Sell-Side Due Diligence Checklist

Our Sell-Side Due Diligence checklist provides you with all the necessary tasks and information to effectively carry out due diligence and satisfy the average buyer.

Sell-Side Due Diligence

Sell-side due diligence during a company acquisition has become about more than just responding to a buyer’s due diligence checklist. Effective due diligence by the seller involves proactively seeking out and readying the most commonly requested types of information. It also requires that a seller be ready to answer a buyer’s most likely and common concerns and questions.

Read on below to find out what you’ll need to prepare in order to satisfy the average, diligent buyer.

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Sell-Side Due Diligence

Sell-side due diligence during a company acquisition has become about more than just responding to a buyer’s due diligence checklist. Effective due diligence by the seller involves proactively seeking out and readying the most commonly requested types of information. It also requires that a seller be ready to answer a buyer’s most likely and common concerns and questions.

Read on below to find out what you’ll need to prepare in order to satisfy the average, diligent buyer.

Sell-Side Due Diligence Checklist

Our Sell-Side Due Diligence checklist provides you with all the necessary tasks and information to effectively carry out due diligence and satisfy the average buyer.

Download Template
Start Due Diligence With DealRoom
Start Integration With DealRoom

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Sell-Side Due Diligence

Sell-side due diligence during a company acquisition has become about more than just responding to a buyer’s due diligence checklist. Effective due diligence by the seller involves proactively seeking out and readying the most commonly requested types of information. It also requires that a seller be ready to answer a buyer’s most likely and common concerns and questions.

Read on below to find out what you’ll need to prepare in order to satisfy the average, diligent buyer.

What Tasks does the 

Sell-Side Due Diligence Checklist

 Include

Legal

The legal structure of a company is always of primary concern to a buyer. A seller should always know and be prepared to discuss the legal underpinnings of the company being sold.

  • Collect all information about the company’s structure, including: an organizational chart, Governing and constitutional documents of the corporation, a list of jurisdictions in which the business is permitted to do business, minutes of any board, shareholder, and managerial meetings
  • List all related party transactions
  • Include the firm’s policies with respect to related party transactions
  • Compile the CVs for all board members, managers, and vital employees
  • Compile all information about the capital structure of the company that is not included on the Statement of Shareholder Equity
  • Compile a list of all of the firm’s permits, licenses, and authorizations
  • Describe the firm’s compliance policies and provide any related documentation
  • Disclose if any officers or persons holding substantial numbers of shares qualify as Bad Actors
  • Disclose if the firm is currently restricted from doing business under any regulatory or legal provision
  • Collect any communications with a regulatory agency
  • Include a list of all previous product recalls and significant warranty claims

Valuation

More than anything else, a well-supported valuation by a reputable business valuation firm will provide a foundation for your asking price and negotiating position. Try to obtain this reasonably early and make sure that the valuation firm isn’t erring on the fanciful side when it comes to arriving at their final number.

  • Obtain a current, “as-is” valuation of the firm

Tax

Taxation problems arise frequently after acquisitions when the due diligence process has been defective. Additionally, virtually any buyer of a business is going to want detailed information about any outstanding tax information. This includes information about tax policies within the company (with respect to employees and transfer pricing) and to pending tax liabilities owed to the state.

  • Identify any deferred tax liabilities or assets and valuation allowances
  • Outline all transfer pricing policies
  • Outline all tax sharing or allocation agreements
  • Justify and provide a written explanation of the classification of employees and contractors
  • Include all tax audits conducted in recent history (up to five years prior)
  • Include any loss surrenders made in exchange for research and development credits
  • Describe property taxes paid by the firm in recent history (up to five years prior)
  • Describe any overseas activity
  • Describe any sale and leaseback transactions
  • Disclose any matters related to the firm under investigation by any tax authority
  • Disclose the tax base of any asset when it differs from its original cost
  • Explain the firm’s current approach to tax planning and strategy

Current Agreements

All current agreements need to be explained and described in full. This includes not just written agreements, but verbal and “handshake” agreements as well. The purpose of this exercise is to paint for the buyer a clear picture of the firm’s rights and obligations pursuant to all current agreements.

1. Identify all current contract obligations, including:

  • Written contracts
  • Verbal contracts
  • “Handshake agreements”
  • Joint venture or partnership agreements
  • Any contracts terminable upon a change of control of the firm
  • Indemnification agreements
  • All real estate contracts and contracts involving real property or for the insurance thereof
  • Employment, independent contractor, consulting, compensation, and severance agreements

2. Describe all current obligations, including:

  • Assignability
  • Financial terms
  • Length of commitment

3. Identify any contracts to be entered into in the near future, including:

  • Letters of intent
  • Ongoing negotiations

4. Identify any crucial relationships with vendors, distributors, etc.

Accounting

With respect to the firm’s accounting practices, in addition to identifying all of a firm’s procedures and practices with respect to accounting, the firm should describe any way in which their practices diverge from IFRS or GAAP. Importantly, the firm should also identify any accounting adjustments that can legitimately and realistically be used to adjust EBITDA upwards. Since the buyer will be looking for any reason to adjust EBITDA downwards, it makes sense to do the opposite in order to arrive at a fair number.

  • Identify each way in which usual accounting practices differ from Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS)
  • Identify all legitimate opportunities to adjust EBITDA (Earnings Before Interest, Taxes Depreciation, Amortization) upwards (as a purchaser will find any opportunity to adjust it downwards)

Identify accounting procedures used within the firm:

  • Key personnel
  • Software used
  • Bookkeeping practices

Financial

The purpose of financial due diligence is to create a complete and compelling financial story for the buyer. They should be able to understand, based on your due diligence alone, what the past, current, and future financial state of the firm was, is, and is likely to be.

  • Identify and highlight all recent capital expenditures and their likely impact on future cash flows
  • Identify capital expenditures likely to be required in the near future and their likely impact on future cash flows
  • Identify any seasonal or cyclical cash flow trends (in order to avoid under- or over-pricing the business, depending on the time of year)

Describe your sales patterns:

  • Identify your largest and most important clients and products/services
  • Identify any significant sales prospects
  • Identify any significant new products
  • Identify any significant discontinuances or potential losses of clients
  • Collect all complete and current financial statements
  • Specify and list any departures from GAAP and IFRS used during the preparation of the financial statements
  • Collect all budgets and financial projections
  • Include all Management Representation letters and any other communications regarding accounting controls

Information Technology (IT)

Information technology acts as the backbone of many modern companies. A thorough understanding of a firm’s IT capabilities is necessary in order to properly value the company.

Provide details of:

  • Any planned or current IT projects
  • The firm’s practices regarding IT acquisition and deployment
  • The firm’s practices with respect to customer IT support
  • The firm’s practices with respect to web and internet automation

Compile a list of all significant software relied upon by the firm, including:

  • The names of the programs
  • Any vendor support contracts to which the firm is entitled

Compile a list of all essential IT personnel

Compile a list of all essential IT hardware, including:

  • A diagram of all IT infrastructure
  • The location of the hardware
  • A description of the network architecture
  • Detail the annual cost associated with all IT personnel, infrastructure, and software
  • Describe all contracts relevant to the ownership and maintenance of IT
  • List all IT consultants retained in the past, currently, and reasonably expected to be retained in the foreseeable future

List all of the firm’s practices with regard to IT security, including:

  • A description of backups and recovery capability
  • Data privacy policies and practices
  • Data storage and encryption
  • Antivirus and anti-malware capabilities
  • Mobile device security
  • Verification and monitoring of existing IT security

Intellectual Property (IP)

In some industries, intellectual property is the biggest contributor to a firm’s final valuation. Extensive due diligence with respect to IP is essential to ensuring a firm legal and contractual basis for ownership of that resource.

  • Compile a summary of all of the firm’s trademarks, patents, copyrights, and web domains and sites
  • List all agreements and contracts under which the firm is granted the use of a third party’s intellectual property
  • List all agreements and contracts under which a third party is granted the use of the firm’s intellectual property
  • List all intellectual property used by the firm that is not solely owned by the firm
  • Create a summary of all intellectual property litigation involving the firm that is either concluded, ongoing, or reasonably foreseeable
  • List all instances in which a third party has infringed on the firm’s intellectual property (even if it did not result in litigation)
  • Describe the company’s process for developing and protecting its intellectual property

Human Resources

Human resources can hide a multitude of complex issues and problems. Appropriate due diligence is necessary to reveal problematic relationships or employees that might jeopardize the health of the business. Because buyers will want to know about these issues, the seller should be prepared to disclose and discuss them.

  • Include a summary of all employment benefits provided by the firm
  • Detail the firm’s compensation policy, including bonuses, options and pensions
  • List any disciplinary action taken against an employee or grievance filed by an employee

Compile a schedule of employees, including:

  • Headcount
  • Location
  • Whether any are covered by disability legislation
  • Whether any are currently on any form of leave or suspension
  • Include the firm’s employee manuals and policies
  • Explain the firm’s hiring policies and procedures
  • Include a description of any loans made to employees by the firm and their current status

FAQ

What Is Due Diligence?

Due diligence is a critical aspect of any deal that begins very early in the process and can continue right up until closing. During due diligence, the potential buyer asks questions and requests documentation from the seller that helps the buyer understand the target company and its business. These requests are usually general to start and become more specific as the buyer develops a greater understanding of the target. Buyers use the information provided by the seller to evaluate the opportunities and risks associated with the potential transaction. It is important for sellers to stay organized throughout the process. Buyers often submit thorough, detailed request lists that require input from numerous members of the seller’s deal team.

What is a due diligence checklist?

As the name implies, a due diligence request list is a list of questions and requests for information and documentation that a buyer submits to a seller in order to learn about the target company, its business and its operations. The initial diligence request list tends to be broad and typically includes an extensive list of questions covering a wide range of subjects. This allows the buyer to gain a broad understanding of the target company and identify key issues that can be investigated and considered more closely. Because every deal is different, due diligence request lists have to be tailored to meet the needs of the buyer and address the unique circumstances of your transaction.
However, there is a variety of fundamental requests that are relevant in most deals. These are the types of requests that our templates are designed to address.

What Questions Does the Master Due Diligence Questionnaire Include?

As the name implies, a due diligence request list is a list of questions and requests for information and documentation that a buyer submits to a seller in order to learn about the target company, its business and its operations. The initial diligence request list tends to be broad and typically includes an extensive list of questions covering a wide range of subjects. This allows the buyer to gain a broad understanding of the target company and identify key issues that can be investigated and considered more closely. Because every deal is different, due diligence request lists have to be tailored to meet the needs of the buyer and address the unique circumstances of your transaction.
However, there is a variety of fundamental requests that are relevant in most deals. These are the types of requests that our templates are designed to address.

Key considerations when using our m&a due diligence template

Our templates are drafted to provide an inclusive and wide-ranging list of initial due diligence requests. However, the templates, as well as the information contained therein, are not legal advice. They are not complete, and they are not specific to your transaction. The templates are designed to elicit general information from the seller that will provide the buyer with a broad overview of the target and it’s business and operations. You should review any template before using it, and it may need to be modified to ensure that it is suitable and relevant to your circumstances. Information provided by the seller will likely trigger additional questions that focus on specific aspects of the target’s business and issues identified during the due diligence process.

Are the requests in the template comprehensive?

No. Our Due Diligence Checklist is drafted to include typical requests that are relevant in most transactions. However, every deal and every target company is unique. Before utilizing any template, it is important that you review it with the help of your legal and other professional advisors to ensure that the requests are complete and tailored to the specific circumstances of your deal.

How to use the template with Dealroom

  • Start 14-day Free Trial of DealRoom and sign-up
  • Select a Master Due Diligence Template while creating a new room
  • Start assigning, adding to, and completing due diligence requests with needed documents by uploading them into the built-in virtual data room. The Requests tab is automatically populated with the requests from the due diligence template.

Can I change requests in this checklist or add new?

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

Does this questionnaire provide all the necessary integration information?

This checklist was created by and for M&A professionals. It includes a comprehensive starting point for the integration process. However, every deal is different and may require additional requirements and tasks.

How to use this template with DealRoom?

  • Start 14-day Free Trial of DealRoom and sign-up
  • Select an Integration Template while creating a new workspace
  • Start planning, assigning, adding to, and completing integration tasks. The Requests tab is automatically populated with the tasks from the integration template.

Key considerations when using our m&a due diligence template

Our templates are drafted to provide an inclusive and wide-ranging list of initial due diligence requests. However, the templates, as well as the information contained therein, are not legal advice. They are not complete, and they are not specific to your transaction. The templates are designed to elicit general information from the seller that will provide the buyer with a broad overview of the target and it’s business and operations. You should review any template before using it, and it may need to be modified to ensure that it is suitable and relevant to your circumstances. Information provided by the seller will likely trigger additional questions that focus on specific aspects of the target’s business and issues identified during the due diligence process.

Are the requests in the template comprehensive?

No. Our Due Diligence Checklist is drafted to include typical requests that are relevant in most transactions. However, every deal and every target company is unique. Before utilizing any template, it is important that you review it with the help of your legal and other professional advisors to ensure that the requests are complete and tailored to the specific circumstances of your deal.

How to use the template with Dealroom

  • Start 14-day Free Trial of DealRoom and sign-up
  • Select a Master Due Diligence Template while creating a new room
  • Start assigning, adding to, and completing due diligence requests with needed documents by uploading them into the built-in virtual data room. The Requests tab is automatically populated with the requests from the due diligence template.

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