Due Diligence Report

This report is an example of the types of due diligence questions to be answered when completing mergers & acquisitions (M&A).

What’s included an a due diligence report?

This article is an example due diligence (DD) report to be completed with a merger or acquisitions. The report is often sent as an internal memo to members of the executive team who are evaluating the transaction.

Corporate Records

  • State of incorporation and in good standing with the state
  • Capitalization and authorized and issued shares of stock and seller of each subsidiary
  • Articles of incorporation and bylaws
  • Copies of all correspondence with shareholders and obtain a shareholder list
  • Existence of any warrants, options, or other potentially dilutive securities

Financial information

  • Copies of financial statements for the past five years that have been audited, including all notes and management’s discussion and analysis
  • Copies of correspondence between management and auditors
  • List of federal and state jurisdictions where the seller has filed taxes for the past 5 years
  • Federal, state and local tax returns for the past 5 years
  • All board of directors’ presentations
  • All internally generated financial models and forecasts

Indebtedness

  • Investigate indebtedness or seller and subsidiaries, including loan agreements, notes, mortgages, and security agreements
  • Review correspondence with lenders demonstrating compliance with financial covenants
  • Order uniform commercial code searches with each subsidiary

Employment and Labor

  • List and biographies of officers, directors, and employees of a certain level
  • List of all employees, their job function, department, location and compensation
  • Documents detailed any profit sharing, pensions, deferred compensation, stock plans, and other non-salary compensation or benefits
  • Copies of all employee handbooks, codes of conducts, and policies
  • Copies of employment, consulting, termination, parachute and indemnity agreements
  • Pending litigation related to labor and employment law

Real Estate

  • Address and legal description for all real property
  • Copies of title issuance policies with respect to real property
  • Copies of all appraisals
  • Copies of all studies, site evaluations, and government filings and reports prepared by consultants

Agreements

  • All agreements entered into by the company and its subsidiaries
  • All real estate leases
  • All partnership or joint venture agreements
  • All marketing, sales, commission, distributor, franchise agreements
  • All brokerage or investment banker agreements
  • All customer or client agreements
  • All licenses and subscriptions
  • All material contracts not otherwise obtained from this list

Supplier and Customer Information

  • List of all material customers including dollar and volume of sales
  • List of all material suppliers including dollar and volume of purchases
  • Correspondence with customers or suppliers related to complains or disputes

Legal

  • Copies of each report or document filed with government agencies
  • Descriptions of all litigation, administrative proceeding, governmental investigations
  • Copies of all government licenses
  • Environmental liability assessments and environmental compliance audits

Who performs a due diligence report?

There can often be many groups involved with preparing the DD document.  Companies may carry out the analysis internally with their corporate development team, or they may hire external advisers like investment bankers or the  DD Team at an accounting firm.