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Checklist for a Buyer Contemplating Purchasing a Business

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This document provides a checklist for a buyer contemplating the purchase of a business. The checklist provides standard questions a potential purchaser should consider including the financial, accounting, and legal background of the target business. These questions will guide the purchaser through the due diligence process which involves collecting the necessary legal, financial, and operational documents as well as confirming the seller’s representations and the material facts pertaining to the sale. Prior to receiving any confidential data about the target, buyers should be prepared to sign a Non-Disclosure Agreement in addition to providing basic personal, financial, and work experience information to the seller.

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									This document provides a checklist for a buyer contemplating the purchase of a
business. The checklist provides standard questions a potential purchaser should
consider including the financial, accounting, and legal background of the target
business. These questions will guide the purchaser through the due diligence process
which involves collecting the necessary legal, financial, and operational documents as
well as confirming the seller’s representations and the material facts pertaining to the
sale. Prior to receiving any confidential data about the target, buyers should be
prepared to sign a Non-Disclosure Agreement in addition to providing basic personal,
financial, and work experience information to the seller.
          Checklist for a Buyer Contemplating Purchasing a Business

1.   Business background.

     A.    Why is business being sold?

     B.    Length of time on the market?

     C.    Any adverse external factors facing the industry?

     D.    Any adverse factors facing the business?

     E.    Recent developments by competition?

     F.    Major customers identified?

     G.    Major suppliers identified?

     H.    Long-term contracts identified and reviewed?

     I.    Reputation of current owners/management?

     J.    Any criminal charges brought against owners/managers?

     K.    Have any operations been discontinued?

     L.    Labor union present?

     M.    Labor negotiations under way?

     N.    Reasonableness of employee salary/benefits?

     O.    Litigation reviewed (present and potential)?

     P.    Organization chart obtained?

     Q.    Employment agreements reviewed?

     R.    Key personnel to stay?

     S.    Access to current advisors (CPA, attorneys, bankers)?

     T.    Former managers to return as employees or consultants?

     U.    Covenant not to compete required?

2.   Financial background.
     A.   Business' current credit rating?

     B.   Confirmed financial information with banks, other creditors?

     C.   Mortgages and other loan agreements reviewed?

     D.   Loan agreements reviewed for consequences of a sale?

     E.   Lease obligations confirmed with lessors?

     F.   Franchise agreements reviewed?

     G.   Evidence of factoring or assignment of accounts?

     H.   Property tax amounts/valuations confirmed?

     I.   Title to assets/realty confirmed?

     J.   Liens (tax, judgment etc.)?

     K.   Contracts with related parties?

     L.   Insurance coverage adequate (property plant and equipment, inventory)?

     M.   Method of acquisition (financial accounting and tax basis)?

     N.   Possibility of seller financing?

     O.   Outside financing available?

3.   Accounting review.

     A.   Audited financial statements reviewed?

     B.   Case projections/forecasts reviewed?

     C.   Accounts payable confirmed?

     D.   Accounts receivable confirmed?

     E.   Allowance for doubtful accounts (bad debts) adequate?

     F.   Aging of accounts receivable obtained and reviewed?

     G.   Prepaid items reviewed?

     H.   Inventory value reasonable?
I.    Obsolete inventory investigated?

J.    Financing accounting policies reviewed?

K.    Cost accounting system in place?

L.    Formal budgeting used?

M.    Internal control system adequate?

N.    Cost of goods sold analyzed?

O.    EDP system adequate?

P.    Tax liabilities current?

Q.    Prior federal and local tax returns reviewed?

R.    Sick pay or vacation pay liability?

S.    Pension liabilities recorded?

T.    Retiree health care liability identified?

U.    Potential contingent liabilities identified

V.    Qualified plan in place?

W.    Qualified plans fully funded?

X.    Employee stock ownership plan (ESOP) in place?

Y.    Unusual end of period transactions?

Z.    Returns or refunds after the end of period financial statements?

AA.   Have needed maintenance or pay raises been postponed in preparation
      for the sale?

BB.   Requested 5–10 years of accounting data for analysis?

CC.   Performed analytical review of past financial data?

DD.   Inquiries made of current outside auditor?
4.   Legal formalities.

     A.    Business name properly registered?

     B.    Legally incorporated?

     C.     Authorized to do business in all states?

     D.    Scope of authorized business activity?

     E.    Classes and number of shares of stock authorized, issued, and
           outstanding verified?

     F.    Voting rights of all stock?

     G.    Any stock options, rights, or warrants?

     H.    Current directors, managers, and stockholders identified?

     I.    Minority ownership present? Potential dissenters?

     J.    Restrictions on stock transfer?

     K.    Corporate articles and bylaws reviewed?

     L.    Corporate minute book reviewed?

     M.    Buy-sell agreement or right of first refusal between stockholders?

     N.    UCC collateral filings searched?

     O.    Potential environmental problems?

								
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