BUYING A BUSINESS
DUE DILIGENCE CHECKLIST

Regardless of whether the deal is structured as an asset transaction, a stock transaction or a merger, the buyer should make sure to know what he or she is getting into by requiring detailed information from the seller regarding its business operations and finances.   The following is a checklist of information and documents you should review:

1. Organization and Good Standing


• The Company's Articles of Incorporation, and all amendments thereto.
• The Company's Bylaws, and all amendments thereto.
• The Company's minute book, including all minutes and resolutions of shareholders and directors, executive committees, and other governing groups.
• The Company's organizational chart.
• The Company's list of shareholders and number of shares held by each.
• Copies of agreements relating to options, voting trusts, warrants, puts, calls, subscriptions, and convertible securities.
• A Certificate of Good Standing from the Secretary of State of the state where the Company is incorporated.
• Copies of active status reports in the state of incorporation for the last three years.
• A list of all states where the Company is authorized to do business and annual reports for the last three years
• A list of all states, provinces, or countries where the Company owns or leases property, maintains employees, or conducts business.
• A list of all of the Company's assumed names and copies of registrations thereof.


2. Financial Information.


• Audited financial statements for three years, together with Auditor's Reports.
• The most recent unaudited statements, with comparable statements to the prior year.
• Auditor's letters and replies for the past five years.
• The Company's credit report, if available.
• Any projections, capital budgets and strategic plans.
• Analyst reports, if available.
• A schedule of all indebtedness and contingent liabilities.
• A schedule of inventory.
• A schedule of accounts receivable.
• A schedule of accounts payable.
• A description of depreciation and amortization methods and changes in accounting methods over the past five years
• Any analysis of fixed and variable expenses.
• Any analysis of gross margins.
• The Company's general ledger.
• A description of the Company's internal control procedures.


3. Physical Assets


• A schedule of fixed assets and the locations thereof.
• All U.C.C. filings.
• All leases of equipment.
• A schedule of sales and purchases of major capital equipment during last three years.


4. Real Estate


• A schedule of the Company's business locations.
• Copies of all real estate leases, deeds, mortgages, title policies, surveys, zoning approvals, variances or use permits.


5. Intellectual Property.


• A schedule of domestic and foreign patents and patent applications.
• A schedule of trademark and trade names.
• A schedule of copyrights.
• A description of important technical know-how.
• A description of methods used to protect trade secrets and know-how.
• Any "work for hire" agreements.
• A schedule and copies of all consulting agreements, agreements regarding inventions, and licenses or assignments of intellectual property to or from the Company.
• Any patent clearance documents.
• A schedule and summary of any claims or threatened claims by or against the Company regarding intellectual property.


6. Employees and Employee Benefits.


• A list of employees including positions, current salaries, salaries and bonuses paid during last three years, and years of service.
• All employment, consulting, nondisclosure, nonsolicitation or noncompetition agreements between the Company and any of its employees.
• Resumes of key employees.
• The Company's personnel handbook and a schedule of all employee benefits and holiday, vacation, and sick leave policies.
• Summary plan descriptions of qualified and non-qualified retirement plans.
• Copies of collective bargaining agreements, if any.
• A description of all employee problems within the last three years, including alleged wrongful termination, harassment, and discrimination.
• A description of any labor disputes, requests for arbitration, or grievance procedures currently pending or settled within the last three years.
• A list and description of benefits of all employee health and welfare insurance policies or self-funded arrangements.
• A description of worker's compensation claim history.
• A description of unemployment insurance claims history.
• Copies of all stock option and stock purchase plans and a schedule of grants thereunder.


7. Licenses and Permits.


• Copies of any governmental licenses, permits or consents.
• Any correspondence or documents relating to any proceedings of any regulatory agency.


8. Environmental Issues.


• Environmental audits, if any, for each property leased by the Company.
• A listing of hazardous substances used in the Company's operations.
• A description of the Company's disposal methods.
• A list of environmental permits and licenses.
• Copies of all correspondence, notices and files related to EPA, state, or local regulatory agencies.
• A list identifying and describing any environmental litigation or investigations.
• A list identifying and describing any known superfund exposure.
• A list identifying and describing any contingent environmental liabilities or continuing indemnification obligations.


9. Taxes.


• Federal, state, local, and foreign income tax returns for the last three years.
• States sales tax returns for the last three years.
• Any audit and revenue agency reports.
• Any tax settlement documents for the last three years.
• Employment tax filings for three years.
• Excise tax filings for three years.
• Any tax liens.


10. Material Contracts.


• A schedule of all subsidiary, partnership, or joint venture relationships and obligations, with copies of all related agreements.
• Copies of all contracts between the Company and any officers, directors, 5-percent shareholders or affiliates.
• All loan agreements, bank financing arrangements, line of credit, or promissory notes to which the Company is a party.
• All security agreements, mortgages, indentures, collateral pledges, and similar agreements.
• All guaranties to which the Company is a party.
• Any installment sale agreements.
• Any distribution agreements, sales representative agreements, marketing agreements, and supply agreements.
• Any letters of intent, contracts, and closing transcripts from any mergers, acquisitions, or divestitures within last five years.
• Any options and stock purchase agreements involving interests in other companies.
• The Company's standard quote, purchase order, invoice and warranty forms.
• All nondisclosure or noncompetition agreements to which the Company is a party.
• All other material contracts.


11. Product or Service Lines


• A list of all existing products or services and products or services under development.
• Copies of all correspondence and reports related to any regulatory approvals or disapprovals of any Company's products or services.
• A summary of all complaints or warranty claims.
• A summary of results of all tests, evaluations, studies, surveys, and other data regarding existing products or services and products or services under development.


12. Customer Information


• A schedule of the Company's twelve largest customers in terms of sales thereto and a description of sales thereto over a period of two years.
• Any supply or service agreements.
• A description or copy of the Company's purchasing policies.
• A description or copy of the Company's credit policy.
• A schedule of unfilled orders.
• A list and explanation for any major customers lost over the last two years.
• All surveys and market research reports relevant to the Company or its products or services.
• The Company's current advertising programs, marketing plans and budgets, and printed marketing materials.
• A description of the Company's major competitors.


13. Litigation


• A schedule of all pending litigation.
• A description of any threatened litigation.
• Copies of insurance policies possibly providing coverage as to pending or threatened litigation.
• Documents relating to any injunctions, consent decrees, or settlements to which the Company is a party.
• A list of unsatisfied judgments.


14. Insurance Coverage


• A schedule and copies of the Company's general liability, personal and real property, product liability, errors and omissions, key-man, directors and officers, worker's compensation, and other insurance.
• A schedule of the Company's insurance claims history for past three years.


15. Professionals


• A schedule of all law firms, accounting firms, consulting firms, and similar professionals engaged by the Company during past five years


16. Articles and Publicity


• Copies of all articles and press releases relating to the Company within the past three years