Mergers and Acquisitions Due Diligence Checklist

Nicholas J Price
6 min read
There are so many things to consider at the outset of starting a business or partnership that it can be completely overwhelming. It's important to dot every "I" and cross every "t" to ensure that your new venture will be highly successful.

Starting a company or being part of a merger or acquisition carries many opportunities. It also carries much risk. It's crucial to consider all facets of a business, including the inherent problems it brings with it. It's important to consider the company's debts, liabilities, problem contracts, litigation risks, intellectual property risks and much more. Acquiring a private company carries even more risks because they haven't stood the test of the markets and buyers have less access to information from public sources.

Either way, it's not a process you want to hurry through, regardless of how attractive the offer may be. The best and most secure way to ensure due diligence is to set up a virtual data room with Diligent Corporation. Setting up your virtual data room and your mergers and acquisitions due diligence checklist are the first steps in tackling mergers or acquisitions.

At a minimum, the following 20 items should be on all companies' merger and acquisition due diligence checklist:

20 Items That Should Be on Every Due Diligence Checklist

  1. Financial Matters
Buyers should ask for a full report of financial statements and metrics for the past, present and future. Ask for documents related to the audit, 401(k) balance, accounts receivable, current and contingent liabilities, and all other financial matters. Of special concern is whether the company has the capital to continue operating through the acquisition.
  1. Technology and Intellectual Property
Buyers should inquire about the scope of the seller's technology and intellectual property, including information on patents, trademarks, copyrights, licenses and trade secrets. Carefully evaluate any problems, disputes, encumbrances and litigation over technology and intellectual property.
  1. Sales and Customers
Buyers will want to gain a good understanding of the company's customers and sales approach. Discussions should focus on customer retention, issues with risks related to product concentration, customer satisfaction and unusual product return activity.
  1. Strategic Fit With Buyer
Buyers will be interested to know whether there's a strategic fit between them and the company they want to acquire. They'll want to know if the company has products, services and technology that the buyer doesn't have and whether key people will expect to stay on – or if the company can expect them to stay on – after the acquisition.
  1. Material Contracts
The most time-consuming part of due diligence is reviewing all of the material contracts and commitments of the company. Buyers will want to pay special attention to contracts that would adversely affect the company if they were terminated.
  1. Managerial or Employee Problems
This area of due diligence includes labor disputes and problems, employment agreements, compensation plans, retirement benefits and the potential for layoffs.
  1. Litigation
Sellers should provide buyers with an overview of past, present or threatened litigation. This includes injunctions, settlements, consent decrees, matters in arbitration, insurance claims, threatened governmental proceedings and judgments.
  1. Tax Matters
Both parties should share and discuss tax information for the last five years, including federal, state, local and foreign income sales; government audits; IRS Form 5500 for 401(k) plans; tax sharing and transfer pricing agreements; correspondence with taxing authorities; and settlement documents with the IRS and other government taxing authorities.
  1. Antitrust or Regulatory Matters
Due to increased scrutiny over antitrust matters, buyers should analyze the scope of antitrust issues. The acquisition may require getting approval from a regulator. It's important to discuss and verify any prior antitrust or regulatory inquiries or investigations.
  1. Insurance
All mergers and acquisitions due diligence activities should include a review of every type of insurance policy including health insurance, E&O, D&O, liability, property, umbrella, workers' compensation, car, intellectual property, key man insurance and employee liability insurance.
  1. General Corporate Matters
It's standard practice for the seller to offer up all organizational documents and general corporate records, including charter documents, tax authority certificates, lists of subsidiaries, meeting minutes, and lists of officers, directors and security holders.
  1. Environmental Issues
Environmental issues run the gamut from environmental audits, testing, environmental permits, EPA notices, potential Superfund exposure, asbestos exposure, contractual obligations, use of petroleum products, records of public agency investigations, and any records pertaining to environmental litigation or claims.
  1. Related Party Transactions
Buyers should inquire about agreements or arrangements between the company and any current or former director, officer, employee or stockholder that entitles them to compensation or where they may have an interest in any asset. These are called related party transactions.
  1. Governmental Regulations, Filings and Compliance With Laws
Due diligence in the area of governmental regulations includes things like citations, notices or pending or threatening investigations or governmental proceedings. This area includes material reports to government entities, costs of regulatory compliance, and the status of all government permits and licenses.
  1. Property
Due diligence also includes a review of all property including deeds, leases, deeds of trusts and mortgages, title reports, other interests in real property, operating leases, conditional sale agreements, financing leases, and sale and leaseback agreements.
  1. Production-Related Matters
Reviews may include due diligence on production-related matters, such as lists of subcontractors and suppliers, manufacturing summaries, schedule of backlog orders, inventory reports, supplies, service contracts, and other agreements related to research, development, manufacturing and testing the company's products.
  1. Marketing Arrangements
The due diligence process includes a review of the company's marketing strategies and arrangements including sales, distributor, agency and franchise agreements. It also includes sales literature, price lists, catalogs, purchase orders, agreements and press releases.
  1. Competitive Landscape
Purchasing companies will want to know who the principal current and anticipated competitors are. They'll also be interested in technologies that could make current technology or manufacturing processes obsolete and the advantages or disadvantages between them and their competitors.
  1. Online Data Room
The success of mergers and acquisitions depends on having the availability for both parties of an online data room or virtual data room such as a secure virtual data room by Diligent Corporation. Virtual data rooms should have search capabilities for all documents, ability to bookmark within the application, ability to print pertinent documents, and due diligence checklist provided by the buyer for the purpose of cross-referencing and review. Virtual data rooms should have a disclosure schedule, and updates to the data room should be clearly marked with automatic notifications to the buyer's counsel.
  1. Disclosure Schedule
The company should prepare a comprehensive disclosure schedule addressing all of the issues stated above very early in the planning stages of a mergers and acquisitions transaction.

As you can see, mergers and acquisitions transactions involve a substantial amount of due diligence by the buyer and its counsel. A Diligent Corporation virtual data room will ensure that this process goes smoothly, complicated as it is.