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Due Diligence Review Part Iv: Position In The Marketplace & Adminstrative Records
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Due Diligence Review Part Iv: Position In the Marketplace & Adminstrative Records

When most lawyers think of document review, they think of a pack of attorneys sitting at desks with a PC tagging electronic documents for responsiveness (or not) as part of the litigation discovery process. This is what occurs daily all over every major U.S. city, the Philippines and India.

However, there is another type of legal document review that is an important facet in corporate mergers and acquisitions – due diligence review.

When one company intends to acquire another, by merger or another method, it must conduct a comprehensive and detailed analysis of the target company before completing the process. This is called due diligence review.

In this fourth and final article on the entire due diligence process, we are focusing on the target company’s position in the market and administrative records.

Target Company’s Position in the Marketplace

Customers are the driving force of any business. It is crucial to evaluate the makeup of the target company’s customers. Equally important is a study of the company’s market and is there potential growth opportunities.

Following are the steps for a detailed evaluation of the company’s position in the marketplace:

1. It is important to analyze the customer base and answer the following questions:

  • How large is the customer base?
  • Where are the customers located?
  • Are there any “special” customers who take a large percentage of the business sales?
  • Can the customer base be diversified to spread the revenues over a larger customer base?

2. Evaluate customer loyalty. Determine the degree of customer loyalty maintained by the business. It is also important to discern whether there are key customers who are loyal to the owner rather than the business.

3. All customer agreements must be carefully reviewed for their expiry dates, renewal options and termination procedures.

4. Examine whether the target company’s industry is showing overall growth.

5. It is very important to evaluate the company’s customer service staff and processes. A company cannot be successful in business without effective customer service.

6. Review the company’s advertising procedures – what campaigns were successful and why? Evaluate which media channels worked and did not work.

7. Analyze the company’s website and determine if it is cost effective to refurbish it.

Target Company’s Administrative Records

Administrative records are the documents detailing the management procedures of the company’s day-to-day operations. This data must be carefully scrutinized to create a clear picture of the target company’s true status.

Following is a list of some of the important administrative records:

1. All current contracts must be reviewed – regardless they are with consultants, independent contractors or sales agents.

2. Bank statements for all bank accounts must be analyzed to measure debt.

3. Evaluate the company’s inventory for its market value.

4. Carefully scrutinize the company’s insurance policies for the amounts, name of insurers, life, health, liability, property, etc.

5. Examine any insurance claims incurred but not reported.

6. Review the company’s credit reports.

7. Determine whether the target company’s pricing policies are up-to-date or not.

8. Review the company’s memberships in any clubs or trade associations.

9. Evaluate the company’s organizational chart.

10. Examine the employee handbook to make sure that employee policies are in compliance with state and federal employment laws.

The above lists are by no means exhaustive of all that needs to be analyzed when completing a due diligence review before acquiring another company. It is advised that you contact a reputable law firm or legal services company who has experience completing due diligence review.

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