Tax liens.

Financial Matters

  • Audited financial statements for three years, together with Auditor’s Reports.
  • Most recent unaudited statements, with comparable statements.
  • Auditor’s letters and replies for the past five years.
  • Credit report.
  • Any projections, capital budgets and strategic plans.
  • Analyst reports.
  • Schedule of all indebtedness and contingent liabilities.
  • Schedule of inventory.
  • Schedule of accounts receivable.
  • Schedule of accounts payable.
  • Description of depreciation and amortization methods and changes in accounting methods over the past five years.
  • Any analysis of fixed and variable expenses.
  • Any analysis of gross margins.
  • General ledger.
  • Internal control procedures.

Environmental

  • Environmental audits, if any, for each property leased.
  • Listing of hazardous substances used in the company’s operations and disposal methods.
  • Environmental permits and licenses.
  • All correspondence, notices and files related to EPA, state, or local environmental regulatory agencies.
  • Description of any environmental litigation or investigations.
  • Description of any known superfund exposure.
  • Description of any contingent environmental liabilities or continuing indemnification obligations.

Intellectual Property

  • Schedule of domestic and foreign patents and patent applications.
  • Schedule of copyrights, trademarks and trade names.
  • Methods used to protect trade secrets and know-how.
  • Consulting agreements, agreements regarding inventions, licenses or assignments of intellectual property.
  • Any patent clearance documents.
  • Schedule and summary of any claims or threatened claims regarding intellectual property.

Information Technology, Privacy and Cybersecurity

  • Licensing agreements.
  • Privacy policies.
  • Cybersecurity policies and information.

Human Resources

  • List of employees including positions, current salaries, salaries and bonuses paid
    during last three years, and years of service.
  • All employment, consulting, nondisclosure, non-solicitation or non-competition
    agreements with any of its employees.
  • Resumes of key employees.
  • HR handbook.
  • Schedule of all employee benefits and holiday, vacation, and sick leave policies.
  • Descriptions of qualified and non-qualified retirement plans.
  • Collective bargaining agreements, if any.
  • Description of employee disputes within the last three years, including alleged wrongful termination, harassment, and discrimination.
  • Description of any labor disputes, requests for arbitration, or grievance procedures currently pending or settled within the last three years.
  • Description of benefits of all employee health insurance benefits or self-funded arrangements.
  • Description of worker’s compensation claims history.
  • Description of unemployment insurance claims history.
  • Employee stock option and purchase plans.

Products and Services, Marketing Strategy and Competition

  • All existing products or services and products or services under development.
  • All correspondence and reports related to any regulatory approvals or disapprovals of any products or services.
  • Summary of all complaints or warranty claims.
  • Summary of results of all tests, evaluations, studies, surveys, and other data regarding existing products or services and products or services under development.
  • Information about the largest customers and any lost within the last three years.
  • News articles and press releases relating to the Company within the past three years.

Regulatory Compliance

  • Government-issued licenses, permits or consents.
  • Correspondence or documents relating to any proceedings of any regulatory
    agency

Assets, Leases and Material Contracts

person doing their due diligence checklist with magnifying glass

  • Schedule of fixed assets and real estate.
  • Real estate leases, deeds, mortgages, title policies, surveys, zoning approvals, variances or use permits.
  • U.C.C. filings.
  • Leases of equipment.
  • Schedule of sales and purchases of major capital equipment during last three
    years.
  • Schedule of subsidiary, partnership, or joint venture relationships and obligations, and all related agreements.
  • Contracts between the Company and any officers, directors, 5-percent shareholders or affiliates.
  • Loan agreements, bank financing arrangements, line of credit, or promissory notes.
  • Security agreements, mortgages, indentures, collateral pledges, and similar agreements.
  • All guaranties.
  • Installment sale agreements.
  • Distribution agreements, sales representative agreements, marketing agreements, and supply agreements.
  • Letters of intent, contracts, and closing transcripts from any mergers, acquisitions, or divestitures within last five years.
  • Options and stock purchase agreements involving interests in other companies.
  • Standard quote, purchase order, invoice and warranty forms.
  • Nondisclosure or noncompetition agreements.
  • All other material contracts.

Legal

  • Schedule of all pending litigation.
  • Description of any threatened litigation.
  • Insurance policies.
  • Injunctions, consent decrees, or settlements.
  • Schedule of unsatisfied judgments.
  • Schedule of all law firms, accounting firms, consulting firms, and similar professionals engaged during the past five years.

Updates to Information for Due Diligence Projects Underway Since COVID-19

  • If your company has received information from a seller as part of your due diligence process but you have not yet closed, you should seek to have all of the information updated to reflect the impact of COVID-19 on the business.

Contact the M&A Specialists at KPPB LAW

Due diligence checklists are widely available on the internet, but they are not one-size-fits-all. Though they all cover some of the essential information about a company’s operations, checklists should be tailored to ensure that all of the information needed to make an informed business decision is covered. For that, businesses should contact the M&A experts at KPPB LAW. They will help identify any overlooked areas and ensure that all business aspects are considered. Contact them for more information.

If you are considering litigation related to a contract dispute, consider the value range of your matter with the investment of engaging an attorney to be sure your legal action makes fiscal and business sense.

Filed Under: Mergers & Acquisitions

Roy Banerjee profile picture
Roy Banerjee

Roy Banerjee helps defend, settle and pursue claims to protect your business interests. He is an accomplished business litigator who specializes in efficient resolution of real estate and business matters.

Legal Disclaimer*

Articles published by KPPB LAW are purely for educational purposes and provide generalized information of the topic(s) covered. These articles should not be considered as legal advice.

Please contact the attorneys at KPPB LAW for more information regarding your case.

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