Due diligence is the stage of the purchase where you review the details of a company after your offer is accepted and you sign a letter of intent (LOI). Documents review is an integral step in the due diligence process. In this review, we discuss the documents that you should request during the due diligence stage.
Although the sheer number of documents you should request may seem excessive, it is imperative to review as many documents as possible to ensure there are no stones left unturned. Specifically, you should request financial, legal, intellectual property, marketing, property, contract, operational, insurance, asset, and employee documents.
Depending on your situation and how comfortable you feel moving forward with the purchase, you may not need to request all of the documents below. In some cases, you may need additional documents not mentioned below. Along with your business broker, you should examine your needs and create your personalized list of documents that you should request. Below we highlight the documents you will need to review as the buyer during due diligence.
Financial Documents
Sellers want to present a glossy image of their company. Unfortunately, in many cases, the image they portray is smoke and mirrors, and they may highlight certain financial numbers to make the company seem more profitable than it actually is. As the saying goes, “the devil is in the details.” To help ensure you get an accurate depiction of the company’s financial performance, request the following documents:
- Federal returns (3+ years)
- Profit and loss (P&L) statements
- Cash flow statements and balance sheets
- Loans and credit agreements
- Company investment information
- Stockholder details
- Capital structure and budgets
- Projections and strategic plans
- Foreign exchange reserves
- A list of past or current accounting issues
Legal Documents
You should ensure the company is on the up-and-up when it comes to its operations. In other words, you should request legal documents to verify that the company is in possession of the proper business licenses, permits, etc. You should also verify patents for their proprietary designs and technology. Specifically, you should request the following legal documents:
- Business licenses (local, state, and federal)
- Occupational licenses
- Building permits
- Land use permits
- Legal cases (previous and outstanding)
- IP claims (and litigation, if applicable)
- Domain names
- Patents issued (and applications)
- Industrial designs
- Liens
- Copyrights and trademarks
- Licenses
- Ownership and right of use agreements
Marketing Documents
Some companies conduct no marketing or advertising efforts, whereas others are entirely reliant upon outreach efforts to attract new business. You can help learn more about where the company gets its business by requesting these three documents:
- Sales and marketing overview
- List of suppliers
- Sales percentages for each sales channel
Property Documents
You will also need to check the seller’s property documents. This is especially important if the seller owns commercial real estate that is included in the sale, although it is still essential even if the seller has a rental lease agreement. Here are some of the key property documents that you should ask for:
- Real estate properties
- Valuation for all real estate
- Lease information (for rented properties)
- A list of equipment
- A list of inventory
- Technology lists (i.e. computers, etc.)
Contract Documents
Any contract the company has with another party must be reviewed during due diligence. The seller may have contracts with vendors, suppliers, banks (and other financial institutions), employees, shareholders, other contractors, and more. Here are the most important documents to request during due diligence:
- Vendor contracts
- Supplier contracts
- Partnership agreements
- Franchising agreements
- Equipment leases
- Property leases
- Employee contracts
- Non-compete agreements
- Settlement agreements
- Loan and credit agreements
Operational Documents
You will need to learn about the company’s operations as well. This includes the work processes, their mission and bylaws, supply chains, and more. From organizational charts to customer satisfaction surveys, there are a range of operational documents you may need. Notably, you should request these operational (and organizational) documents:
- Company name(s)
- Ownership information
- Documents related to correspondence with government authorities
- Company bylaws and amendments
- Organizational chart
- A list of states where the company operates
- Customer satisfaction surveys
- Supply chain strategy and operations
- Supply or inventory concerns
Insurance and Liability Documents
The insurance and liability documents should include all insurance agreements for the company. This could be for a range of insurance types, such as general liability, worker’s compensation, commercial auto, liquor liability, and more. The seller should also provide insurance limits and amount information, along with a claims history report.
- A copy of all insurance policies (i.e. worker’s compensation, etc.)
- A list and summary of all claims history, including pending claims
- Information related to the cancelation or non-renewal of insurance policies
- All additional documents that are related to the company’s insurance coverage and needs
Employee Documents
Employees are often the lifeblood of a business. The documents below are essential to understand your employment-related obligations (salaries, etc.), which allows you to plan accordingly. You can also learn more about employee relations and human resources with employee documents as well.
For instance, if a company has a number of employees that have departed in the past year or two, then there may be an issue with employee turnover due to a poor workplace culture. The best way to learn about the current state of the workforce is to review these documents:
- A list of current employees and independent contractors
- Terms of employment for employees and contractors
- Past employee disputes (if applicable)
- Conduct and safety handbook for employees
- Employee training regimen
- Policy for bonuses, incentives, and commissions
- Policy for sick days, holidays, vacations, and overtime
- A list of key employee departures in the past three years
Need Assistance From a Business Broker? Contact Us Today
Sigma Mergers and Acquisitions understand the purchasing process and help buyers through the journey of acquiring an existing company. From helping you search for viable companies to buy and making offers to requesting information during due diligence, we are there to assist you. Contact us today to learn more and get started.
