|
|
What is Due Diligence ?
According to Merriam-Webster Online
dictionary, Due Diligence means the care that a reasonable
person exercises under the circumstances to avoid harm to other
persons or their property. It is typically a term used in
business transactions for conducting research and analysis of a
company or organization during a corporate merger or purchase of
securities.
Through due diligence, a prospective buyer/investor gathers
detailed information about the businesss operations, financial
condition and other factors that must be discovered and analyzed
before proceeding with the deal. Due-diligence also enables the
seller to evaluate the terms of the sale, the creditworthiness
of the buyer, and the tax consequences of how the sale is
structured.
The extent of a due diligence
investigation will depend on a number of factors including
the size and complexity of the businesses involved
the experience and knowledge of the respective parties
involved in the transaction
the ease with which that information can be obtained and
verified
the resources available to conduct a thorough review within
the time pressure of closing the deal
|
|
|
|
|
|
|
|
|
|
Due
diligence is an important information gathering process for a
prospective purchaser to
evaluate the strengths and weaknesses of the target business
rectify and renegotiate any new terms of agreement
cancel the deal
minimize post settlement "surprises"
determine whether or not to proceed with the acquisition of
the target business
The prospective buyer can use either in-house resources or hire
a consulting firm that specializes in due diligence and
corporate investigations to investigate the background of the
target company.
A due
diligence investigation generally includes
reviewing press and SEC filings
checking for regulatory and licensing problems
identifying liens and judgments
discovering civil and criminal litigation matters
identifying conflicts of interest and insider trading
looking into press and public records
checking the company's solvency and assets
|
|
Following is a general checklist for
conducting a due diligence of companies. All documents listed
below may not be necessary or more documents and information may
be needed depending on the type of transaction and companies
involved.
Corporate Records
Charter and By-laws
Minutes of meetings
Shareholders qualifications and registrations
Reports to shareholders
Intellectual property
Material agreements
Financial Information
Financial statements
Tax information
External and internal auditors' reports
Schedule of prepaid expenses and other assets
Product expenses & other operating expenses
Property and equipment
Cash/Investments
Accounts payable and accrued liabilities
|
|
Employee
Materials
A list of employees including positions, current salaries,
salaries, and bonuses paid during last three years, and years of
service
All employment agreements between the Company and any of its
employees
Personnel handbook and a schedule of all employee benefits and
holiday, vacation, and sick leave policies
Descriptions of qualified and nonqualified retirement plans
Copies of collective bargaining agreements, if any
Description of employee problems within the last three years
including alleged wrongful termination, harassment, and
discrimination
Description of any labor disputes, requests for arbitration,
or grievance procedures currently pending or settled within the
last three years
List and description of benefits of all employee health and
welfare insurance policies
Description of worker's compensation claim history and
unemployment insurance claims history
Copies of all stock option and stock purchase plans |
|
|
|
Licenses and
Permits
Copies of any governmental licenses, permits, or consents
Any correspondence or documents relating to proceedings of any
regulatory agency
Litigation
Schedule of all pending litigation
Description of any threatened litigation
Documents relating to any injunctions, consent decrees, or
settlements to which the company is a party
Insurance Coverage
Copies of insurance policies
Environmental Issues
Environmental audits, if any, for the Company properties
Listing of hazardous substances used in the Company's operations
Description of the Company's disposal methods
List of environmental permits and licenses
Copies of all correspondence, notices, and files related to EPA,
state, or local regulatory agencies
Copies of any environmental litigation or investigations
Miscellaneous
Press releases
Listing and description of subsidiaries, joint ventures,
partnerships, etc.
Description of any future acquisition or disposition plans
Description of any future restructuring plans
Description of Company's information management system
A due diligence effort will disclose any potential risk areas that
might require further investigation and the effort will also shed
light on potential benefits for the prospective purchaser.
Due
diligence can often result in
the purchase price being affirmed or re-negotiated
the value of the assets being reduced
additional terms and conditions being added to the agreement for
sale and purchase
assets of the business being purchased instead of shares
improved structuring of the purchase price
A due-diligence investigation will provide a level of comfort and
satisfaction to the prospective buyer to go through with the deal.
It makes good business sense to spend the money on due diligence
that can prevent problems beforehand rather than be faced with
problems after the purchase.
|
