Due Diligence - Part 2 of 4

6. Shareholders, Buy-Sell, and Operating Agreements-These agreements frequently indicate who has the authority to approve the sale of the business and if any shareholder or member has the ability to block or veto a sale. If the agreements provide a value for the business than is different than the sale price, the reasons for this difference should be provided to the buyer. A listing of all shareholders/members along with their ownership interests and rights should be provided along with a list of any option holders and any additional rights that have been conveyed to different classes of stock such as cumulative dividends.

7. Employee Files- All information pertaining to the business’ current and former employees is vital to anyone who is considering purchasing the business. Frequently, employees have options, restricted stock, and other forms of equity interests in the business that should be disclosed along with any severance obligations. It is usually helpful to prepare a chart listing all the following information for every employee:

Name
Address
Employee Number
Date of Hire
Current Title
Job Description
Work Location- (City)
Salary and compensation over the past three years
Bonus amount and calculation
Equity Ownership
Options
Health Insurance Status
Other perquisites received from the business such as automobile allowance, life insurance, 401k plan, etc should be provided
Severance Obligation, if any
Supervisor's Name

However care should be taken that this disclosure does not violate HIPPA or any other privacy laws.

8. Key customers- A listing of the business’ customers as well as the sales to each customer over the last few years should be provided. A buyer is frequently concerned if the sales are concentrated with a small group of the business’ customers. A schedule outlining all customer contracts, with commencement and termination dates, pricing, volumes, products or services purchased, assignment rights, contact information, and other relevant provisions, such as if the contract can be terminated upon sale, should be provided along with copies of the contracts.

9. Supplier Relationships- as is the case with customer lists, a spreadsheet of the business’ suppliers along with the relevant information and copies of all contracts should be provided. Some issues that a buyer will try and determine are if the business is dependent on a few suppliers that cannot be easily replaced, if the contracts are with related parties, and if the contracts can be terminated upon sale. Accordingly, a chart should be prepared summarizing the relevant supplier data.

10. Debt-a schedule should be prepared listing all of the debt obligations of the business. For each obligation the following information should be provided: a.) creditor’s name and address, b.) loan number, c.) original amount of debt, d.) current amount of debt, e.) interest rate, f.) amortization period, g.) balloon payments, h.) due on sale provisions, i.) prepayment fees, j.) collateral, and k.) other covenants. Copies of the loan agreements, notes, mortgages, UCC-1s and other relevant documents should also be provided.