Due Diligence is the process whereby the prospective buyer gets the opportunity to verify all the information they have been given in the Business Review / Offering Memorandum, and subsequently, over the phone or in meetings with the seller. The process usually commences after a signed Letter of Intent has been offered and accepted. In some cases the Contract or the Asset Purchase Agreement is also signed subject to the finding of the Due Diligence process.
Many companies use a due diligence master check sheet and focus on the items that apply to the particular transaction. Generally, for companies in the middle market, they include:
Corporate Documents: Including a review of the Minute Book (of Board of Director Meetings – you might need to get yours up to date); Review of any leases; Company Bi-Laws; Registered trade marks; and other issues that may have been raised by their attorney. Insurance coverage, unemployment claims, any litigation issues and compliance with various regulatory directives will be reviewed. For public companies the list is considerably longer.
Financial & Accounting: Most buyers will want to review your accounts receivable aging (this may be a schedule attached to the contract); costing of inventory (traced back to the original invoice); the costing of the items in cost of sales: the listing of prepaid expenses included in the transaction; and the depreciation schedule for all fixed assets. In addition, they will normally want to check invoices to customers and to discuss all discounts, back charges and other deductions from the invoice amount. Some will tie individual invoices back into the sales journal. Finally, any liabilities to be assumed will be checked and verified. The aging of the accounts payable will be closely reviewed and the seller may be responsible for any amount over the total of all payables listed.
Cut-Offs: Make sure all “cut-offs” are clean, meaning what cash, shipments, receivables, payables, equipment, furniture, and personal property remain with the seller and what will be the new property of the buyer. Remove any personal items or equipment not included before the due diligence process starts.
Fixed Assets & Inventory: Most buyers will want to check off each piece of equipment and furniture against the asset list and verify that the machinery is operable. In addition, they will want to participate in the closing physical inventory, verifying counts, pricing and extensions.
Computer Systems, Software & Web Page: If the contract calls for these items to be transferred, they will be checked to make sure they are operable and tied into the various systems and reports that are used by the seller. In addition, web page management may be interviewed.
Personnel Usually Present or Available: Generally, it is good to have the seller’s, sales manager, operations manager and controller present, as well as, the outside accountant on standby to answer any questions. If the Tidewater Group is representing either party, we will be available, if requested. In addition, we are happy to provide a check list of items to check that are appropriate for the transaction. We will assist our client throughout the entire process.
Download this article as a PDF: POV_25 Due Diligence