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Small Business Due Diligence Checklist

Template for Small Business Due Diligence

Acquiring an existing business can be a very smart, strategic decision for your company since it may enhance the efficiency of doing business or product selling and placement.

Although there can be a few complications as you go through the acquisition process with the target company and get to know its business life.

In some cases, it can even be a very costly mistake if the buyer doesn’t thoroughly check all the business aspects of the targeted small business.

Consequently, it is of great importance to learn as much as possible regarding the small business’s financial statements, legal records, legal procedure, and human resource elements; in addition, other significant aspects of the company’s structure need to be understood and assessed. 

This can only be accomplished by conducting due diligence for buying a small business, and assembling the effective due diligence team.

How to Best Perform Due Diligence?

By the time for conducting due diligence comes, you will probably have already met with the board of directors of the selling side and discussed other acquisition terms.

The only step remaining is the assembly of the due diligence team that is preferred to include an accountant and legal advisor, as well as trustworthy associates that will be reviewing the small business’s items of interest.

After you have gathered your associates for this procedure, you will have to form a checklist for the small business due diligence containing all the necessary documentation and items that prove the target company’s well-standing.

The due diligence process should be done thoroughly by inspecting all the crucial business aspects to be sure that by buying the target small business, you are not making a bad move.

Checklist of Important Items for Review 

Listed below is the complete checklist for buying a small business due diligence:

Financial Information

It is crucial to ensure that your target company has clean financial records, as well as to check the financial flows and budget estimations of the small business you will be buying.

To avoid future financial complications and set-backs, review the following documents and items:

  • Copies of all financial business records for the previous 3 business years 
  • A report on the initial total company value, containing all financial assets, as well as products if the company has an official product for selling 
  • Copies of the bank reports on any existing credits with the total amount left to be paid
  • A description of the internal company’s financial control methods, including the financial control role of the employees 
  • A list of the payable and receivable income and cash flow statements
  • Copies of the company’s balance sheets for foreign and domestic accounts
  • Copies of the reports regarding the tax returns conducted in the previous 3 business years
  • A list of all debts of the company, if applicable, with the exact amount and terms for each 
  • Company’s general income amount accumulated in the last 3 business years
  • General cost amounts of the company listed in the previous 3 business years
  • Copies of the balance sheets providing information regarding the variable and fixed costs of the firm
  • A detailed description of the company’s investment policies and procedures used in the previous 3 business years
  • A list showing all the company’s accounting team members, with their personal information and the accounting methods used by each member
  • Copies of all previously  financial audits, if conducted, containing the information about each financial auditor responsible 

Legal Information

Acquiring the necessary legal information regarding the company that you desire to purchase is another crucial aspect of thoroughly done due diligence for buying a small business.

Specifically, making sure that the company you are targeting has no legal issues and ongoing investigations is very important so that your newly acquired business won’t have any legal operating problems in the beginning of its work.

Here are the most important legal items for review:

  • A list containing all of the previous and ongoing legal issues and litigations that could affect the business of the company, with the description for each litigation
  • A description of all of the company’s legal advisors and representatives including personal information, number of cases won and lost, and an overview of their performance on the legal behalf of the company
  • A list of all of the company’s insurances and methods, with a detailed description of each
  • A  list including all of the necessary licenses and permits that the company must have in order to continue doing  business
  • Licenses and permits regarding product placement rights as well as the selling of the official company’s product
  • Legal confirmation of the company’s official trademark with the necessary information that proves the trademark’s originality 
  • A list of all of the company’s employee insurance policies and acquiring methods for all existing policies in use
  • A list detailing the situations of all previous court processes of the company
  • Legal confirmation of the company’s official patent rights, if the company has any, with detailed information on how the patent is being protected as a company’s property

Organizational and Operational Items

Operational and organizational information should be reviewed so you can accurately assess how well organized the company is, how tasks are divided, and what employee restrictions come into play.

Without having an already well organized firm, you can’t be sure how well the newly acquired firm will perform its business obligations.

Here are the most important operational and organizational items you should review:

  • A copy of the company’s Article of Incorporation with relevant documentation 
  • An organizational chart of the target company 
  • A list of all of the company’s bylaws and amendments
  • Copies of all the necessary business licenses and permits issued by the state attorney of the states where the company is permitted to do business in
  • A list of the company’s partners and business associates and information regarding their shares in the common businesses or target company’s business equipment usage
  • Copies of the relevant documentation including the details regarding current company investors and shareholders
  • A complete list of the business authorizations issued by the state secretary of foreign and domestic states where the company is permitted to do business in
  • A description of protection methods used for securing the official company’s trademark, logo, official websites and domains of the company
  • A list of all products and services offered by the targeted small business including the information regarding product costs and margins
  • Registration details and conditions that the company must have fulfilled for being able to conduct business operations
  • Business compliance programs and information relevant for the business of the company
  • Description of all existing marketing plans

Material and Partnership Contracts

Checking if the company has any joint ventures or partnerships is another essential task; you must understand the nature of those contracts and the company’s business itself.

For these reasons, a detailed review of the material contracts is necessary.

Listed below are the most important items for review of material and partnership contracts:

  • Review if the company has existing loan agreements, credit or lease obligations, with the detailed information on each if your newly acquired business will have to deal with those items in the future
  • A list of all nondisclosure or incomplete agreements that could be inherited to the future business of the company
  • Invoices and warranties of the company’s purchase orders
  • A list of all existing merger and acquisition contracts for review and verification
  • Security agreements that are currently in use in the company 
  • Copies of all worker contracts for revision, containing the directors and manager contracts with all the crucial information
  • Review all stock purchase contracts and agreement details included

Company’s Intellectual and Material Property Items

By inspecting the property details of the target small business you can be sure that there will be no unpleasant surprises when it comes to the ownership of the company’s property.

Be sure to thoroughly check all the information and contract details to ensure there will be no future issues regarding this matter:

  • A list containing information regarding all company’s material property such as business facilities, offices, vehicles and other relevant for business property
  • A list showing number of offices and business equipment under rent or lease, as well as credit information if such an option was chosen for purchasing material property of the company
  • Contract details regarding any credited or under loan material property including details information of the payment methods
  • A complete list of the company’s intellectual property factors such as patents and trademarks including legal protection methods used for securing each of the items 
  • A description of the methods used for dealing with the intellectual property of the firm along with the information of responsible personnel
  • Licenses and permits issued by the state secretary regarding material and intellectual property of the company and its protection

Internal controls and auditor reviews related to material property of the company

Employee and Board of Directors Items

Checking all the employee and manager information of the firm is crucial when trying to understand the workforce of the company and its qualifications and capabilities.

Listed below are some of the most important employee and Board of Directors items needed for a review:

  • A complete list containing information regarding all current employees and Board of Directors of the small business targeted
  • Information relevant for hiring active personnel of the firm
  • A scheme diagram showing the duty delegation to every active employee member of the company and his/her obligations regarding such duties
  • Description of methods used when calculating employee salary and bonuses
  • A list of all employee-related insurances and bonuses currently applied in the company
  • Employee motivation methods used in the company with a detailed description of each

Can I change requests in this checklist or add new?

Every M&A and due diligence 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 due diligence information?

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

Easily Collect Data Using this Due Diligence Template in DealRoom

DealRoom is a project management solution and virtual data room for complex financial transactions. DealRoom enables increased collaboration, efficiency and value creation by providing a centralized platform in which practitioners can organize and complete tasks essential to due diligence, integration and deal success. By conducting all aspects of integration through DealRoom, practitioners can securely store important documents, collaborate on requirements, communicate more easily with third parties, and establish priorities.

How to use the template with DealRoom:
  • Download the due diligence template from DealRoom’s website
  • Open a room within DealRoom
  • Go to the Requests tab and select “import”
  • Import the downloaded template

The Requests tab is automatically populated with the requests from the due diligence template. Users can begin assigning, adding to, and completing due diligence requests.

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