21 Jul 2020 Ankit Chadha

Top Priority: M&A Due Diligence Checklist

Concluding a due diligence process lets potential buyers or investors discover and learn more about a company's operations, financials, and projections before confirming any transactions or investments. The due diligence process is a crucial stage for making any significant transactions or investments, which is especially essential from a mergers and acquisitions (M&A) perspective. Whether you are a buyer or a seller, it is crucial to know precisely just what information disclosed by the other party needs investigation before you can finalize any deal.  

In order to manage and arrange important business-related information, M&A specialists construct and research through a wide-ranging due diligence process checklist before they begin structuring the closing deal.

What Is The Due Diligence Process? 

The entire due diligence process is a comprehensive evaluation of a business that a prospective buyer or investor usually undertakes before making any decisions regarding investments or acquisition of another company.  

When a buyer or an investor deploys the due diligence process, an attorney reviews the focused company's operational structure, business functions, assets, liabilities, and crucial business relationships. Comprehensive data and information on these aspects of a company allow effective evaluation of the deal's strategic and commercial potential, which ensures that the merger or acquisition is valued appropriately.  

Similarly, when a seller or company owner deploys the due diligence process, an attorney helps provide suitable documents and information to the buyer or investor. Apart from just providing necessary information about the company and its operations, the attorney also helps manage the due diligence process so that the seller or the owner of the business can continue to run operations and not be inundated by document requests. 

Key Factors to Add To Your Due Diligence Process Checklist 

Every M&A deal is unique -- and the extent of due diligence process required for a particular subject will differ depending on the company and the changing aspects of the acquisition deal. However, there are certain aspects related to the due diligence process that are primarily included to formulate deals and transactions. Here are eight areas of due diligence process that need to be addressed on any due diligence checklist: 

  1. General Matters & Corporate Structure  

Company attorneys thoroughly review the business's corporate structure, capitalization methods, organizational documents, and general corporate records of the business to ensure that everything is in place. Some of the materials that are typically reviewed include: 

  • Incorporation Records 

  • Corporate Guidelines 

  • Organizational Chart 

  • Directories of All?Securities?Holders 

  • Stock Option Contracts and Proposals 

  • Stockholder and Voting Accords 

  • Warranties and Licenses 

  • Stock Appreciation Rights, Policies, and Related Endowments 

  • Recapitalization or Restructuring Records and Files 

  • Minutes From All Board, Shareholder, and Executive Committee Meetings Since Charter 

  • Agreements and Proposals Related to Any Sales or Purchases of Businesses 

Typically, corporate lawyers review the company's financial data from the last five years, which includes: 

  • Income Statements 

  • Balance Sheets  

  • Cash Flow Reports 

  • Audit Reports 

  • Credit Agreements 

  • Debts 

  • Contingent Liabilities 

Additional financial documents and data that may get reviewed includes: 

  • Projections 

  • Budgets 

  • Forecasts  

All these above-mentioned documents, data and information are acquired for a duration of the next five years to examine and evaluate whether the company's standing is satisfactory and acceptable.  

  1. Taxes and Charges 

Tax?due diligence process delves into the company's historical income tax liabilities to provide an evaluation of any tax carryforwards and their possible benefits. Corporate attorneys also verify that the taxes are present in all jurisdictions and that there are no unanticipated tax issues. Some important tax and charges related documents include: 

  • Central, State, Local, and Foreign Income including Sales and Other Tax Returns Filed in the Last Five Years 

  • Correspondence or Notice From Any Foreign, Central, State, or Local Taxing Authority Body 

  • Government Audits 

  • Tax Sharing Contracts 

  • Transfer Pricing Arrangements 

  • Net Operating Losses or Credit Carryforwards 

  • Settlement Records With The IRS or Other Tax Authorities 

  1. Tactical and Strategic Fit 

In any M&A business deal, future performance and strategic fit are considered as important as the present profitability of the company. As a prospective buyer, a crucial business viewpoint is determining the scope of a company's functions to see if they fit strategically within your existing business or how synergy can be formed in the future. This method of exploring business scopes includes: 

  • Considerations of Human Resources 

  • Integration and Transition 

  • Marginal Costs 

  • Technology 

  • General Work Culture 

  1. Intellectual Property and Rights 

An intellectual property rights attorney helps you determine the extent and value of the targeted company's expertise and intellectual property, as well as its security and rights. Predominantly, the following documents are reviewed: 

  • Patents 

  • Copyrights 

  • Trademarks 

  • Domain Names 

  • Trade Secrets 

  • Licenses and Licensing Agreements or Contracts 

  • IP Litigation, Claims and Related Documents 

  • Liens or Impediments on The Company's Intellectual Property 

  1. Assets  

The material assets of a company play a critical role in the due diligence process for actualizing any M&A transaction. It's essential to consider the total value of all assets, including any debts or liabilities that are present against these assets. Commonly, the following assets are appraised: 

  • Inventory stock 

  • Real estate 

  • Equipment 

  • Machinery 

  • Technology 

  • Research and development 

  1. Contracts and Agreements 

A corporate attorney reviews all material?contracts, agreements?and commitments of the targeted company and is one of the most serious and time-consuming parts of the due diligence process. Generally, the company attorney reviews all the contracts that are presently in force and involve the targeted company. Some of the contracts and agreements include: 

  • Customer and?Supplier?Contracts 

  • Schedule of Accounts Payable and Receivable 

  • Guarantees, Loans and Credit Agreements 

  • Partnership or?Joint Venture Agreements 

  • Equipment Leases 

  • Settlement Agreements 

  • Non-Compete Agreements 

  • Exclusivity Agreements 

  • License?Agreements 

  • Distribution and Dealer Contracts 

  • Sales Agency or Advertising Contracts 

  • Franchising?Agreements 

  • Employment?Agreements 

  1. Litigation and Related Documents 

Before purchasing a company or investing in it, it is essential to understand whether the deal would include impending legal liabilities. Consequently, a company attorney usually reviews the following: 

  • Settled?Litigations 

  • Pending, Threatened Litigations 

  • Arbitration Proceedings  

  • Regulatory Proceedings  

  1. Compliance and Regulatory Matters 

Finally, corporate lawyers also review regulatory and compliance issues that involve both the targeted company and the overall deal in general. ?Usually, the anti-trust implications and repercussions of the suggested transaction is reviewed. ? 

How TRC Helps With The Due Diligence Process? 

Any business or company that considers a transaction must first check all the assumptions about that particular deal. We, at TRC Corporate Consulting, offer due diligence services to company and institutional investors by assessing and validating all the related commercial, economic, organizational, and strategic assumptions. 

At TRC, our due diligence professionals offer comprehensive reports on the company's financial and legal stability. It enables vendors with more leverage over the process of selling and the pace of purchases, which in turn supports and secures a better value for their business. Additionally, our due diligence process also facilitates vendor assistance by delivering personalized solutions to help vendors accomplish divestments profitably and successfully. To find more about our due diligence process or other services, contact us! 

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