Preliminary Due Diligence List

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Preliminary Due Diligence List

Corporate Organization

  • Organizational chart of the Company (legal entities)
  • Legal status and ownership of the Company
  • Articles of incorporation and by-laws
  • Minutes of board meetings


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  • Background of the Company and the timeline of significant events
  • Discussion of any significant JVs, acquisitions and divestitures to date
  • Historical products and markets
  • Major contracts performed
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Description of Business

  • General description of the business and markets in which the Company competes
  • List of specific products offered
  • Describe pricing determinations and competitive pricing pressures for products
  • Describe planned new products
  • Description of any related party transactions
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Industry Overview

  • Discussion of major market segmentation by size, region, type of customer
  • Key product, service, and technology trends
  • Discussion of market size, key trends and growth outlook
  • Discussion of cyclicality/seasonality
  • Discussion of barriers to entry
  • Any additional industry information and/or statistics to assist in our analysis
  • Key industry publications, economic/demographic statistics, etc.
  • Strategic Plan / Growth Strategies
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Strategic Plan /Growth Strategies

  • Business Plan, if available, and other planning documents
  • Discussion of pricing strategy
    • controlling Factors
    • Price elasticity of major customers
    • Ability to pass on changes in costs and timing
    • Short-term growth opportunities
    • discussion of long-term opportunities
    • Domestic/international expansion
    • New Businesses/product lines
    • Describe material risk factors affecting the Company’s ability to achieve projections
    • Describe efforts underway impacting projections
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Research & Development / Product Engineering

  • Focus on program
  • Major products
  • Funding
  • Comparison with competitors
  • Budget by program or product
  • Breakdown of personnel by location and position
  • Previous new products developed
  • Success of product development, quality issues, product life cycle, time to market
  • Review the current proposed staffing and personnel requirements for each activity
  • The methods of authorization, funding and reporting for product engineering and R&D
  • Are proprietary rights on all products under development adequately secured to the Company
  • Any patents and trademarks held or for which the company has applied
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  • Discussion of key competitive factors/differentiation including:
  • Price, product, quality, service, facilities, brand, etc.
  • Discussion of major competitors
  • List Company’s major competitors for each major product or by region as appropriate
  • Respective market share
  • Relative strengths and weaknesses
  • Relative ability to maintain current and increase market share
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Sales and Marketing

  • Overview of selling process for each of Company’s products
  • Description of resources (e.g. headcount, budget, outsource resources utilized etc.)
  • Description of marketing and advertising strategy
  • Description of promotional strategy
  • Description of discounting strategy
  • Marketing brochures
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  • List of location, square footage, year opened and mortgage or lease terms and condition for all facilites
  • List of material personal property and equipment
  • Description and condition of facilities and capital equipment, with analysis of maintenance, repair, overhaul or replacement considerations
  • Copies of any appraisals or disclosures of any bids, including any of the following
  • Real estate appraisals/valuations
  • Market value/replacement value
  • Description of any know restriction on land, including leases or encumbrances
  • Maintenance and refurbishment schedule
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Production and Distribution

  • Vendors, suppliers, purchasing, logistics and raw materials
  • List of major suppliers
  • Top 10 raw materials; components and other inputs
  • Discuss stability of pricing for raw materials, components and other inputs
  • Purchase arrangements – summary of terms of existing contracts and quality of relationships
  • Discuss abiltiy to pass through cost increases
  • Production plants and distribution facilities
  • Square footage and acreage by plant
  • Lease or owned, and terms
  • Discussion of capacity utilization and operating level by facility
  • Appraisal of property, plant and equipment (if existing)
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Historical Financial information

  • Audited income statements, balance sheets and cash flow statements for each of the past three years
  • Revenue analysis by region or product group for the past three years
  • Discussion of key cost components and expenses (including SG&A)
  • Discussion of working capital requirements (seasonality, volume increase/decreases etc.)
  • Discussion of nonrecurring charges (restructuring and impairment charges)
  • Discussion of discontinued operations
  • Off-balance sheet items
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Projected Financial Information

  • Projected income statements, balance sheets and cash flow statements for the next five years with assumption related thereto. Details include:
  • Revenue breakout (product mix, customer mix geography)
  • Capital requirements (breakout maintenance versus expansion)
  • Market share analysis supporting projections
  • New product offerings, including implementation and ramp-up schedule
  • Full discussion of underlying assumptions
  • Quarterly and monthly financial projections (budget) fro the next 12 months
  • Balance sheet data
  • Outstanding debt schedule with detail of material terms and conditions
  • Breakout of working capital items
  • Breakout of PP&E (gross and net land, building, improvements, FFOE, etc.)
  • Cash requirement
  • Depreciation and amortization schedule
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Consolidating Financial Information

  • Standalone historical and projected financial information by for each entity/business unit
  • Consolidating historical and projected financial information, including all adjustments
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  • Analysis of sales by product and geography
  • Review of sales trends over time
  • Description of sales channels utilized (sales and volume through each channel)
  • Review of 10 largest customers by volume
  • Current backlog and runoff
  • Commissions and/or discounts
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Cost of Sales

  • Analysis of material, labor and production overhead costs
  • Review of costing procedures
  • Split between fixed and variable costs
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Gross Profit

  • Analysis by product
  • Review of gross profit margins over time
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  • Overview of receivables
  • Aging of receivables and provision for bad debt
  • Overview of inventories/cost of goods
  • Analysis of other working capital
  • Detail of prepaid expenses and other current assets
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Fixed Assets

  • Schedule of gross book value, accumulated depreciation and net book value by asset category
  • Basis of providing for depreciation / amortization of each main category
  • Any recent changes in the rates used for providing depreciation
  • Comparison of net book value and tax written down values of assets eligible for capital allowances
  • Insured values and terms of insurance cover
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Capital Expenditures

  • Provide details of historical capital expenditures for the past three years and budgeted capital expenditures for the next five years – breakout:
  • Maintenance
  • Expansion
  • Acquisition – related
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Operating and Capital Leases

  • Breakout of composition of major operating and capital leases
  • Terms, cost and duration
  • List of major lessors
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Employees, Management and Directors

  • Overview of current management
  • Organizational chart
  • Turnover metrics of employee base
  • Biographies of senior management and key employees, including education, professional experience, professional licenses and associations
  • key management available to prospective purchaser
  • Recruiting and training efforts
  • Compensation and benefits
  • Wage scale, promotion and review – by grade / classification and geography
  • Material incentive awards – programs and policies
  • Insurance (life and medical), auto, personal loans and vacations
  • Deferred compensations plans, policies
  • Material severance plans or policies
  • Number of employees, classified as followes:
    1. Function
    2. Skilled versus unskilled
    3. Full-time/part-time
    4. Region / geography / product / customer
    • Discussion of labor rates, relations and negotiations, by geography/location
    • Photocopy of the complete Employee Manual and all written release
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Employee-Related Issues

        • Status of collective bargaining, organization of unionization of members of the work force
        • Discuss competition for labor including key turnover metrics
        • Discuss work conditions, including:
        • Accident frequency
        • Last health and safety review
        • Discuss employee training programs
        • Discuss how employee performance or productivity is measured
        • Description of all incentive/retirement plans
        • Employee stock purchase and stock option plans
        • Retirement/pension plans
        • Post-retirement/pension plans
        • Employee/company contribution to plans
        • Discuss funding status of all plans and obligations including amount over funded / underfunded and ability and cost of terminating plans to be replaced with annuities
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Accounting Responsibility and Function

        • Audit letters for past three years
        • Quality and size of financial, accounting and internal audit staff
        • Frequency and adequacy of physical inventory counts
        • Discuss and significant changes to account policies over past five years
        • Variations in company’s accounting policies from industry standards
        • Revenue recognition
        • Inventory
        • Classification as current assets, etc.
        • Depreciation
        • Management letters from outside auditors (past three years), including and unusual or material proposed adjustments mode during past five years
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Financing, Supplier and other Agreements

        • Key terms of existing material debt and copies and material loan (credit) agreements and indentures
        • Contracts and agreements with suppliers, vendors and other parties
        • Current mortgages on properties and appraisals
        • Material capital lease agreement
        • Summary of outstanding loans for Letters of Credits
        • Description and terms of any exclusive and nonexclusive agreements
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Budgeting System

        • Discussion of the budgeting, forecasting and financial reporting process
        • Historical budget variance analysis (monthly, past 2 years – if available)
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Information, technology and communication (“ITC”) systems

        • Computer/ITC systems overview
        • Internet-based or electronic ITC platforms including:
        • Purpose, location, access
        • Design, maintenance arrangements
        • Cost control and accounting capture/reporting
        • Production and service quality control monitoring
        • Inventory control systems
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Legal and Environmental Issues

        • List of patents, trademarks, copyrights, trade names and licenses
        • Assignability of contracts with leases, suppliers and customers
        • Details and description of major litigation over the past five years
        • Currently outstanding litigation
        • Currently outstanding environmental or occupational safety issues
          • Copies of any environment test or audit (Phase I, Phase II, etc.)
        • Summary of current insurance coverage and risk management arrangements
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Intellectual Property Rights

        • Patents – please list the following items, both domestic and foreign, in connection with the Company’s business and provide copies of the supporting documentation with respect to each:
          • Issued patents
          • Patent application
          • Invention disclosures not covered by patent or patent application
        • Trademarks and Copyrights
          • Please list all registered trademarks, common law trademarks, service marks, trade names, symbols and logos, including any application for or registration of any of the foregoing, used, controlled or owned by the Company in connection with current, past or anticipated operations of the Company’s business
          • Please list and provide a brief description of all copyrighted products and materials used, controlled or owned in connection with current, past, or anticipated operations of the Company’s business
        • Trade Secrets
          • Please list the principal processes and other proprietary information considered by the Company to be trade secrets of the Company
          • Please describe unwritten, and provide copies of written, Company policies and procedures regarding the protection of any Trade Secrets
        • General
          • List of all active licenses (whether the Company is licencor or licensee), sub-licenses (whether the Company is licencor or licensee), settlement agreements, consents, decrees or judgments with respect to Patents, Trademarks, Copyrights or Trade Secrets (Intellectual Property) to which the Company is a party, indicating whether either party is in default there-under. (Standard form of licenses to customers may be listed by Product.)
          • Description of all pending and/or threatened litigation, governmental proceedings, claims or assessments, whether or not formal filings have been made concerning the Company’s Intellectual Property, including a brief summary of the current status and expected outcome of any Intellectual Property Litigation
          • All correspondence with any third party who has alleged infringement by the Company of said third parties’ rights under Patents, Trademarks, Copyrights, Trade Secrets and/or unfair competition
          • Copies of any opinions provided by counsel for the Company relating to infringement, validity, right to use or clearance searches on Patents, Trademarks and Copyrights held by corporate or private individuals other than the Company
          • Copies of any indemnities or standard form of indemnity provided, by the Company to third parties regarding intellectual property rights of the Company
          • Description of the use of any Intellectual Property of the Company by any third party that the Company believes may infringe or otherwise compromise the Company’s rights in its Intellectual Property
          • All agreements or forms of agreement between the Company and employees, consultants, vendors, suppliers, customers and others relating to nonuse or nondisclosure of the Company’s Intellectual Property, assignment of rights in the Company’s non-competition, or any combination thereof
          • Description of all liens/or encumbrances on the Company’s Intellectual Property, or rights of third parties therein (which are not otherwise disclosed pursuant to the above paragraphs)
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