Due Diligence Part 3 of 4

This is the third part of a four-part article, which discusses the 20 most likely items that a buyer will request when analyzing a business. The last two posts on the blog discussed the first ten items that may be requested by a buyer when purchasing a business. This week’s posting will discuss items 11 through 15 that are frequently requested by the buyer.

11. Leases- a schedule should be requested which lists all of the lease obligations of the business. For each obligation the following information should be provided: a.) landlord’s name and address, b.) the address of the property being leased or description of property if it is equipment , c.) term of lease, d.) lease number, e.) total lease payments to be made, f.) annual amount of lease payments, g.) early termination fees, if any, h.) due on sale provisions, i.) other obligations of tenant and landlord, j.) guarantees, if any, and k) other covenants. If the landlord is a related party, that information should be indicated as well. Copies of the leases, guarantees, equipment descriptions, architect’s plans and and other relevant documents should also be provided.

12. Benefit Plans- the business should provide a listing of all benefit plans that it provides to its employees such as Profit Sharing, 401K plans, Pension Plans, Health Savings Accounts, Dependent Care Plans, Long-term Disability Plans, etc.  For each plan, the Summary Plan Description Booklet, Plan Document, Participant Statements, Tax Returns, Financial Statements, and Actuarial Reports, if any, should be provided.  A listing of the employers and employees contributions, as well as any outstanding obligations, should also be obtained.

13. Real Estate Owned- If the business owns any real estate, a listing of the properties owned including a description of any buildings, the location's address, property dimensions and size, zoning, annual taxes, appraisals, and assessments should be compiled and summarized in a chart.  Copies of the deed and title searches should also be provided.

14. Advisors- the names of all of the business’ key advisors including attorneys, CPAs, insurance brokers, and outside consultants should be prepared.  In addition to providing the contact information for each individual, the annual fees that were paid over the last three years, along with the scope of the work, rates, and ongoing obligations should be compiled in a chart.

15. Backlog- The backlog provides security to a potential buyer since it represents sales that have not yet been fulfilled. The seller should provide a list of the goods or services that have been ordered by customers but not yet provided. The listing should provide details such as the customer name, names of products/goods ordered, quantities delivered vs. outstanding, pricing, gross margins, deposits received, balances due, and expected delivery or installation dates.