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
-
- 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.
-
- Tax Returns
-
- Federal, state, and local tax returns for the past 3-5 years to verify reported income and tax obligations.
-
- Accounts Receivable and Payable
-
- Aged receivables and payables reports to understand outstanding debts and credits.
-
- Bank Statements
-
- Bank statements for the past 12 months to verify financial transactions and balances.
-
- Budgets and Projections
-
- Current year budgets and future financial projections to gauge expected performance.
-
- Financial Statements
Legal Documents
-
- Corporate Documents
-
- Articles of incorporation, bylaws, and any amendments.
- Partnership or LLC agreements, if applicable.
-
- Contracts and Agreements
-
- Copies of all major contracts, including those with suppliers, customers, and service providers.
- Lease agreements for property and equipment.
-
- Intellectual Property
-
- Documentation of patents, trademarks, copyrights, and trade secrets.
- Licenses and royalty agreements.
-
- Litigation Records
-
- Information on any past, ongoing, or pending litigation or legal disputes.
-
- Regulatory Compliance
-
- Permits, licenses, and any correspondence with regulatory bodies.
-
- Corporate Documents
Operational Information
-
- Business Model and Strategy
-
- Detailed description of the business model, products/services offered, and strategic plans.
-
- Organizational Structure
-
- Organizational chart and details about key employees, their roles, and compensation.
-
- Operational Processes
- Documentation of standard operating procedures and workflow processes.
- Customer Information
-
-
-
- List of key customers and sales reports showing revenue from major accounts.
-
-
5. Supplier Information
- List of key suppliers, terms of agreements, and dependency on specific suppliers.
-
- Business Model and Strategy
Human Resources
- Employee Records
- List of all employees, including job titles, salaries, benefits, and employment agreements.
- Employee handbooks and policies.
- Benefit Plans
- Information on retirement plans, health insurance, and other employee benefits.
- Independent Contractors
- Agreements and payment records for any independent contractors.
Marketing and Sales
- Marketing Materials
- Samples of marketing materials, advertising campaigns, and promotional activities.
- Sales Reports
- Detailed sales reports showing performance trends and revenue breakdowns.
- Customer Acquisition
- Strategies for customer acquisition, retention rates, and loyalty programs.
Physical and Intellectual Assets
- Inventory
- Detailed inventory lists with valuations and turnover rates.
- Fixed Assets
- List of all fixed assets, including equipment, machinery, and real estate, along with depreciation schedules.
- Intellectual Property
- Documentation of all intellectual property assets and any associated agreements.
Information Technology
- IT Systems
- Overview of IT infrastructure, including hardware, software, and network systems.
- Data Security
- Policies and procedures for data security, including any incidents of data breaches.
- Software Licenses
- Documentation of all software licenses and related agreements.
Insurance
- Insurance Policies
- Copies of all insurance policies, including liability, property, workers’ compensation, and key person insurance.
- 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.