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Legal Due Diligence Checklist For Buying A Business

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Legal Due Diligence Checklist For Buying A Business Powered By Docstoc
					This is a checklist of information, documentation and other materials that a potential
buyer of a business should carefully examine before purchasing a business. It is
essential that a potential buyer exercise due diligence when making a financial decision
of this magnitude. The checklist ensures that the potential buyer reviews information
regarding the business' corporate compliance, financial and tax matters, employment
and labor matters, business contracts, intellectual, personal and real property, and
litigation matters. This document is a useful tool for potential purchasers of a business
or their attorneys.
          LEGAL DUE DILIGENCE CHECKLIST FOR BUYING A BUSINESS

1. General Corporate Compliance/Organizational Information.

     Review the articles of incorporation and bylaws of the seller, and any/all amendments.
     Review the minute book of the seller.
     Verify that the seller is duly incorporated and in good standing in the state of its
incorporation.
     Verify that the seller is qualified to do business in all states in which it transacts business.
     Review all stock certificates and determine the number and type of the authorized and
issued shares of stock of the seller and the registered owners of the issued and outstanding
shares.
     Determine whether there are options, warrants, or other rights to acquire shares
outstanding.
     Review stock transfer records of the seller.
     Review all agreements between the seller and its shareholders.
     Review securities law filings under state and federal securities laws.

2. Financial and Tax Information

     Review the financial statements, balance sheets and income statements of the seller,
including all profit and loss statements for the current year and the past five years.
     Review all budgets, business plans, projections and management reports prepared by the
seller within the past five years.
     Review the seller’s accounts payable, including their quality, aging and composition, and
determine if there are any disputed accounts.
     Secure credit reports.
     Review any forecasted income statements and balance sheets. if available, for both the
current and following fiscal years, or for such periods as forecasts have been prepared, and the
assumptions upon which the forecasts are based.
     Review seller’s pricing policies and compliance.
     Review seller’s inventory valuation, turnover and obsolescence review
     Determine whether the seller has any secured financing, including accounts receivable or
inventory financing, and review all documents associated with that financing.
     Review and create a list of names and locations of all banks utilized by the seller
including full information on the types of accounts and the names of persons authorized to draw
thereon.
     Review all bank loan agreements.
     Review all federal, state, and local income tax returns of the seller for the past five years.
     Obtain copies of property tax assessments for the past five years.
     Communications between the seller and the IRS, including, without limitation, audit and
revenue agent’s reports (federal, state and local); settlement and consent documents and
correspondence; and agreements waiving statute of limitations or extending time.
     Copies of documents relating to IRS or state tax proceedings, deficiencies assessed, or
audits commenced.
3. Employment and Labor Matters.

     Obtain a list of the seller’s employees, their job classifications, compensation, and length
of employment.
     Review all employment agreements.
     Review all indemnification contracts or similar arrangements for officers and directors of
the Company.
     Review all of the seller’s employee benefit plans, including retirement plans, pension
plans, profit-sharing plans, deferred compensation plans, health insurance, and other employee
health and welfare plans.
     All documents relating to employee stock option plans, incentive stock option plans,
employee stock purchase plans, stock bonus plans, salary bonus plans and any other benefit plans
or arrangements.
     Review the seller’s personnel manual and all documents furnished to employees in
connection with their employment.
     Review the current and proposed organizational structure of the Company.
     Determine whether there are any claims by employees or government agencies, or
investigations, pending against the seller arising out to employment matters, including
discrimination claims, grievances, arbitration cases, workers’ compensation cases, OSHA cases,
labor disputes and similar matters.
     Review the seller’s relationship with independent sales agents and other independent
contractors with whom the seller deals on a regular basis.
     Review all collective bargaining and union agreements to which the seller is a party.
     Review any copies or schedules of contracts, plans, or arrangements regarding election or
termination of directors and officers.

4. Business Contracts and Commitments

      Obtain a list of the seller’s major suppliers, the goods or services supplied, and annual
dollar volume of business with the seller.
      Review copies of all agreements between the seller and its major suppliers
      Obtain a list of the seller’s major customers, the goods or services supplied, and annual
dollar volume of business with the seller.
      Determine whether there are currently, or have in the past been, material disputes
between the seller and its suppliers or customers.
      Review all agreements pertaining to the marketing and distribution of the seller’s
products or services, including all agreements with independent sales representatives,
distributors, marketing companies and franchisees.
      Review all material agreements with customers, including warranties provided to
customers
      Review all installment sales agreements
      Review all forms of sales invoice, purchase order, receipt, agreements, and other sales
documents used by the seller.
      Review documents describing the seller’s products or services such as promotional
literature, brochures, and newsletters.
      Review copies of any license or royalty agreements.
    Review any sale-leaseback arrangements.
    Note any membership agreements or other relations with trade associations.

5. Intellectual Property.

     Review all material license agreements relating to intellectual or intangible property
running to and from the Company.
     Create a list of all patents, trademarks and copyrights held by or licensed to the company.
     Review all documents relating to patents and trademarks including filings with U.S.
Patent and Trademark Office.
     Note any policies and procedures relating to identification and protection of trade secrets
and other confidential information developed by the company and/or disclosed to the company
under a covenant of nondisclosure.
     Review the technological infrastructure of the Company, including: proprietary hardware,
software systems, and networks; all leased, purchased, or shared hardware, software systems,
and networks; all interconnecting hardware, software systems, and networks’; environmental
systems, including vaults, alarm systems, elevators, and telephones
     Review sales contracts for hardware and software systems, including warranty
provisions, licensing agreements, operating agreements, maintenance and service contracts,
consulting agreements and other strategic business relationships pertaining to data processing
and information technology.

6. Equipment and Personal Property.

     Obtain a list of all machinery, equipment, furniture, and fixtures owned or leased by the
seller and depreciation schedules and leases.
     Review any installment purchase agreements.
     Review service contracts on tangible personal property of the seller.
     Obtain an inventory list, including category and aging information.
     Review the seller’s accounts receivable records, including age, composition and write-off
history.
     Review information about the seller’s trade secrets and evaluate the seller’s trade secret
protection program.
     Obtain a search of appropriate state and local records for U.C.C. financing statements and
other evidence of liens or encumbrances on the personal property of the seller.
     Review the seller’s insurance coverage on personal property.

7. Real Property.

     Obtain legal descriptions and information about the location and character of all interests
in real property owned or leased by the seller.
     Review the seller’s title insurance policies and consider the purchaser’s need for title
insurance.
     Obtain copies of, and review, all appraisals of the seller’s real property.
     Obtain copies of all studies, site evaluations, and governmental filings and reports
prepared by consultants or employees of the seller concerning the real property.
     Review the seller’s real property depreciation schedules.
     Review copies of all leases, including amendments, and investigate whether there are any
defaults under the leases.
     Investigate the presence of hazardous materials or toxic substances on, under, or about
any property owned or leased by seller.
     Review insurance coverage.

8. Legal Compliance and Litigation Matters.

     Determine whether the seller has all required licenses or permits to operate the seller’s
business.
     Determine whether the purchaser can obtain all necessary licenses and permits by transfer
from the seller or otherwise.
     Review all regulatory reports and compliance filed by the seller with governmental
agencies within the past five years, including all consents, filings, and correspondence.
     Determine what government regulations apply to the business and whether any changes
in those regulations are pending.
     Consider whether the seller is in compliance with environmental regulations.
     Obtain a description of all pending and possible litigation, administrative or arbitration
proceedings, or other adversarial proceedings to which the seller is, or was within the past five
years, a party or which are pending or threatened against the seller.
     Copies of pleadings, briefs, and decisions filed or rendered in connection with, and
opinions of counsel for the Company with respect to, all litigation, arbitration, and governmental
proceedings to which the Company or any of its directors, officers, or key employees have been
or are a party within the past five years or which are threatened against any of them.
     Copies of any consent decrees, prospective judgments, writs, orders and injunctions to
which the Company or any of its directors, officers, or key employees have been or are a party
within the past five years or which are threatened against any of them.
     Copies of any settlement agreements or correspondence regarding such to which the
Company or any of its directors, officers, or key employees have been or are a party within the
past five years or which are threatened against any of them.

9. Miscellaneous.

    
				
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Description: This is a checklist of information, documentation and other materials that a potential buyer of a business should carefully examine before purchasing a business. It is essential that a potential buyer exercise due diligence when making a financial decision of this magnitude. The checklist ensures that the potential buyer reviews information regarding the business' corporate compliance, financial and tax matters, employment and labor matters, business contracts, intellectual, personal and real property, and litigation matters. This document is a useful tool for potential purchasers of a business or their attorneys.