KYC: Due Diligence Checklist for M&A in 2019

This due diligence checklist helps ensure that all relevant information is gathered during an M&A deal. The following aspects of due diligence are needed for a deal that creates value and spurs innovation.

Download Due Diligence Checklist in Excel

To download the full version of the checklists below into an excel format, visit the page below and enter your email and simply click download button.

Download Due Diligence Template

What is a Due Diligence Checklist?

Tackling due diligence during an M&A transaction is an overwhelming task, but essential for closing a successful, equitable and efficient deal. A due diligence checklist incorporates all necessary information a company must acquire from their target before moving forward with a deal.

DealRoom created a mergers and acquisitions due diligence checklist that enables to track the diligence progress and secure important documents. This allows practitioners to make well-informed decisions throughout a deal’s lifecycle.

What Information Should be Collected?

While conducting a deal in any industry, teams must collect accurate, wide-ranging information on the target company. This is the only way to ensure a valuable deal. Potential buyers should collect documents that give insight on the organization’s corporate structure. They also need to collect documents regarding taxes, strategic fit, intellectual property, material assets, contracts, members, litigation.

due diligence information

Due Diligence Checklist for M&A

Legal Due Diligence Checklist

Collecting legal due diligence is a meticulous process. Legal risks are collected and assessed in order to gain insight on a company’s legitimacy and viability. Any and all litigation, permits, licenses, and agreements are considered during this aspect of the diligence process.

Corporate Organization

  • Organizational chart showing the corporate structure of the target, subsidiaries, and affiliates.
  • Joint venture, partnership, and other agreements involving the sharing of profits or technology.
  • Governing documents for the Target, subsidiaries, and affiliates. Include Articles of Incorporation, Articles of Organization, Bylaws, Operating/LLC Agreement, Articles of Association, etc.
  • List of all jurisdictions in which the Target licensed to do business.
  • Information for all board, shareholder, and member meetings.
  • Contracts relating to any material acquisitions, equity divestitures, assets.

Management

  • All related party transactions, including review/approval procedures applicable thereto.
  • Professional biography for each member of the team and any other key employees.
  • Professional biography for each member of the board.

Capital Structure

  • Analysis showing the number of shares outstanding.
  • Documentation evidencing each issuance of private equity.
  • Summary of warrants, convertible notes, and any right entitling the holder to obtain equity.
  • Copy of outstanding debt instruments.
  • Shares owned by each shareholder for the target, branches, and affiliates.

Legal

  • Summary of material litigation.
  • Summary of permits, licenses, and other authorizations including any required export control licenses.
  • Copies of material contracts that are terminable upon a change of control or other corporate transaction.
  • Copies of agreements or instruments that place restrictions or encumbrances on assets.
  • Contracts that restrict the target's right to conduct its business.
  • Contracts with obligations such as covenants and indemnification.
  • Indemnification agreements between the target and any officers, directors or agents thereof.
  • Summary of the target's compliance program and copies of all policies, procedures and other related documentation.
  • Confirm officers, or significant shareholders is subject to any of the Bad Actor disqualifications.
  • Confirm that the firm is not restricted from doing business under OFAC regulations or similar.
  • Confirm whether the target has any direct or indirect presence and/or other engagements.
  • Summary of regulations applicable and/or its business, and anticipated changes
  • Copies of any letters with any regulatory agencies or authorities.
  • Summary of product recalls conducted and all material warranty claims brought.

Real Estate

  • List of the address and description of each property development, office, warehouse or other facility operated or maintained by the target.
  • Summary of deeds with respect to all owned real estate. Include copies of all related title papers, title insurance policies, appraisals and surveys.
  • Lease agreements and agreements related to the purchase or sale of real property.
Download expanded version of Legal Due Diligence Checklist here

Commercial Due Diligence Checklist

This part of due diligence enables the potential acquirer to better understand a company’s commercial soundness and appeal. Commercial diligence gives an assessment on the market and the target company’s potential. This report often includes top customers, competitors and commercial policies.

Suppliers

  • List of the top 15 suppliers for each of the past 3 years.
  • Material supplier and subcontractor contracts.
  • Summary of the policies and procedures produced when evaluating and onboarding any new supplier or contractor.

Marketing

  • Copies of any strategic, marketing, or advertising plans prepared for the target.
  • Summary of anticipated new products and/or product improvements.
  • Copies of all brochures, presentations, sales sheet, and other advertising/marketing materials.
  • Product descriptions for all material products and product lines.
  • Summary of all ongoing RD projects, including an estimated timeline for completion thereof.
  • Summary of all marketing risks and opportunities.

Commercial Policies

  • Copies of policies and procedures related to pricing, credits, returns, warranty claims, etc.

Customers

  • List of the top 25 customers for each of the past 3 years, including revenue.
  • List of customers that have stopped doing business with the company.
  • List of all material sales channel partners for each of the past 3 years, including revenue.
  • Breakdown of sales and gross profits by Product Type; Geography; Sales Channel.
  • Copies of all material customer contracts.
  • Copies of all material contracts that have remaining terms longer than one year.
  • Copies of all contracts with material sales channel partners.
  • Copies of all contracts with government customers.

Financial Due Diligence Checklist

Information concerning finances must also be added to the buyer due diligence checklist. Financial due diligence includes a target company’s revenue, profits, financial assets, and risks. This aspect of due diligence gives potential buyers a clear vision of a company’s market value. It also gives potential buyers a look at the company’s financial stability and growth capacity.

Accounting

  • Financial statements for the target and branches.
  • Description of off-balance sheet/statement of financial position items, liabilities or obligations of any nature.
  • Schedule of any contingent liabilities not disclosed or referred to in the financial statements.
  • Detailed schedule of the components of all prepaid expenses and deposits.
  • Copies of any letters regarding the target’s accounting controls, including all Management Representation Letters.
  • Key accounting policies necessary to the understanding of the financial statements.
  • Material changes to accounting policies adopted.
  • Budgets and operating plans, and financial projections prepared.
  • Unaudited financial statements.

Finance

  • Summary of any cash management controls and practices.
  • Investment policies.
  • Hedging policies, including copies of related contracts or instruments.
  • Report reflecting all aged accounts receivable trial balances for target.
  • Summary of the target’s inventory costing system and other procedures and policies related to inventory.
  • Debts, agreements or arrangements that are expected to result in a loss to the target.
  • Current listing of standby letters of credit, performance bonds, performance guarantees.
  • Copies of recent bank reconciliations and bank statements.

Operations

  • Summary of all material capital expenditure projects.
  • Summary of all capital expenditures planned in the next 12 months.
  • Asset register and/or copy of latest physical inventory of equipment and assets.
  • Schedule of equipment split by capital vs. operating lease.

Insurance

  • Summary of all current insurance coverages and copies of all policy documents related thereto.
  • Summary of claims made against any insurance policy.

Human Resources (HR) Due Diligence Checklist

Mergers and acquisitions combine two unique cultures and workforces in order to create value and innovation. It is important that during diligence, a target company provides substantial information on current employees and policies. This helps teams plan on how to blend the two cultures effectively. A business acquisition due diligence checklist within HR typically unearths employee contracts, agreements and a summary of current recruitment initiatives.

Human Resources Agreements

  • Copies of all employment and severance agreements and indicate those affected by the transaction.
  • Copies of all consulting agreements.
  • Agreements relating to any compensation arrangements.
  • Collective bargaining agreements, non-competition, nondisclosure or similar agreements.
  • Summary of any current recruitment initiatives, including any financial commitments related thereto.

Benefits

  • Summary of all benefits and a copy of the target's compensation policy.
  • Details of bonus or other profit-related schemes and details of beneficiaries/participants.
  • Copies of plan documents for all benefit plans.
  • Summary of incentive stock option plans.
  • Summary of outstanding stock option awards and copies of any award documents related.
  • List and summary of all pension plans.

General HR

  • Summary of litigation against the target brought by any current or former employee.
  • Description of any court judgement or current employment tribunal award in respect of any employee dispute.
  • Details of any disciplinary proceedings taken against an employee or grievance brought by an employee.
  • Summary of any investigations and proceedings by authorities relating to employment matters.
  • Headcount by function and location.
  • Schedule of any employees suspended – including reasons for suspension and salary implications.
  • Schedule of employees.
  • Summary of absence from work due to disability, long-term illness, or otherwise.
  • Schedule of employees covered by any disability legislation.

HR Policies

  • Copies of all employee manuals and policies.
  • Target's hiring practices and policies, including use of background checks, checks of immigration status.
  • Summary of any changes.
  • Schedule of any loans and all sums owed.
Download expanded version of HR Due Diligence Checklist here

Intellectual Property Due Diligence Checklist

Intellectual property is one of the major aspects of a company that is bought or transitioned during an M&A deal. Intellectual property creates immense value to the deal, due diligence checking patents, trademarks, and digital domains is essential to success.

Intellectual Property Registrations

  • Summary of the target’s registered trademarks and patents
  • Schedule of all websites and domains owned.

Intellectual Property Contracts

  • Agreements under which the target is granted the right to use IP owned by a third party.
  • Agreements under which a third party is granted the right to use IP owned.
  • Summary of any IP that is not solely owned by the Target.

Intellectual Property Litigation

  • Summary of any past or current instances where any third party actually or allegedly infringed on the target's IP.
  • Summary of any restrictions to which IP assets of the target are subject.
  • Summary of all IP litigation in which the Target is or has been involved.

Intellectual Property Development

  • Summary of process for generating/developing, recognizing, capturing, and protecting IP assets.

Information Technology Due Diligence Checklist

Completing IT audit gives significant insight into company’s key initiatives and projects.  It includes a detailed description of their main policies, practices, resources and possible security threats. In the digital age, collecting this information is vital to value creation and creating cultural synergy. It is also valuable to have a due diligence checklist when selling a business. This way you can make sure the key IT projects fit well with the potential acquirer’s initiatives.

IT Administration

  • Details of any current and planned IT initiatives/key projects.
  • Summary of key IT resources (hardware/software/people).
  • Policies and practices of the purchase and maintenance of software.
  • Summary of all material software utilized by the target.
  • Policies and practices regarding the purchase and maintenance of IT hardware.
  • Summary of material hardware utilized by the target, including the physical location.
  • Diagram of technical architecture including servers, storage devices, operating systems and databases.  
  • Description of the networking systems and specific hardware configurations.
  • Summary of any vendor support or other support services to which the target is entitled.
  • Summary of annual costs associated with maintenance of IT hardware, including hardware upgrades and replacements.
  • Material contracts related to software and IT services.
  • Summary of services provided by all external IT contractors/consultants.
  • Capacity for growth in the target's current IT environment.
  • Summary of how the target acquired technology and the role of IT/technology in strategic planning
  • Description of the target's support/help desk effectiveness and approach.  
  • Describe the level of automation and web or internet facing applications.

IT Security

  • Detailed summary of the key security protocols.
  • Description of backups and disaster recovery policies and procedures.
  • Detailed description of data privacy policies and procedures.
  • Summary of all personal and/or sensitive information.
  • Target's policies and procedures regarding data storage and data encryption.
  • Summary of any issues, including loss of confidential information, inappropriate or malicious content, etc.
  • Results of stress test analysis, including the resolution of any issues identified.
  • Details about monitoring measures/tests to ensure technical safeguards are working as expected.
  • Summary of any logged security issues.
  • Summary of any anti-virus and anti-malware protections.
  • Policies and procedures utilized by the target to manage mobile device security
  • Description of any cyber attacks/intrusions.
Download expanded version of IT Due Diligence Checklist here

Environmental, Health and Safety (EH&S) Due Diligence Checklist

Whether completing a potential acquirer or an angel investor due diligence checklist, it is important to assess EH&S risks. This allows for environmental conscious M&A discussions. Target companies should provide information about past or present environmental, health or safety liabilities, investigations or citations.

Environmental

  • All environmental investigations, citations, or notices of violation.
  • All litigation in which the target has been involved related to environmental matters.
  • Information related to past or present enforcement actions against any premises owned by the target.
  • All information regarding generation, treatment, storage and disposition of hazardous substances.
  • Summary of any material financial losses.
  • Copies of environmental studies, assessments and surveys in respect of land.
  • Summary of all dedicated reserves for management of environmental liabilities.
  • Copies of any material correspondence with any environmental regulatory agencies.
  • Results of all environmental audits.
  • Risks arising from arrangements for the treatment or disposal of materials, liquids, or gases used by the target.
  • Copies of permits and other governmental approvals relating to environmental matters.
  • Description of any existing ground or underground storage tanks.

Health & Safety

  • All investigations, citations, or notices of violation related to employee health and human services.
  • All emergency response policies and procedures.
  • Summary of all current or past litigation brought against the target by any current or former employee.
  • Results of all health and safety audits, including the resolution of any findings.
  • Accidents within the last 5 years.
  • Summary of all workers' compensation and health care.
  • Copies of all material safety data sheets for materials.  

Tax Due Diligence Checklist

A tax due diligence requirements checklist includes property taxes, tax assets, audits, returns and any overseas activities. Target companies should provide extensive documentation on their tax history to prove their legality, legitimacy, and viability. For an investment due diligence checklist, these tax requirements will indicate a worthy transaction.

Tax Summary

  • Results of all tax audits conducted in the past 5 years.
  • Summary of property taxes paid by the target in the past 5 years.
  • Copies of any tax sharing, tax allocation or related intercompany agreements.
  • Summary of deferred tax assets, valuation allowances and deferred tax liabilities.
  • Summary of policies regarding taxes, including transfer pricing policies and audits.
  • Loss surrenders made in return for R&D tax credits paid by the relevant tax authority.
  • Tax assets, including details of how they are reflected in the statutory accounts.
  • Summary of sale and leaseback transactions.
  • Summary of overseas activities.
  • Tax filing position, including a summary of any matters under investigation by a relevant taxing authority.
  • Details regarding the tax base cost of major assets where their base cost is other than original cost.
  • Summary of tax planning or reorganization involving the target.
  • Summary of previous audits or investigations related to employment taxes by the taxing authority.

Returns

  • Copies of all federal, state and local tax returns.
  • Copies of all communications and agreements between the company and any taxing authority.

FAQ

Can I change requests in this checklist or add new?

Every M&A and due diligence process steps are different. Downloaders are urged to make these checklists their own by changing the providing information to better fit their needs.

Does this checklist provide all the necessary due diligence information?

This due diligence checklist was created by and for M&A professionals and includes a comprehensive starting point for any diligence process. Every deal is different however and may require additional requests or diligence areas.

Easily Collect Data Using this Due Diligence Checklist in DealRoom

Don’t manage your merger and acquisition due diligence checklist using excel. DealRoom is a due diligence management software and virtual data room that allows M&A practitioners to easily upload checklists. DealRoom enables users to import checklists, assign requests, check statuses, and communication on one, centralized platform.

Related articles