Fifteen Areas Reviewed in a Due Diligence Study

By: Jo Ann Joy
Submitted: 2007-01-17 15:15:12
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The due diligence study is done by investors or lenders to be certain that your company is operating properly and efficiently. The in depth due diligence study will uncover any accounting errors and any operational problems. After completing the due diligence study, the investors or lenders must be satisfied that they are invested money in a company that conducting its business in the best possible way. The due diligence study will review the following fifteen areas:

1. Corporate records:

• The company’s original articles of incorporation or articles of organization

• By-Laws and minutes of any Board meetings, executive committee meetings, and

shareholder meetings

• Stock issuance and transfer

• The company’s communication with shareholders

• Press clippings and press releases

• Applications for and documents authorizing the company to do business in another state

• Stockholder agreements, voting, proxies, and other similar documents

• The company’s organization chart showing how it is structured and if there are any affiliates

2. Insurance:

• All insurance policies, their coverage limits, the deductibles, renewal dates, and premiums

paid or owed

• Insurance claim history

3. Government regulations and filings:

• Reports and correspondence with any governmental authority

• Licenses, permits, approvals, etc.

• Bonds posted for licenses, permits, etc.

• Records of any investigation, inquiry, or inspections by government

• Government orders with which the company must comply

4. Financing:

• Documents evidencing loans, secured and unsecured, and personal guarantees

• Bank agreements confirming lines of credit

• Documents evidencing sale, lease-back, instalment purchases, sales contracts, loan

agreements

• Correspondence to and from lenders

• Evidence of satisfaction or liens or debts

5. Financial information

• Audited financial statements

• Unaudited monthly and quarterly financial statements

• Capital budgets, changes in accounting practices

• Inventory summary

• Aged accounts receivable and payable

• List of all assets with purchase price

• Correspondence with inside and outside accountants

6. Taxes:

• Federal, state, and local tax returns

• Any adjustments, settlements, recapture, or notices with taxing authority

• FICA, FUTA, and other employee withholding

• Calculations of tax basis, book basis, and depreciation of all assets

7. Customer information

• Customer agreements

• List of 10 largest customers and list of sales to each

• Government or quasi-government customers

• Catalogs, product literature, advertising, and price lists

8.

• Agreements concerning distribution of stock, stock options, preemptive rights, and stock

option plans

• Agreements or contracts concerning capital expenditures

• Licenses, agreements, franchises, joint venture or partnership agreements

• Interconnection agreements, leases, any document limiting the company’s line of business,

and non-compete agreements

• Agreements entered into in the normal course of business and agreements not in the

normal course of business

• Agrements to pay of indemnify the debts or liabilities of third parties

• Documents regarding acquisition or disposition of businesses or assets

• Agreements or contracts with directors, officers, stockholders, or affiliate or relatives of

such parties

• Sample purchase orders and distribution agreements

• Copies of documents evidencing the company’s or stockholders’ interest in any entity in the

same industry

• Bartering contracts

9. Employee-related documents

• Employment, union, nonunion agreements, memoranda of understanding, grievance

settlements

• Letters offering employment

• Consulting and independent contractor agreements

• Personnel policy manual

• Employee health benefits, bonuses, deferred compensation, pension, profit sharing, stock

options, employee stock purchases, retirement, and other employee benefits

• Financial statements and list of assets and valuation for all employee plans

• Actuarial reports and nonfunding for any employee plan

• Tax returns and other communications with taxing authorities regarding employee plans

10. Real property

• Description and copies of all real property leases and options

• Mortgages in which company is a party

• Deeds, title reports, surveys, and certificates of occupancy for all real estate owned in

whole or in part by company

• Special use permits or variances for any real property occupied by company

11. Environmental matters

• Information regarding compliance or noncompliance, claims, permits, licenses,

correspondence, and notices with any environmental protection laws or regulations

• Inspections, citations, audits, feasibility studies, corrections, and outstanding enforcement

actions

• Spill reports, notifications, clean-up requirements, and financial estimates for clean-ups or

violations

• Intracompany correspondence, memos, and reports relating to environmental matters

• List of all above-ground and underground tanks, their contents, and their location

• Information regarding prior ownership and uses or company-owned property

12. Intellectual property,

• All patents, patent applications, invention disclosures, and list of important unpatented items

• Documents of ownership or other agreements concerning acquisition, security, and

confidentiality of information

• Trademarks, pending trademark applications, registrations, renewals and unregistered

trademarks

• Trade names, manner and territory of use of trade names, and state or federal failings of

trade names

• Concurrent use agreements, settlements, or registrations

• Copyrights, copyright applications, registrations, renewals, assignments, and documents

• Any licenses of patents, trademarks, trade names, or copyrights

• Disputes, legal proceedings, infringements, judgments, decrees, settlements, or court

orders regarding patents, trademarks, trade names, and copyrights

13. Banking

• Bank accounts, credit agreements, debt instruments, and lines of credit

14. Litigation/Disputes

• All documents regarding any actual or pending litigation, administrative proceedings,

government investigations, disputes, grievances, and inquiries

• Consent decrees, judgments, court orders, settlement agreements to which the company is

a party

15. Miscellaneous

• Analyses by investment bankers, engineers, management consultants, accountants

• Marketing studies, credit reports, and other financial reports

• Pending powers of attorney

• Organizational charts, job descriptions, job titles, salaries, start dates, and bonuses

• Internal management reports

This list should help you prepare, but it is only the legal portion of a due diligence study. There may be other areas considered in a due diligence study such as product or service studies, competitive analysis, market analysis, and reference and background checks. A due diligence study is often undertaken by investors or lenders before any investments or loans are made.

Jo Ann Joy, Esq., MBA, CEO The future of your business starts here!

You may contact Jo Ann by phone at (602) 663-7007, by fax at (602) 324-7582, by email at joannjoy@Indigo Business Solutions.net, and by mail at 2313 East Ocotillo Rd., Phoenix, AZ 85016. Copies of any articles will be provided free of charge.

For information about other important legal, tax, and business topics, free copies of articles, or EBooks, please visit our website at u>www.IndigoBusinessSolutions.net. Copyright 2006. All rights reserved. Indigo Business Solutions is a registered trade name.

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