When selling a business, due diligence is a crucial phase where potential buyers thoroughly investigate the business to verify its value, assess risks, and ensure that everything is in order. This process involves the seller providing a comprehensive set of documents and information about the business. Understanding what items are commonly requested during due diligence can help sellers prepare and facilitate a smoother transaction.

Financial Information

1. 1. Financial Statements
      • • Income Statements: Showing profit and loss over the past 3-5 years.
        • Balance Sheets: Detailing assets, liabilities, and equity for the same period.
        • Cash Flow Statements: Indicating the cash generated and used by the business.
   2. Tax Returns
      • • Federal, state, and local tax returns for the past 3-5 years to verify reported income and tax obligations.
   3. Accounts Receivable and Payable
      • • Aged receivables and payables reports to understand outstanding debts and credits.
   4. Bank Statements
      • • Bank statements for the past 12 months to verify financial transactions and balances.
   5. Budgets and Projections
      • • Current year budgets and future financial projections to gauge expected performance.

Legal Documents

1. 1. Corporate Documents
      • • Articles of incorporation, bylaws, and any amendments.
        • Partnership or LLC agreements, if applicable.
   2. Contracts and Agreements
      • • Copies of all major contracts, including those with suppliers, customers, and service providers.
        • Lease agreements for property and equipment.
   3. Intellectual Property
      • • Documentation of patents, trademarks, copyrights, and trade secrets.
        • Licenses and royalty agreements.
   4. Litigation Records
      • • Information on any past, ongoing, or pending litigation or legal disputes.
   5. Regulatory Compliance
      • • Permits, licenses, and any correspondence with regulatory bodies.

Operational Information

1. 1. Business Model and Strategy
      • • Detailed description of the business model, products/services offered, and strategic plans.
   2. Organizational Structure
      • • Organizational chart and details about key employees, their roles, and compensation.
   3. Operational Processes
      1. Documentation of standard operating procedures and workflow processes.
   4. Customer Information
      1. • • • List of key customers and sales reports showing revenue from major accounts.

      5. Supplier Information

      1. List of key suppliers, terms of agreements, and dependency on specific suppliers.

Human Resources

1. Employee Records
   • List of all employees, including job titles, salaries, benefits, and employment agreements.
   • Employee handbooks and policies.
2. Benefit Plans
   • Information on retirement plans, health insurance, and other employee benefits.
3. Independent Contractors
   • Agreements and payment records for any independent contractors.

Marketing and Sales

1. Marketing Materials
   • Samples of marketing materials, advertising campaigns, and promotional activities.
2. Sales Reports
   • Detailed sales reports showing performance trends and revenue breakdowns.
3. Customer Acquisition
   • Strategies for customer acquisition, retention rates, and loyalty programs.

Physical and Intellectual Assets

1. Inventory
   • Detailed inventory lists with valuations and turnover rates.
2. Fixed Assets
   • List of all fixed assets, including equipment, machinery, and real estate, along with depreciation schedules.
3. Intellectual Property
   • Documentation of all intellectual property assets and any associated agreements.

Information Technology

1. IT Systems
   • Overview of IT infrastructure, including hardware, software, and network systems.
2. Data Security
   • Policies and procedures for data security, including any incidents of data breaches.
3. Software Licenses
   • Documentation of all software licenses and related agreements.

Insurance

1. Insurance Policies
   • Copies of all insurance policies, including liability, property, workers’ compensation, and key person insurance.
2. Claims History
   • History of insurance claims and any outstanding or unresolved claims.

Conclusion

Preparing for due diligence involves compiling a comprehensive set of documents and information to provide potential buyers with a clear and accurate picture of the business. By understanding and organizing these common due diligence items, sellers can facilitate a smoother and more efficient transaction process. Ensuring that all requested documents are readily available and accurate can help build trust with potential buyers, reduce delays, and increase the likelihood of a successful sale. Consulting with legal, financial, and business advisors can further streamline the due diligence process and address any potential issues proactively.