Record company details

The first step in the private equity due diligence checklist is to record the details of the company being examined. Do so using the form fields below.

Copies of Corporate Records:

Certificate/Articles of Incorporation/Corporate By-Laws

Examine articles of incorporation in order to determine the vision/mission statements, corporate objectives/by-laws, other information about the incorporators before making an investing decision. Vital information such as corporate objectives and suchlike might run counter to the business direction of the prospective buyer.

Corporate Stock Documents:

Minute Books

Review minute books of the corporate secretary in order to find out the agenda of the board meetings because decisions on such meetings affect investing decisions of the prospective investors.

Stock Book and Stock Ledgers

Examining stock book/ledgers is a way of knowing the changes in the shareholdings of the stockholders which in turn might raise their controlling stake and thus their corporate power over the operations of the business. These accumulation of corporate power would block any attempt to acquire a business concern.

Stock Options, Rights, Warrants and Dividends Plans

Check to verify stock-related information such as stock options/right/warrants/dividend plans because such information gives the current shareholders more controlling stakes over the business. The prospective investor should familiarize himself/herself with such information as these particulars would affect business acquisition-decisions.

Treasury Shares Documents

Review treasury shares documents in order to find out the shareholdings bought back by the business concern for possible re-sale to other investors, who would like to have a more controlling stake in the business operations.

Preemptive Rights Agreements on Debt-Equity Securities

Check to verify preemptive rights agreements on debt-equity securities as these rights would give current shareholders more controlling stakes over the business and thus more corporate power. This corporate power would block any attempt to acquire the business.

Intellectual Property:

Patents Clearance Documents

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

Trade Secrets Documents

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.

Copies of Major Contract/Agreements:

Product/Service License Agreements

License agreements with principals should be reviewed as this would affect the decision to acquire the business concern because it might contain terms & conditions prohibiting any changes in business ownership.

Marketing Agreements documents

Marketing agreements with distributors/dealers should be examined as they might contain provisions that are not advantageous to the business concern.

Independent Vendor Agreements documents

Independent vendor agreements with major suppliers/contractors should be checked to verify certain stipulations that might run counter to the business direction of the prospective investor.

Lease Agreements

Lease Agreements considered as long-term contract should be reviewed as they might contain certain prohibitions over changes in business ownerships.

Joint Venture Projects Contracts

Joint Venture project contracts should also be checked to verify whether its clauses/conditions may not be advantageous to the prospective investor.

Employer-Employee (Permanent/Casual Worker) Contracts

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

Service Providers/Professional Services Contracts

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.

Copies of Retirement Pension Plans/Trust Fund Contracts

Retirement Pension Plans/Trust Fund should be reviewed because there might be some provisions that could pose obstacles to a management takeover.

Copies of Renewable Supply/Services Contracts

Copies of renewable supply/services contracts should be studied. Some of these contracts may contain certain provisions that would be disadvantageous to the prospective investor.

Copies of Agreements on Subsidiary, Joint Ventures and Partnerships

Agreements on Subsidiaries, Joint ventures, and Partnerships should be thoroughly studied because of certain provisions/clauses that might pose a threat to any takeover bid.

Copies of Promissory Notes, Loan Agreements Credit Lines

Promissory Notes, Loan Agreements and suchlike should be carefully scrutinized by the prospective buyer since there might be some terms and conditions that might prove to be disadvantageous to a management takeover in the long-run.

Copies of Mortgages, Collateral Pledges, Security Agreements and Indentures

Mortgages, collateral pledges and the like should be carefully evaluated in order to determine if some provisions/clauses might do more harm than good in the event of a management takeover.

Personnel/Employee Benefits Documents:

Copies of Employees Compensation package for the last 3 years

Employees compensation package should be carefully studied in order to ascertain if there are some provisions that might prove to be detrimental to the prospective investor in the event of a management takeover.

Copies of Non-competition and Non-Disclosure Agreements

This includes resume of key employees, personnel handbook, schedule of employees' benefits, vacation and sick leave policies, schedule of employees' healthcare & pension insurance policies.

Reviewing these considerations is of the utmost importance since there might be some provisions that would have negative impact on the business concern in the event of a management takeover.

Permits & Licenses, Environmental/Safety Issues:

Copies of Governmental Licenses & Permits

Review of these government-issued licenses & permits is necessary since there are possibilities where the business concern might be burdened by too much regulations to the extent that it hinders its long-term growth. The prospective buyer should look into that aspect before making an investment decision.

Copies of Non-Government Regulatory Agencies

Industry Associations usually have regulations over its member-companies that might not be necessary for its viability. An investor, for instance, should carefully study such consideration before making any takeover bid.

Employee Safety and Hazards Reports/Work-related Accidents Reports

Industrial safety should be one of the priority areas that a business concern should focus on in conducting its operations. In this context, the prospective buyer should review accident-related hazards reports. A new management does not want to inherit recurring problems that could prove costly in the event of a management takeover.

Copies of Materials Safety Data Sheet (MSDS)

An investor who wants to buy out a manufacturing concern should focus its attention on the hazards facing production workers. In this context, materials safety data sheets should be reviewed in order to safeguard the well being of its workers. There might be cases when the manufacturing concern does not require materials safety data sheet (MSDS) for its procured materials & supplies. In such a case, it poses unnecessary health risks to its production workers.

Litigations, Investigations and Other Disputes:

Schedule and description of pending or threatened litigation, claims and other disputes

Pending or threatened litigation, claims and other disputes should be reviewed by the prospective investor since new management does not want to inherit such costly problems.

Description of government regulatory or administrative orders

Government regulatory circulars or administrative orders should be carefully studied by the prospective investor since there is a possibility that these regulations might affect business operations over the long-term.

Settlement agreements and Schedule of warranty claims

The prospective investor should carefully evaluate settlement agreements and warranty claims since these considerations may be used as reference to deal with similar cases in the future.

Financial Information:

Annual audited/unaudited financial statements

Review copies of comparative audited financial statements with external and internal auditors' summary reports accompanied by Notes to financial statements as follows:

  • Short-term and long-term investments
  • Analysis of accounts receivable reports
  • Schedule of prepaid expenses and other assets
  • Schedule of financing arrangements

Through these audited statements, institutional or individual investor can make a strategic decision on private equity investment.

The investor should think twice before making an investment decision if there is a huge discrepancy between the comparative audited and unaudited financial statements.

Copies of the 5 largest contracts for the current year

Check to verify copies of the five largest contracts for the current year in order to determine its financial impact on the financial operation of the business concern.

The investor can make a strategic decision based on the seriousness of the financial impact on the business concern.

Current & Projected Financial Information

Review copies of current/projected financial information (e.g. comparative cash flows statement/projections, comparative income statements/projections) in order to determine the financial implications of the business concern over the short-term/long-term period covered.

Sales Reports

Comparative sales reports for the last five years should be examined so as to determine the sales trend over that period.

An increasing sales trend should be eye-catching for the prospective investor who could be motivated to offer a premium price for the business acquisition.

Property, Plant and Equipment:

Copies of Fixed Assets Policy including depreciation methods

The prospective investor should review fixed assets policy since this is a major asset component of the business concern and since its financial impact might be too costly in the event of a management takeover.

Copies of the 5 largest contracts for the current year

Copies of the five largest contracts for the current year regarding the acquisition of machinery and equipment should be reviewed thoroughly by the prospective investor as these big-ticket items have repercussions on the balance sheet of the business concern.

Taxes Schedules:

Schedule of states and local jurisdictions in which the Company currently files tax returns for the last two years

Filing of local and state tax returns is an indication that the business concern is taking seriously its tax obligations. It represents good financial management. In this case, the prospective investor would be more than willing to pay a premium price to take over the business.

Schedule of comprehensive tax examinations/audits for the last 5 years

The prospective investor would want to take over a business that submits itself to a comprehensive tax examination/audit for the last five years. It implies that it has the means to put its financial house in order.

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