In today's episode, we are talking about the due diligence process from the perspective of a seller and what to expect.
What's in before an LOI:
Corporate performance
Financial performance
Market conditions
Once a seller has disclosed with a degree of accuracy these 3 main metrics (with several sub metrics) it is acceptable to expect a letter of intent (LOI) surrounding a combination. In that letter a seller should expect a valuation (at least a range), a methodology for getting to the valuation (so that adjustment to the purchase price are based on actuals vs a change in perceived value levers), a list of terms including the currency (cash, equity, earn-out / or a combination of all) as well as a detailed allocation of where the IP value sits and how it is measured.
Post LOI due diligence:
An extensive list of disclosures, documents, and artifacts that verify the information gathered prior to the execution of an LOI.
Below is a sample of the information gathered post LOI but ahead of definitive agreements (whether asset purchase or stock purchase):
| Organization | | Articles of Incorporation | | Company bylaws | | Organization Charts | | Capital structure | | Certificate of Good Standing from state in which company is incorporated | | List of regions in which the company is authorized to do business | | List of regions in which the company has employees, contract relationships, leases facilities, or transacts business | | List of any names (and documentation) under which the company may operate | | Financial Items | | Financial statements for previous three years | | Company/Auditor correspondence from previous three years | | Credit report | | Capital budget | | Strategic planning documents | | Financial schedules | | Contingent liabilities | | Indebtedness | | Inventory | | Accounts receivable | | Accounts payable | | Depreciation and amortization procedures and accounting methods in previous three years | | Financial model containing revenue, fixed and variable expenses, and gross margins | | Analysis of internal control procedures | | Physical Assets | | Listing of fixed assets and their respective locations | | Any filings for Uniform Commercial Code | | Equipment leases | | Transactions relating to major capital equipment in previous three years | | Real Estate | | Detailed listing of business locations | | Copies of | | real estate leases | | mortgages | | deeds | | titles | | surveys | | zoning approvals | | variances | | use permits | | Intellectual Property (IP) | | Listing of patents (domestic and foreign) and respective applications | | Listing of trademark and trade names | | Listing of copyrights | | Documentation | | technical know-how | | agreements regarding inventions | | licenses or assignments of IP | | patent clearance | | Listing of any claims or grievances against the company regarding IP | | Employees | | List of employees and associated employment agreements (noncompetes, nonsolicitations, nondisclosure, etc) | | Resumes for management and key managerial personnel | | Employee handbook outlining key benefits and holiday, vacation, and sick leave policies | | Plan outlines of company-sponsored retirement plans | | Documentation of any employee issues in previous three years (harassment, discrimination, etc.) | | Listing of any workers compensation claims | | Lisitng of unemployment claims | | Documentation of employee stock option and stock purchase plans information | | Licenses and Permits | | Copies of government licenses, consents, or permits | | Correspondence or documents relating to proceedings of any regulatory agency | | Environmental Issues | | Environmental audits relating to properties leased by the company | | Listing of hazardous materials used by company in operations | | Documentaiton of company procedures relating to disposal of hazardous materials | | Listing of environmental permits and licenses | | Correspondence relating to EPA or other regulatory agencies | | Listing of environmental litigation of investigations or possible superfund exposure | | Listing of contingent environmental liabilities or indemnification obligations | | Taxes | | Federal, state, local, and foreign income tax returns for the last three years | | States sales tax returns for the last three years | | Audit and revenue agency reports | | Any tax settlement documents for the last three years | | Employment tax filings for three years | | Excise tax filings for three years | | Any tax liens | | Material Contracts | | Listing of all subsidiary, partnership, or joint venture relationships and obligations | | Contracts between the Company and any officers, directors, 5-percent shareholders or affiliates | | Loan agreements, bank financing arrangements, line of credit, or promissory notes to which the Company is a party | | Security agreements, mortgages, indentures, collateral pledges, and similar agreements | | Guaranties to which the company is a party | | Installment sale agreements | | Distribution agreements, sales representative agreements, marketing agreements, and supply agreements | | Letters of intent, contracts, and closing transcripts from any mergers, acquisitions, or divestitures within last five years | | Options and stock purchase agreements involving interests in other companies | | Product or Service Lines | | Listing of all existing products or services and products or services under development | | Correspondence and reports related to any regulatory approvals or disapprovals of any company's products or services | | Summary of all complaints or warranty claims | | Summary of results of all tests, evaluations, studies, surveys, and other data regarding products or services | | Customer Information | | Listing of the company's twenty largest customers in terms of sales over the previous three year period | | Supply or service agreements | | Description or copy of the Company's purchasing policies | | Description or copy of the Company's credit policy | | Schedule of unfilled orders | | Listing and explanation for any major customers lost over the last two years | | Customers by ZIP trailing 90 days | | Average Order Value by ZIP | | Description of the Company's major competitors | | Litigation | | Listing of all pending litigation | | Description of any threatened litigation | | Copies of insurance policies | | Documentation relating to any injunctions, consent decrees, or settlements | | Listing of unsatisfied judgments | | Insurance Coverage | | Listing of the Company's insurance policies | | Listing of the Company's insurance claims history for past three years. | | Service Providers | | Listing of all law firms, accounting firms, consulting firms, and similar professionals engaged by the company during past five years | | Marketing Awareness | | Documentation of articles and press releases relating to the company within the past three years |
In summary: