Buyer's Due Diligence
From the buyer's perspective, due diligence is the investigation of a business for buyer's acquisition. It typically focuses on the business's assets, liabilities, and commercial potential. To enable buyer's due diligence, the acquisition agreement usually will have a provision requiring seller to deliver certain items to buyer for its review as a part of buyer's research and investigation of the business to be acquired. A buyer normally wants to review such items as:
Documents. Insurance policies, leases, rental agreements, notes, mortgages, deeds of trust, maintenance agreements, service agreements, utility contracts, warranties, guarantees, employment contracts, waivers, licenses, approvals, authorizations, certificates, and any other documents, agreements, and contracts affecting seller's equity, assets, and business.
Governmental Notices. Notices from any federal, state, or local governmental authority regarding any violation by seller of any laws, regulations, policies, or other governmental requirements.
Inventories. An inventory of all property.
Employees. A list of all employees and their positions, duties, pay scales, social security numbers, terms of employment, accrued but unused vacation pay, and whether covered by a written employment agreement or union contract.
Tax Statements and Certificates. Most recent ad valorem tax statements and tax returns for the past three to five years.
Operating Schedule. Schedule for the past twelve months setting out the amount paid for all taxes; insurance premiums; ordinary business expenses; capital expenditures; deferred maintenance or other reserves or projected costs expected for the next 12 to 24 twenty-four months; and the total revenues collected during the past 12 months.
Permits. Certificates of occupancy and all waivers, approvals, licenses, and permits required to run seller's business.
Title Search and UCC Searches. A current survey and title report covering all real property and a search of all the offices of the secretary of state and county clerk of all states and counties where seller owns real or personal property.
As an additional part of buyer's due diligence, buyer should obtain a provision giving buyer and its representatives access to seller's business, books, and records, plus a commitment from seller to provide any additional information buyer may request. Usually, sellers require buyers to treat such information as confidential.
This informational memorandum is to provide information of interest. It is not intended to be an exhaustive treatment of its subject matter but an overview of some pertinent elements of such a transaction. It is not intended to be legal advice or a legal opinion and should not be relied on in making legal or business decisions. If you have questions, please get in touch.