It is a common occurrence for businesses, due to certain reasons such as growth, diversification, or a simple avoidance of bankruptcy, to enter a merger and acquisition (M&A) deal. Two companies go through this process when one purchases the other, or they merge to reach a common goal.
During this process, businesses are always required to act with due diligence, which refers to evaluating various parts of the M&A to ensure that both sides exercise the needed level of care.
An acquisition due diligence checklist helps buyers assess the financial health, legal obligations, tax requirements, potential risks, and many other parts of the deal before making a final decision.
If you’re looking for an M&A due diligence checklist you can follow to streamline the process, this guide is for you!
Financial Due Diligence Checklist
When talking about finances, it’s crucial to provide every relevant document. That way, the company conducting the purchase knows whether the other business’s financial health aligns with expectations.
Some of the materials generally reviewed during financial due diligence are:
- Bank statements
- Business credit card statements
- Loans
- Documents concerning any audits
- Financial and operating budgets
- Accounting policies
A financial due diligence review usually focuses on examining all financial statements in the last 3 years. It assesses revenue growth, profit made from its incorporation, debts, liabilities, and more. It’s also crucial to review liquidity levels and cash flow to ensure financial stability.
Tax Due Diligence Checklist
Although part of the financial check, we set tax due diligence as a separate section simply because of its relevance. Staying in line with tax laws is an important part of a company if it wants to ensure long-term success. Your tax due diligence M&A checklist should include the following documents:
- Tax jurisdiction schedules
- Documents of all filed taxes
- Tax audits
- Proof of up-to-date taxes (everything from income taxes to VAT and social security)
- Tax benefit agreements
Legal Due Diligence Checklist
Entering an M&A agreement shouldn’t bring one or the other company to a potential violation of the law. For that reason, a legal due diligence process is conducted, and documents usually checked include:
- Articles of Incorporation
- Key contacts
- Stock certificates
- Past or ongoing litigations
- Shareholder agreements
- Transcripts of the directors’ and shareholders’ meetings and their duration
- Company bylaws
The aim of the legal due diligence process is to evaluate all documents and ensure there are no actions that can harm the acquiring company. Verifying that the business adheres to all laws and has the evidence to prove it allows a smooth M&A.
Intellectual Property Due Diligence Checklist
With the growth of technology and social media, the distribution of an idea or product is easier than ever. However, that also means everyone has to see and potentially reuse an existing idea. That can bring many lawsuits to companies simply due to the infringement or copying of certain products and/or features.
For that reason, intellectual property (IP) due diligence checks are essential for a business to ensure the M&A doesn’t bring any future clashes with the law. Documents usually checked are:
- Lists of all patents, copyrights, trademarks, and other IP
- Proof of software owned, licensed, or used by the company
- Royalty and licensing agreements
- Proof of possession of domain names
- Past or current claims for infringement of IP laws
Organizational & Operational Due Diligence Checklist
Knowing how the company is organized and how it operates helps the acquirer learn whether the new brand fits its needs, mission, and vision.
Operational Checklist
When talking about operational due diligence, the checklist usually includes copies of these documents:
- List of suppliers and third-party service providers
- Supply contracts
- Agreements of all third-party service providers (influencers, marketing agencies, sales, franchises, etc.)
- Marketing plan and strategy
These can help understand how the business generates profit and whether it is viable for long-term success. Inventory management and IT infrastructure checks also help assess the quality of workflow.
Organizational Checklist
The organizational due diligence checklist contains everything needed to ensure the company has a strong workforce to rely on. We’re talking about documents such as:
- Certificates of incorporation
- Working contracts
- HR policies
- Copies of meetings of shareholders, board of directors, etc.
- Organizational charts
- All names the company has used to conduct business
Market Analysis Due Diligence Checklist
Many companies claim they are marketing leaders, but that’s not always the case. Hence, acquirers go over certain documents to ensure the business is positioned for sustainable growth in its industry. These include:
- Copies of revenue made by customer, age, location, etc.
- Billings of services
- Sales pipelines
- List of products
- SWOT analysis
- Marketing plans and goals
Before an M&A, a company must understand how the other brand fits and performs within the industry. By having relevant insights into it, the acquirer can compare performance metrics with the competitors, analyze customer retention rates, learn whether the company can adjust to emerging trends and more. Thus, it provides a clear picture of its future.
Risk Assessment Due Diligence Checklist
Every company must have a risk management plan. Checking it during an M&A allows both sides to adjust and prepare for any potential risks in the future. As part of this checklist, usually, businesses include:
- Detailed risk management plans (legal, operational, marketing, etc.)
- Mitigation plans
- Contingency plans
Every document, from the drafts to the suggestions, should be included in this checklist. The goal of this due diligence assessment is to ensure the company runs smoothly so there is no unseen harm to the acquirer.
Conclusion
An acquisition due diligence checklist practically looks into every part of a company to ensure all operations run smoothly before going forward with the M&A. A well-structured due diligence checklist will help evaluate all acquisition opportunities and mitigate potential risks.
Following a systematic approach ensures a smooth transition and boosts profits. Once you’ve completed your due diligence check, don’t forget to summarize all key insights so you know you’re making the right choice with the M&A.