Completing a “due diligence” process allows a potential buyer or investor to learn more about a company in order to finalize a transaction or investment. Due diligence is a key step for any major transaction or investment -- and is especially important in the mergers and acquisitions (M&A) context. Whether you are the buyer or seller, it is important to know exactly what information will need to be investigated before the deal can be finalized. In order to organize this information, M&A attorneys create and research a comprehensive due diligence checklist before starting in on structuring the deal. A Priori lawyer can help you negotiate a comprehensive -- but not unduly onerous -- M&A due diligence checklist and help you organize the materials, if you are the seller.
What Is Due Diligence?
Due diligence is a comprehensive appraisal of a business that a potential buyer or investor generally undertakes before buying a company or agreeing to make an investment. As a buyer or investor, during due diligence process, your attorney will review the target company’s assets and liabilities, structure, operations and key business relationships. This information allows you to effectively evaluate the deal’s strategic commercial potential and ensure that the merger or acquisition is priced correctly. As a seller or company owner, your lawyer will help provide the appropriate documents to the buyer or investor, but also help manage the process so that you can continue to run your business and not be deluged by document requests.
Key Considerations to Put on Your Due Diligence Checklist
Every M&A deal is unique -- and the depth of due diligence needed on a specific topic will vary depending on the company and the dynamics of the deal. Still, there are certain due diligence matters that are generally included in transactions. Below are nine areas of due diligence that are generally addressed on a due diligence checklist:
1. Corporate Structure & General Matters
Corporate attorneys carefully review the corporate structure, capitalization, organizational documents and general corporate records of the company in order to ensure that everything is in order. Some of the documents typically reviewed include:
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Organizational chart;
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Lists of all securities holders;
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Stock option agreements and plans;
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Warranties;
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Stock appreciation rights plans and related grants;
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Recapitalization or restructuring documents;
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Minutes from all board, shareholder, and/or executive committee meetings since charter; and
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Agreements related to any sales or purchases of businesses.
Corporate attorneys generally review all the company’s financial information from the last five years, including income statements, balance sheets, cash flow and audit reports. Other financial documents that may be reviewed include projections, budgets and forecasts for the financials of the next five years and assess whether they are reasonable. Finally, corporate attorneys generally review all credit agreements, debts and contingent liabilities.
2. Taxes
Tax due diligence explores any historical income tax liabilities and provides an analysis of any tax carryforwards and their potential benefits. Corporate lawyers verify that taxes are current in all jurisdictions and that there are no unexpected tax problems. Documents generally reviewed include:
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Federal, state, local, and foreign income, sales, and other tax returns filed in the last five years;
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Correspondence or notice from any foreign, federal, state, or local taxing authority;
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Government audits;
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Tax sharing and transfer pricing agreements;
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Net operating losses or credit carryforwards;
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Settlement documents with the IRS or other tax authorities; and
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IRS Form 5500 for 401(k) plans.
3. Strategic Fit
In any M&A transaction, future performance and strategic fit can be just as important as any current profitability. As an potential buyer, a key business diligence point is exploring the extent to which company will fit strategically within your current business or how you will be able to work together in the future. This includes considerations of human resources, integration and transition, marginal costs, technology and general work culture.
4. Intellectual Property
An intellectual property lawyer can help you establish extent and quality of the target company’s technology and intellectual property, as well as its protection. The lawyer typically reviews all:
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IP litigation and claims
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Liens or encumbrances on the company’s intellectual property
5. Material Assets
Often, the material assets of the company are key to the M&A transaction. It’s important to consider the total value of all assets and any debts or liabilities against them. Generally, the following assets are appraised:
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Inventory stock;
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Real estate;
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Equipment;
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Technology; and
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Research and development.
6. Contracts
A corporate lawyer’s review of all material contracts and commitments of the target company is one of the most critical and time consuming parts of due diligence. A corporate attorney generally reviews all of the contracts currently in force that involve the target company, including:
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Customer and supplier contracts;
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Schedule of accounts receivable and payable;
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Guaranties, loans and credit agreements;
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Agreements of partnership or joint venture;
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Equipment leases;
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Settlement agreements;
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Non-compete, most favored nation and exclusivity agreements;
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License agreements;
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Distribution, dealer, sales agency or advertising agreements;
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Franchising agreements; and
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Employment contracts.
7. Employees and Management
Whether the employees are a key resource in a merger or acquisition or not, understanding the quality and structure of company’s management and employee base is often important to understanding the value of a company. An employment lawyer generally reviews all employee contracts, benefits, and policies. Buyers also generally seek to understand which employees should remain with the company after the transaction, as well as any past employee issues or looming future problems.
8. Litigation
It’s important to know if the deal would include potential legal liabilities. Accordingly, a lawyer generally reviews any pending, threatened or settled litigation, arbitration or regulatory proceedings involving the target company.
9. Compliance and Regulatory Matters
Attorneys also review regulatory and compliance issues—both involving the target company and the deal in general. In particular, lawyers nearly always assess the the antitrust implications of the proposed transaction.
Priori Pricing
Depending on the type of deal, pricing can vary widely. When you hire a lawyer in the Priori network, hourly rates for this type of transaction can typically start at $225 per hour but range significantly higher based on certain types of experience. In order to get a better sense of cost for your particular situation, put in a request to schedule a complimentary consultation and receive a free price quote from one of our lawyers.
FAQ
Is this a comprehensive due diligence checklist?
No. When you are involved in an M&A deal, you do not want any surprises, which means that a due diligence checklist should be exhaustive. Your attorney will be able to create a comprehensive due diligence checklist that you can work through together in order to ensure that you have all the information that you need before finalizing any agreement.