Corporate Due Diligence Checklist
Due diligence is the detailed examination of a company, including its operations, assets, liabilities and stakeholder relationships. Due diligence team members may consist of company management, lawyers, accountants and auditors. When one company buys or merges with another, the agreement is usually subject to due diligence and regulatory approvals. The checklist covers general organizational matters, financial details, the business environment and legal issues. The objective of a due diligence exercise is to limit unpleasant surprises after the deal closes.
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Organization
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General organizational items should be reviewed, including articles of incorporation; bylaws; minutes of board meetings and annual shareholder meetings; copies of any government licenses and permits; and correspondence with government oversight and regulatory agencies. The corporate structure, including subsidiaries and joint ventures, as well as the background of senior management, are examined to identify possible areas of consolidation. The history of the company's relationships with its stakeholders, including vendors, investors, stock analysts and unions, are another area to evaluate.
Finances
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A detailed review of the company's finances generally precedes a merger agreement. The due diligence process provides additional opportunities for trained professionals to take a closer look at audited and unaudited financial statements, auditor's opinions, credit reports, operating budgets, investments in plant and equipment, and debt obligations. For a public company, recent analyst reports and shareholder communications (for example, quarterly conference calls and regulatory filings) are reviewed. Other financial items of interest include owned and leased properties, inventory, recent acquisitions and planned strategic initiatives.
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Business Environment
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Business environment analysis could include reviewing the company's current market share, major customers by percentage of annual sales, supplier and distributor relationships, and the company's customer satisfaction record. Some of these details are analyzed before making a purchase or merger offer. The due diligence process allows a more thorough examination, including a detailed analysis of the financial stability and strategies of the company's main competitors.
Legal
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The due diligence team's legal professionals would examine existing legal contracts, such as employee and management contracts, franchise agreements, leases, loan covenants and partnership agreements. Some contracts have survivorship clauses in them, meaning they remain in force through a change of ownership. The due diligence team would also do a detailed examination of the company's litigation history, especially the pending litigation case files.
Other
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Other items to check include copyrights and patents that have been granted or have applications pending, environmental audits for property owned or leased by the company, and the methods of disposal for hazardous material. Employee compensation plans, health and other benefit plans, and other employee-related matters should also be reviewed to identify areas where efficiencies are possible.
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