Selling a Business Due Diligence Checklist

Legal Issues

• Review all business licenses, contracts and agreements
• Review settled, pending and potential litigation
• Review the company's rules, regulations and compliance plans
• Look over budget reports and business plans
• Verify that the seller has obtained all of the necessary business permits and licenses

Assets

• Review the complete documentation of the company's current and fixed assets from the past five years
• Review all accounting records, including income, balance and cash flow statements
• Verify the accuracy of all financial statements
• Obtain a list of all business plants, property and equipment
• Review stock plans and agreements
• Check the validity of accounts receivable
• Verify the validity of all intellectual properties
• Review past, current and potential copyright / infringement claims
  
• Evaluate the efficiency of information security and technology systems
  

Property

• Review the full terms and conditions of property usage
• Obtain and review property leases
• Collect information on company’s COBRA.
• Conduct an inspection of all lands and properties
• Prepare an environmental audit of the business land and property
• Make inspections of electrical, structural, mechanical and plumbing systems of buildings
• Evaluate the cost and efficiency of warehouse and production facilities in meeting customer demands
• Determine the level of competitiveness with similar facilities
• Inquire into plans for opening or closing facilities

Suppliers / Manufacturing

• Discuss current and potential contracts with suppliers
• Discuss current and potential contracts with manufacturers
• Determine the storage sites of raw materials
• Determine the methods of disposal for hazardous and non-hazardous waste
• Review the compliance plans with local, state and national environmental laws
• Determine the level of compliance with import / export laws
• Discuss current and potential contracts with suppliers
• Discuss current and potential contracts with manufacturers

Products / Inventory

• Examine all products based on age, condition, design and functions
• Review product plans currently in development
• Review product warranties
• Arrange to purchase the seller's closing inventory item by item
• Conduct a physical audit of closing inventory

Liabilities

• Verify that the seller has filed all tax returns and paid all past and current taxes
• Review tax returns, audits, liens and disputes from the past five years
• Evaluate current and future changes in tax laws
• Determine current and future tax liabilities
• Obtain a list of past and existing creditors with the names, dates, interest charges, total amounts borrowed and due
• Review all loan and credit agreements
• Review active insurance contracts and policies
• Evaluate past, current and potential insurance claims

Sales and marketing

• Evaluate the level of competition with local, statewide and national competitors
• Evaluate future research and development plans
• Evaluate future industry growth and evolving marketplace trends
• Review fluctuations in interest, inflation and economic growth
• Review customer relationship management policies, such warranties, cancellation agreements, etc
• Review sales contract and agreement forms
• Evaluate the efficiency of the sales and marketing professionals
• Determine the sales reports of all products and services

Management

• Obtain a list of all managers / supervisors
• Evaluate their positions and levels of experience within the company
• Check all business transactions between managers and third parties for fairness and accuracy

Human resources

• Obtain a list of current employees and/or independent contractors
• Obtain employee rules of conduct handbooks and safety policies
• Determine which employees should stay with the company
• Review past employee disputes and future problems
• Review employee and/or independent contractor agreements
• Review employee health insurance and retirement plans
• Obtain a list of employee grievances and complaints
• Evaluate policies about labor unions
• Check for pending labor disputes or lawsuits
• Review workplace accidents and/or worker's compensation claims in the past five years
• Obtain documents and/or videos of new hire orientation and training sessions
• Review policies about sick days, paid holidays, paid vacations and overtime pay
• Review policies about bonuses, incentives, commissions and deferred compensation
• Evaluate emergency training and recovery plans

Sale of business

• Review conditions precedent to buyer's obligations
• Review conditions precedent to seller's obligations
• Arrange the transfer of ownership of all assets and documentation to buyer
• Create and review validity of Business of Sale Assets agreement with seller
• Review that all terms and conditions are met in agreement
• Verify consent of all third parties involved in the agreement
• Verify that tangible assets are insured and in good working condition
• Verify that the seller is not violating the law or has any pending lawsuits
• Make payments for the purchases of assets
• Verify receipt of assets and documentation at closing of sale

Legal documents

• Business lease
  
• Business plan
• Privacy policy
• Terms and conditions agreement
• Buy-sell agreement
• Power of attorney

Permits and Licenses 

• Local / state / federal business licenses
  
  • Occupational license
    
  • Liquor license
    
• Building permits
• Zoning and land use permits
• Tax registration
• Buy-sell agreement
• Power of attorney

Sale of business

• Business purchase agreement
• Joint venture or partnership agreement
• Assignment of partnership agreement
• Trademark assignment agreement

Accounting records

• Balance sheets - reports on a company's assets, liabilities, and owner’s equity at a given point in time
  • Tangible assets
    • Current assets: Items that are consumed or converted into cash by the end of a regular operating cycle
      • Cash and equivalencies
      • Currencies, cash accounts, cash advances, negotiable instruments, short-term trade investments
      • Supplies
      • Purchase orders
      • Inventory
      • Manufacturing and supply agreements
      • Accounts receivable
      • Prepaid liabilities
      • Marketable securities
      • Stocks
      • Bonds
    • Fixed or long-term assets: Assets that cannot be easily converted into cash
      • Land
      • Real estate / Property
        • Deeds
        • Construction contract agreement
        • Property management agreements
        • Manufacturing and supply agreements
        • Property inspection reports
      • Equipment
        • Computers, machinery
          • Purchase receipts / Bills of sale
          • Leases
        • Furniture
        • Vehicles
          • Car bill of sale
          • Titles
      • Marketable securities
      • Stocks
      • Bonds
  • Intangible assets: Nonphysical items of value
    • Goodwill
    • Intellectual property - Licensing agreements
      • Brand
      • Patients
      • Copyrights
      • Trademarks
      • Trade names
      • Websites/blogs
      • Software/computer programs

• Current liabilities: Short-term obligations held for one fiscal year or operating cycle
  • Wages / salaries
  • Taxes
    • Tax returns
  • Accounts payable
  • Unearned revenue
• Fixed or long-term liabilities: Long-term obligations held for longer than one year
  • Leases
  • Stocks and bonds
    • Stock certificates
    • Stock purchase agreements
  • Loans
  • Mortgages
  • Pensions
  • Notes payable
  • Product warranties

• Equity statements: A statement of changes in equity
  • Profits or expenses for the year
  • Owner's investments
  • Owner's withdrawals
  • Other comprehensive income
  • Retained earnings
  • Treasury shares
  • Purchases of shares
  • Foreign exchange reserves

• Income statements: Overview of the company's income, profits and expenses during an operating cycle
• Bank statements: Statements of checking and savings accounts at banks
• Cash flow statements: Overview of changes in the company's cash flow
• Cash flow from operations
  • Raw materials
  • Merchandise purchases
  • Inventory
  • Advertising
  • Shipping
  • Interest payments
• Cash flow from investing
  • Sales or purchases of various assets
  • Purchase orders
  • Loans
  • Loan agreements
  • Promissory notes
  • Mergers and acquisitions payments
• Cash flow from financing
  • Dividends
  • Sale or repurchase of shares

• Profits
  • Sales invoices
  • Sales reports
• Expenses
  • Costs of goods sold
  • Labor
  • Materials
  • Overhead costs
  • Selling expenses
    • Salaries and commissions
    • Advertising expenses
    • Shipping expenses
    • Depreciation of sales equipment and buildings
  • General and administrative expenses
    • Professionals' salaries
    • Legal expenses
    • Rent and utilities
      • Rental agreements
    • Supplies
    • Insurance
      • Insurance contracts and policies
  • Depreciation of workplace equipment and buildings
    • Depreciation expenses
  • Research and development expenses

• Other profits: Additional revenue gained from secondary business activities
• Other expenses: Additional expenses accrued from secondary business activities
• Finance costs: Costs of doing business with creditors
  • Interest expenses
• Income tax expenses:
  • Current taxes payable
  • Deferred taxes payable
• Discontinued operations: Fixed assets held for sale but not consumed by the business
• Annual reports: Yearly reports of the company's activities and progress
• Audit reports
  • Internal audits
  • Inspections
  • Financial forecasts
  • Due diligence
  • Environmental audits
  • Information security audits
  • Fraud audits
  • Audit of financial statements
• Human Resources
  • Employment contract
  • Non-disclosure/confidentiality agreements
  • Non-compete agreements
  • Independent contractor agreement
  • Leave of absence agreement
  • Benefits plans
  • Retirement / 401(k) plans
  • Bonus / incentive agreements

Can I change requests in this checklist or add new ones?

Does this questionnaire provide all the necessary due diligence information?