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Typical Due Diligence Documents Required for M&A + Checklist

Show Notes Of Podcast

What are due diligence documents?

Due diligence documents are the research and analysis of a company or organization done in preparation for a business transaction (such as a corporate merger or purchase of securities). Due diligence documents typically include the following categories; legal, financial, sales and marketing, and human resources.

When selling your business, there are several advantages to having first-class due diligence documents prepared in advance.

The mere process of putting these documents together will give you a good overview of your own business and where some of its potential weaknesses lie. As long as the business hasn’t been sold, you can work towards strengthening those areas that your due diligence documents suggest might need reinforcing.

On the buyer side, receiving these documents in a timely and orderly fashion speeds up the M&A process, quickly providing reassurance that what’s under the hood checks out with what the company’s marketing documents show. Above all, it’s the best signaling mechanism a company has to show that it’s worth acquiring.

When selling your business, there are several advantages to having first-class due diligence documents prepared in advance.

The mere process of putting these documents together will give you a good overview of your own business and where some of its potential weaknesses lie. As long as the business hasn’t been sold, you can work towards strengthening those areas that your due diligence documents suggest might need reinforcing.

On the buyer side, receiving these documents in a timely and orderly fashion speeds up the M&A process, quickly providing reassurance that what’s under the hood checks out with what the company’s marketing documents show. Above all, it’s the best signaling mechanism a company has to show that it’s worth acquiring.

What are due diligence documents?

Due diligence documents are the research and analysis of a company or organization done in preparation for a business transaction (such as a corporate merger or purchase of securities). Due diligence documents typically include the following categories; legal, financial, sales and marketing, and human resources.

So, which documents should be collected for due diligence?

One of our previous blog articles (Typical Due Diligence Questionnaire) covered this in some depth and is worth reviewing. Looking at the documents required under their headings, the list looks something like the following - with some differences based on the specifics of your business, industry or geography:

1. Legal Due Diligence Documents

  • Shareholder certificate
  • Local/state/federal business licenses
  • Occupational license
  • Building permits
  • Zonal and land use permits
  • Tax registration
  • Power of attorney
  • Previous or outstanding legal cases

2. Financial Due Diligence Documents

  • Up to date tax returns
  • Audited financial statements (at least 3 years)
  • Auditor's correspondence for last five years
  • Copies of all loans and credit agreements
  • Details of company investments (bonds, marketable securities, etc.)
  • Capital structure
  • Projections, capital budgets, and strategic plans
  • Up to date tax and pension liabilities
  • Details on when contracts and leases are renewed and whether the terms change
  • Details of stockholders (percentage holdings, voting rights, etc.)
  • Foreign exchange reserves
  • List of unrecorded liabilities
  • List of collateral for debt
  • Details of owner withdrawals (if any)
  • Revenue by client (if possible)
  • Gross margins analysis
  • Fixed/variable expenses analysis
  • List of non-operational expenses
  • General ledger

3. Sales and Marketing Due Diligence Documents

  • Detailed overview of sales and marketing strategy
  • Marketing/sales coordination protocols
  • Revenue listed by customer
  • Exhibit relationship between marketing expense and revenue growth
  • Details of existing sales contracts (and when they expire)
  • List of top 10 suppliers
  • Sales reports by category of product or service
  • Details of credit terms with customers
  • Current market share (if possible)
  • Percentage of sales owing to each sales channel (e.g. online, offline, direct sales, etc.)

4. Human Resources Due Diligence Documents

  • Provide a list of current employees and independent contractors
  • Employee rules of conduct handbook and safety policies
  • Detail past employee disputes (if any)
  • Detail employee and independent contractor terms of employment
  • Detail updated employee resumes
  • Outline policy of working with labor union (if any)
  • Outline training conducted with existing employees
  • Worker's compensation/unemployment claims history
  • Outline policy of bonuses, incentives, commissions and deferred commissions
  • Detail policies for sick days, paid holidays, paid vacations and overtime pay

5. Property, Plant, and Equipment Due Diligence Documents

  • Equipment
  • Real estate
  • Technology
  • Inventory

6. Contract Due Diligence Documents

  • Customer contracts
  • Supplier contracts
  • Joint venture/partnership agreements
  • Settlement agreements
  • Franchising agreements
  • Accounts receivable schedule
  • Accounts payable schedule
  • Equipment leases
  • Non-compete agreements
  • Employee contacts
  • Loans, credits, and guaranties agreements

7. Intellectual Property Due Diligence Documents

  • Trade secrets
  • IP claims and litigation
  • Domain names
  • Issued patents
  • Patent applications
  • Design patents
  • Design patent applications
  • Industrial designs
  • Industrial design applications
  • Liens on intellectual property
  • Copyrights
  • Licenses
  • Licensing agreements
  • Trademarks
  • Agreements/documents regarding ownership and rights of use of advertising copy, trade-marks, logos, and slogans

8. Company's Good Standing and Organization Due Diligence Documents

  • Organizational Chart
  • Shareholders/percentages owned
  • Voting trusts, subscriptions, calls, puts, options, and convertible securities agreements
  • State of incorporation status reports for the last three years
  • Assumed names
  • Company minutes book
  • Company bylaws and amendments
  • List of the states and countries where the company has employees, owns assets, leases assets, and does business
  • The Articles of Incorporation/amendments.
  • Annual reports for the last three years.
  • A Certificate of Good Standing from each Secretary of State where the company conducts business

How to Find a Complete Due Diligence Checklist for Your Deal

Every deal is different, therefor no two due diligence checklists will be identical. The above list is just a general guideline of some materials collected during due diligence. For your own process, check with your team if you have conducting similar deals in the past to begin your checklist.

For example one deal may need the following categories - administrative, financial, asset, human resources, environmental, intellectual property, taxes, and legal.

due diligence checklists

How to collect due diligence documents

What emerges from bringing together all of the documents outlined above is a true understanding of your business and what’s ‘under the hood.’ Many of the documents will be partially or fully available straight away (for example, details of your employees and their training to date) while others, such as the audited financial statements, will by their very nature, take longer to put together.

If your company has high quality CRM, ERP or BI systems, they can be used to bring together all kinds of useful data used in due diligence. The feedback provided by these systems also gives reassurance to potential buyers that there’s no human error in the data they’ve received. Furthermore, as we never tire of mentioning, information on your firm is as useful to you as it is to a buyer of a firm, and should be analyzed on an ongoing basis in any case.

Collecting the due diligence documents should be done in a systematic manner that allows you to see where documents can be obtained, whether more should be added, progress reports on their collection and more. We suggest putting together a list in a table format structured similarly to the one provided below:

due diligence documents

Keeping structured records like this in a spreadsheet also allows you to filter for results faster when buyers ask for documents. Whatever headings you opt for, the ‘last updated’ column is particularly important, allowing you to see at a glance when due diligence documents were last updated and thus, how likely they are to be relevant.

When should due diligence documents be provided to the buyer?

Keeping thorough and updated due diligence documents allows you to get relevant information over to the buyer of your business efficiently and with as little friction as possible. But the question then arises:

  • When should due diligence documents be provided to the buyer?
  • Can this be done too quickly?

Absolutely. Unfortunately, the world of M&A is full of tire kickers who enjoy finding out about businesses simply to see what’s out there. Asking you for due diligence documents rarely costs them anything (hence the reason why some bankers push for charging buyers for due diligence).

The best policy is to begin by providing audited financial statements - a great signaling device for any owner looking to sell their business that their ship is in order - and send over documents as they’re requested by the buyer, who should have signed an NDA in advance. The more buyers you speak to, the more likely it is that you’ll be able to anticipate what documents they’re looking for in advance, making the process even more efficient.

How to collect & share due diligence documents easily

You can use DealRoom to efficiently collect due diligence documents.

You can download one of DealRoom's free M&A templates, or upload their own template, into the room. From there, you and your team can create due diligence requests that correspond with every document you need to collect. For more information about how to use DealRoom for this process, check out DealRoom for due diligence.

due diligence software

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When selling your business, there are several advantages to having first-class due diligence documents prepared in advance.

The mere process of putting these documents together will give you a good overview of your own business and where some of its potential weaknesses lie. As long as the business hasn’t been sold, you can work towards strengthening those areas that your due diligence documents suggest might need reinforcing.

On the buyer side, receiving these documents in a timely and orderly fashion speeds up the M&A process, quickly providing reassurance that what’s under the hood checks out with what the company’s marketing documents show. Above all, it’s the best signaling mechanism a company has to show that it’s worth acquiring.

What are due diligence documents?

Due diligence documents are the research and analysis of a company or organization done in preparation for a business transaction (such as a corporate merger or purchase of securities). Due diligence documents typically include the following categories; legal, financial, sales and marketing, and human resources.

So, which documents should be collected for due diligence?

One of our previous blog articles (Typical Due Diligence Questionnaire) covered this in some depth and is worth reviewing. Looking at the documents required under their headings, the list looks something like the following - with some differences based on the specifics of your business, industry or geography:

1. Legal Due Diligence Documents

  • Shareholder certificate
  • Local/state/federal business licenses
  • Occupational license
  • Building permits
  • Zonal and land use permits
  • Tax registration
  • Power of attorney
  • Previous or outstanding legal cases

2. Financial Due Diligence Documents

  • Up to date tax returns
  • Audited financial statements (at least 3 years)
  • Auditor's correspondence for last five years
  • Copies of all loans and credit agreements
  • Details of company investments (bonds, marketable securities, etc.)
  • Capital structure
  • Projections, capital budgets, and strategic plans
  • Up to date tax and pension liabilities
  • Details on when contracts and leases are renewed and whether the terms change
  • Details of stockholders (percentage holdings, voting rights, etc.)
  • Foreign exchange reserves
  • List of unrecorded liabilities
  • List of collateral for debt
  • Details of owner withdrawals (if any)
  • Revenue by client (if possible)
  • Gross margins analysis
  • Fixed/variable expenses analysis
  • List of non-operational expenses
  • General ledger

3. Sales and Marketing Due Diligence Documents

  • Detailed overview of sales and marketing strategy
  • Marketing/sales coordination protocols
  • Revenue listed by customer
  • Exhibit relationship between marketing expense and revenue growth
  • Details of existing sales contracts (and when they expire)
  • List of top 10 suppliers
  • Sales reports by category of product or service
  • Details of credit terms with customers
  • Current market share (if possible)
  • Percentage of sales owing to each sales channel (e.g. online, offline, direct sales, etc.)

4. Human Resources Due Diligence Documents

  • Provide a list of current employees and independent contractors
  • Employee rules of conduct handbook and safety policies
  • Detail past employee disputes (if any)
  • Detail employee and independent contractor terms of employment
  • Detail updated employee resumes
  • Outline policy of working with labor union (if any)
  • Outline training conducted with existing employees
  • Worker's compensation/unemployment claims history
  • Outline policy of bonuses, incentives, commissions and deferred commissions
  • Detail policies for sick days, paid holidays, paid vacations and overtime pay

5. Property, Plant, and Equipment Due Diligence Documents

  • Equipment
  • Real estate
  • Technology
  • Inventory

6. Contract Due Diligence Documents

  • Customer contracts
  • Supplier contracts
  • Joint venture/partnership agreements
  • Settlement agreements
  • Franchising agreements
  • Accounts receivable schedule
  • Accounts payable schedule
  • Equipment leases
  • Non-compete agreements
  • Employee contacts
  • Loans, credits, and guaranties agreements

7. Intellectual Property Due Diligence Documents

  • Trade secrets
  • IP claims and litigation
  • Domain names
  • Issued patents
  • Patent applications
  • Design patents
  • Design patent applications
  • Industrial designs
  • Industrial design applications
  • Liens on intellectual property
  • Copyrights
  • Licenses
  • Licensing agreements
  • Trademarks
  • Agreements/documents regarding ownership and rights of use of advertising copy, trade-marks, logos, and slogans

8. Company's Good Standing and Organization Due Diligence Documents

  • Organizational Chart
  • Shareholders/percentages owned
  • Voting trusts, subscriptions, calls, puts, options, and convertible securities agreements
  • State of incorporation status reports for the last three years
  • Assumed names
  • Company minutes book
  • Company bylaws and amendments
  • List of the states and countries where the company has employees, owns assets, leases assets, and does business
  • The Articles of Incorporation/amendments.
  • Annual reports for the last three years.
  • A Certificate of Good Standing from each Secretary of State where the company conducts business

How to Find a Complete Due Diligence Checklist for Your Deal

Every deal is different, therefor no two due diligence checklists will be identical. The above list is just a general guideline of some materials collected during due diligence. For your own process, check with your team if you have conducting similar deals in the past to begin your checklist.

For example one deal may need the following categories - administrative, financial, asset, human resources, environmental, intellectual property, taxes, and legal.

due diligence checklists

How to collect due diligence documents

What emerges from bringing together all of the documents outlined above is a true understanding of your business and what’s ‘under the hood.’ Many of the documents will be partially or fully available straight away (for example, details of your employees and their training to date) while others, such as the audited financial statements, will by their very nature, take longer to put together.

If your company has high quality CRM, ERP or BI systems, they can be used to bring together all kinds of useful data used in due diligence. The feedback provided by these systems also gives reassurance to potential buyers that there’s no human error in the data they’ve received. Furthermore, as we never tire of mentioning, information on your firm is as useful to you as it is to a buyer of a firm, and should be analyzed on an ongoing basis in any case.

Collecting the due diligence documents should be done in a systematic manner that allows you to see where documents can be obtained, whether more should be added, progress reports on their collection and more. We suggest putting together a list in a table format structured similarly to the one provided below:

due diligence documents

Keeping structured records like this in a spreadsheet also allows you to filter for results faster when buyers ask for documents. Whatever headings you opt for, the ‘last updated’ column is particularly important, allowing you to see at a glance when due diligence documents were last updated and thus, how likely they are to be relevant.

When should due diligence documents be provided to the buyer?

Keeping thorough and updated due diligence documents allows you to get relevant information over to the buyer of your business efficiently and with as little friction as possible. But the question then arises:

  • When should due diligence documents be provided to the buyer?
  • Can this be done too quickly?

Absolutely. Unfortunately, the world of M&A is full of tire kickers who enjoy finding out about businesses simply to see what’s out there. Asking you for due diligence documents rarely costs them anything (hence the reason why some bankers push for charging buyers for due diligence).

The best policy is to begin by providing audited financial statements - a great signaling device for any owner looking to sell their business that their ship is in order - and send over documents as they’re requested by the buyer, who should have signed an NDA in advance. The more buyers you speak to, the more likely it is that you’ll be able to anticipate what documents they’re looking for in advance, making the process even more efficient.

How to collect & share due diligence documents easily

You can use DealRoom to efficiently collect due diligence documents.

You can download one of DealRoom's free M&A templates, or upload their own template, into the room. From there, you and your team can create due diligence requests that correspond with every document you need to collect. For more information about how to use DealRoom for this process, check out DealRoom for due diligence.

due diligence software

What is DealRoom?

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