Business Partnership Due-Diligence Checklist

Due Diligence looks into the organization and good standing of business partnerships by reviewing legal documents in order to establish the legitimacy and reliability of the business establishment.

This includes the following:

• Corporation's Name and Address
• Corporate Objectives
• Corporation's Registered Agent
• Stock Information (authorized number of shares, issued number of shares designation of classes of shares, value of each share)
• Incorporators and signatories of the articles of incorporation and the board of directors

 This includes:

• Time and place of shareholder and director meetings 
• Name and Address of the Company's Shareholders and directors and the procedures used for safekeeping of corporate records 
• Corporate Powers granted upon Company's Officers Directors and Shareholders
• The number of directors in the board of directors and their term length

Lawsuit Documents on Pending and Threatened Litigation should be reviewed carefully in order to assess their legal implications on the business operation.

Report on their current employment status should be carefully reviewed in order to find out its implications should retrenchment be pursued in cases of management takeover.

Changes in employee ranking should be carefully studied to determine its impact on succession planning in case of management takeover.

Current rankings are one of the important considerations to be reviewed because of its implications on separation pay before a new management will take over the business.

The current job rotation and upgrading programs could be used as reference when changes in management occur.

Reports on underutilized and redundant workforce could be used as one of the basis for any planned workforce reduction.

Reports on service pay and productivity incentives could be used as one of the reference-points when negotiations take place as soon as a new management assumes power.

Current succession and retrenchment plans are one of the considerations that could be used in case a downsizing of employees would be decided upon by the new management.

It is very important to be able to identify and communicate with shareholders who are willing to sell their shareholdings to the prospective investor.

Access to shares of stocks documents is an important consideration when planning an acquisition. This is in order to find out which group of shareholders should be given most attention in the negotiations.

Knowing who are the most active stockholders in annual meetings is a very important piece of information when considering an acquisition. This is they are the ones who could oppose a management takeover of the business.

Examining cash and stock dividend documents could be one of the deciding factors in an acquisition because dividend pay-outs could either encourage or discourage investors from taking over the business.

An investor should have a good grasp of these contracts before making a decision on an acquisition because they reveal the benefits or risks that apparently could not be seen without conducting an in-depth investigation.

Over-valuation or under-valuation of properties could encourage or discourage an investor to take over the business.

Real estate documents as well as tax declaration statements are crucial when planning an acquisition because they disclose the real status of the business properties. These estates might be nearing foreclosures due to arrears in tax liabilities or other forms of indebtedness.

Discussing with creditor banks about the company's mortgages could reveal otherwise undisclosed indebtedness of the business.

Reviewing legal documents that could point out the different places where the company conducts business should be done at all costs before deciding on an acquisition because it could disclose transactions that otherwise would not have been recorded in the financial statements.

In planning an acquisition, knowing the implications of taxes and interest expenses on the operating income could make the difference in making a strategic decision because it discloses if the business is heavily indebted due to tax obligations or to its financial obligations with its creditor banks.

It is good business practice for an investor to get hold of copies of audited financial statements and be able to compare them to the unaudited ones in order to obtain a working knowledge of the financial operations of the business. Without such knowledge an investor might end up acquiring a financially mismanaged business.

Reviewing patents makes a lot of business sense when an investor would like to size up the intangibles of the business since it could disclose potential benefits that would bring it more revenues in the coming years or so.

Reviewing copyrights and trademarks documents would enable the investor to determine the intangibles that would bring it more marketplace success in the near future.

Access to trade secret documents could become a game-changer in an investing decision because it could give business insight to the investor in terms of long-term growth and profitability.

In a planned business acquisition, an aspect to be looked into are employees compensation package, including fringe benefits, healthcare, sick leave vacation leave policies in order to determine the costs of the total compensation package to the prospective investor.

It is smart business practice to review the individual resumes of key employees as well as the terms & conditions of the employee stock ownership plan in order to ensure that no conflicts of business interests occur before a management takeover occurs,  

Reviewing employee contracts is vital when conducting due diligence as it discloses the aggregate costs of labor-related expenses to the investor. Management takeover may or may not take place, depending on how high or low the total labor expenditures are, compared to the total revenues of the business.

Renewable contracts on supply and services could give the investor a good perspective on the outsourcing activities of the business. Higher costs of outsourcing activities would discourage business takeover.

Getting hold of copies of these major contracts are usually advisable when conducting due diligence on big business under which subsidiaries and affiliates are operating. An acquisition may not occur if the core business is being undermined by the operations of its subsidiaries and affiliates.

Obtaining copies of such contracts enables the investor to take a good look on the debt management policies of the business. Through these documents, the investor could tell whether the business concern is heavily indebted to creditors.

These documents give the investor a bird's eye view of the business' debt management direction. More mortgages and collateral pledges implies that the business is heavily relying on creditors to finance its operations. This would discourage management takeover.

Knowing the scope and limitations of these licenses/permits, as well as other key regulations, could help the investor in planning an acquisition. The prospective investor would know if business efficiency is improved or not as a result of those licenses/permits and other regulatory practices.

Industry associations have regulations that make business more effective in attaining long-term growth. This would encourage more business acquisitions.

An investor would like to know if the business properties are compliant with environmental regulations. A business takeover would be threatened if these properties are not environment-friendly.

Prospective investors would not take over the business if work-related accidents are too frequent. Poor safety standards discourage management takeover.

Business takeover on a manufacturing business would not happen if their raw materials/supplies do not have Materials Safety Data Sheets because it is an indication that they have sub-standard safety regulations. It poses health risks to its workers and to the environment.

Tax declarations could be intentionally done with the connivance of the tax authorities. Declaration authenticity is important to the prospective buyer otherwise the planned acquisition would become a fraudulent act.

It is important to review the insurance coverage's of a business because the prospective investor would want to know if its employees and operations are adequately protected against actual and potential risks. Non-life insurance coverage includes fire insurance, accident insurance, etc..

An investor would want to take over a business if its property, plant and equipment are sufficiently protected against risks. If the business takes its risk management obligations serious it becomes a more attractive investment opportunity.

A review of the product lines and service reports of a business concern should be undertaken in order to determine if these lines of business are adequately supported with local distributors/dealership contracts, along with agreements from principals for indent orders transactions. This is to ensure a business concern can provide product and service warranties, improve its after-sales services and its product support offerings.

Reviewing the professional services contracts of a business concern is very important in a planned business acquisition because the investor needs to know if these outsourced professional services (such as accounting, legal and technical services) are contributing to the long-term growth of the business or not.