VIEWS: 951 PAGES: 7 CATEGORY: Equity Financing POSTED ON: 6/18/2012
This is a checklist of information that should be carefully examined by venture capitalists while conducting due diligence in connection with a potential investment in a business. The checklist ensures that the potential investor reviews corporate compliance records, finances and taxes, employment and labor issues, business contracts, intellectual property rights, and litigation concerns. This checklist should be used by individuals or entities to help conduct due diligence in connection with a potential investment to ensure that the investor is making a smart and sound investment.
This is a checklist of information that should be carefully examined by venture capitalists while conducting due diligence in connection with a potential investment in a business. The checklist ensures that the potential investor reviews corporate compliance records, finances and taxes, employment and labor issues, business contracts, intellectual property rights, and litigation concerns. This checklist should be used by individuals or entities to help conduct due diligence in connection with a potential investment to ensure that the investor is making a smart and sound investment. VENTURE CAPITAL DUE DILIGENCE CHECKLIST FOR INVESTING IN A BUSINESS 1. General Corporate Compliance/Organizational Information. Review the articles of incorporation and bylaws of the company, and any/all amendments. Review the minute book of the company. Verify that the company is duly incorporated and in good standing in the state of its incorporation. Verify that the company 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 company 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 company. Review all agreements between the company 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 company, 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 company within the past five years. Review the company’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 company’s pricing policies and compliance. Review company’s inventory valuation, turnover and obsolescence review. Determine whether the company 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 company 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 company for the past five years. Obtain copies of property tax assessments for the past five years. Communications between the company 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 company’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 company’s employee benefit plans, including retirement plans, pension plans, profit-sharing plans, deferred compensation plans, health insurance, and other employee health and welfare plans. Review 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 company’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 company arising out to employment matters, including discrimination claims, grievances, arbitration cases, workers’ compensation cases, OSHA cases, labor disputes and similar matters. Review the company’s relationship with independent sales agents and other independent contractors with whom the company deals on a regular basis. Review all collective bargaining and union agreements to which the company 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 company’s major suppliers, the goods or services supplied, and annual dollar volume of business with the company. Review copies of all agreements between the company and its major suppliers Obtain a list of the company’s major customers, the goods or services supplied, and annual dollar volume of business with the company. Determine whether there are currently, or have in the past been material disputes between the company and its suppliers or customers. Review all agreements pertaining to the marketing and distribution of the company’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 company. Review documents describing the company’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 company and depreciation schedules and leases. Review any installment purchase agreements. Review service contracts on tangible personal property of the company. Obtain an inventory list, including category and aging information. Review the company’s accounts receivable records, including age, composition and write-off history. Review information about the company’s trade secrets and evaluate the company’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 company. Review the company’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 company. Review the company’s title insurance policies and consider the purchaser’s need for title insurance. Obtain copies of, and review, all appraisals of the company’s real property. Obtain copies of all studies, site evaluations, and governmental filings and reports prepared by consultants or employees of the company concerning the real property. Review the company’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 company. Review insurance coverage. 8. Legal Compliance and Litigation Matters. Determine whether the company has all required licenses or permits to operate the company’s business. Determine whether the purchaser can obtain all necessary licenses and permits by transfer from the company or otherwise. Review all regulatory reports and compliance filed by the company 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 company 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 company is, or was within the past five years, a party or which are pending or threatened against the company. 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. Review all documents relating to the company’s acquisition of its business or of other businesses. If the company has any subsidiaries, partnerships or joint ventures, each subsidiary partnership or joint venture should be investigated in the same manner as the company. Investigate all continuing obligations in excess of an appropriate dollar amount to which the company is bound. Investigate all continuing obligations which restrict the operation or scope of the company’s business, including covenants not to compete and confidentiality agreements. Review the company’s business activities outside the boundaries of the United States, including foreign subsidiaries, contracts with foreign agents (e.g., sales representatives and distributors), and all domestic and foreign laws and regulations applicable to the company’s overseas activities. Determine whether the company has engaged any broker or agent in connection with the sale, and if so, review said agreement. Review all annual and interim reports, proxy statements, and other communications distributed by the Company to its shareholders during the past three years. Review all other documents viewed by the Company as material to its operations or to the proposed public offering. Review all information or details relating to any actual or potential liabilities and/or loss contingencies of the Company not reflected in the foregoing materials, including without limitation, information relating to hazardous activities, penalty provisions, problems with meeting delivery schedules, etc.
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