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Twelve Steps To Doing Due Diligence Document Review
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Twelve Steps to Doing Due Diligence Document Review

When one corporation intends to acquire another by merger or acquisition, the buyer needs to complete a thorough examination of the target corporation to evaluate its current organizational, financial, and tax position.

In short, the buyer needs to know if he is acquiring what was advertised during negotiations.

A comprehensive due diligence review focuses on 12 areas in order to thoroughly diagnose the true situation of the target corporation. This helps the buyer know what its buying, how it is acquiring, and how to structure the acquisition.

1. General Organizational Information. To learn the true organizational structure of the corporation, the reviewer must examine the articles of incorporation, business plans, reports to shareholders (not financial reports) and minutes of meetings.

2. Financial Information. The buying corporation needs to know if the target company is as healthy financially as advertised. To do this, all of the target company’s financial statements and budgets must be analyzed. You must check for subsidiaries or large debts. In addition, you need to review all lists of suppliers and customers.

3. Tax Data. It is important to carefully review all federal and state income tax returns, federal and state audits (if any) and any sales tax returns (if relevant).

4. Debts and Shareholder Information. All shareholders’ agreements and financial reports of shares must be analyzed to evaluate the true financial position of the target company. You must look for outstanding liabilities for loans and for capital leases.

5. Assets. As part of the analysis, it is important to evaluate all real property and personal property that is owned or leased by the target company. This includes obtaining copies of all deeds, leases and mortgages.

6. Insurance. You must summarize all existing insurance policies – including their premiums, coverage deductibles, etc. In addition, it is advisable to review all insurance claims.

7. Products/Marketing. If the target company sells or markets products, you must examine the list of distributors and any market reviews or plans. It is also recommended to study any competitors and their product.

8. Intellectual Property. Are there any patents, trademarks, copyrights or service marks that are owned by the target company? You need to study any license agreements and non-disclosure agreements. You need to examine whether the company owns any internet domain names.

9. Agreements. It is crucial to carefully analyze all agreements or contracts made by the target. For example, are there any security, guarantees, sales contracts, non-compete or mortgage agreements that affect the target company? This list is simply a sample of what agreements need to be thoroughly examined.

10. Law Suits. Are there legal actions – past or present – that impact the acquisition?

11. Staff (Employees). After obtaining a list of all employees and their duties, it is important to review their contracts and any supplementary agreements, stock options, profit sharing and bonus plans.

12. Environmental Impact. All corporate documents must be reviewed to determine if the target company has any environmental liabilities or hazardous materials in its possession. Examine governmental reports or permits, which will indicate whether the company is in violation of any environmental regulations or facing any claims.

The above list is simply an outline of a comprehensive due diligence document review of a merger & acquisition. In future articles, we will discuss some of the more important steps in greater detail.

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