A due diligence checklist is essential for legal departments involved in important transactions, such as the M&A process (merger and acquisition). This document gives attorneys an efficient way to collect and assess all the information received from a complex legal process.

Below you will see why it is important to have a due diligence checklist template ready and all the elements and items you need to include. Plus, you will be able to start right off with some templates available for their use.

The due diligence checklist is done in a way to analyze a company that your business is acquiring through sale, merger, or any other method. The checklist will show you the target company assets, contracts, benefits, liabilities, and possible problems that are carrying on.

The due diligence checklist is made in a basic format but can be re-arranged for different industries. You can use it to prepare an annual report, analyze general risk management, for a joint venture, for an initial public offering, or for a public or private financing transaction.

Having a due diligence checklist allows you to see what liabilities, suspicious contracts, intellectual property issues, obligations, and litigation risks you are assuming when you try to acquire a new company. It clarifies the M&A process, giving the legal team a feasible opportunity to understand the value of the target company and how it operates.

The buyer will get a bigger picture of the target company, maintaining transparency during the acquisition. It is also very helpful for attorneys from both sides who are in charge during and after the process.

Due diligence helps to determine the value of a business, which will directly influence the transaction for the acquisition. It is determined by examining strong data such as cash flow, products, balance sheets, and its place in the market. But it will also consider the data gained through document evaluation, employees, and any active lawsuits or insurance settlements.

Lastly, a due diligence checklist accelerates the M&A process by identifying relevant documentation and working around any regulatory problem before they complete the deal. Using model forms and different tools will keep attorneys on top of trends in M&A procedures.

Due diligence checklist documents must include any required paperwork, research, and information. Many of those are going to be divided into different categories.

For example, trademarks, environmental audits, customer contracts, financial statements, license agreements, and government audits would be located in different categories.

Whenever it comes out to due diligence checklists, you need to be thorough, as the information collected will help you determine if a deal is worth it.

Next, we will look at the different due diligence checklist categories and what kind of information should be included in each one.

Legal Due Diligence Checklist

This is a meticulous process, as legal risks must be collected and assessed to gain insight into the target company's legitimacy and viability.

All litigations, permits, agreements, and licenses will be considered during the diligence process.

The legal due diligence checklist is divided into the following sub-categories depending on the type of collected information:

• Corporate Organizations and Management:

  • Organizational charts to show the target company's corporate structure, subsidiaries, and affiliates.

  • Partnerships, joint ventures, and other purchase agreements involve sharing profits.

  • Governing documents for the target company, subsidiaries, and affiliates.

  • Information on all shareholders, board, and member meetings.

  • All the jurisdictions in which the company is licensed to do business.

  • Contracts relating to material acquisitions and physical assets from the target company.

  • All related party transactions and brief biographies for each board member and key employees.

• Capital Structure and Real Estate:

  • An analysis that will show the number of shares outstanding.

  • Copy of outstanding debt instruments.

  • Documents evidencing each issuance of private equity.

  • Summary of convertible notes, warrants, and any right entitling the holder to obtain equity.

  • Stock purchase and shares owned by each shareholder.

  • Summary of deeds of all the owned real estate, including copies of the title papers. Also, lease agreements and any related to the sale or purchase of the property.

  • Description and address of each office, warehouse, or other facility operated by the company.

• Legal:

  • Summary of material litigation, licenses, permits, and any other authorizations.

  • Copies of agreements restricting assets and copies of material contracts that could be terminable upon change of control or other transaction.

  • Contracts that will restrict the target company from performing its business activities, and the ones with obligations such as indemnification and covenants.

  • Indemnification agreements between the company and any directors, agents, or officers.

  • Copies of all policies, procedures, and other related documentation. Also, copies of any letter from regulatory agencies.

  • Summary of regulations applicable to its business and anticipated changes.

  • Documents confirming (or not) that the target has influence and other engagements.

  • Documents confirming (or not) officers or significant shareholders are subject to any Bad Actor disqualifications and whether the firm isn't restricted from doing business under OFAC regulations.

Commercial Due Diligence Checklist

This category allows the buyer to understand the appealing aspects and features of the target company.

It will give you a better picture of the company's potential on the market, along with its top customers, commercial policies, and top competitors.

The information that you collect will be divided into the following sub-categories:

• Suppliers and Commercial Policies:

  • List of the best suppliers for the last few years.

  • Contracts of the material suppliers and any subcontractors.

  • Copies of policies related to pricing, warranty claims, credits, returns, etc.

  • Summary of all the policies and procedures to apply when evaluating a new contractor or supplier.

• Marketing:

  • Summary of new products and improvements.

  • Product descriptions for all the current lines.

  • Copies of any advertising, strategic, or marketing plans with their presentations, sales sheets, brochures, and any other marketing materials.

  • Summary of all ongoing RD projects.

  • Summary of all marketing risks and opportunities.

• Customers:

  • List of all the best customers and material sales channel partners for the last few years.

  • List of customers who had stopped doing business with the company.

  • A breakdown of sales and gross profits by product type, geography, and sales channel.

  • Copies of all customer contracts, material contracts, material sales channel contracts, and government customer contracts.

Financial Due Diligence Checklist

The financial due diligence checklist will include the company’s profits, revenue, risks, and financial assets.

These aspects will give the potential buyer a clear look at the company's value, as well as the financial stability and growth potential.

Just like the others, the financial information you collect will be divided into the next sub-categories:

• Accounting:

  • Schedule of the components of all deposits and prepaid expenses.

  • Schedule of any contingent liabilities not disclosed in the financial statements.

  • Unaudited financial statements.

  • Financial statements for the target and their branches.

  • Copies of all the letters regarding accounting controls.

  • Accounting policies are necessary to understand certain financial statements.

  • Operating plans, budgets, and financial projections.

• Finance:

  • Investment policies.

  • Breakdown of cash management controls and practices.

  • Recent bank reconciliations and statements.

  • Current standby letters of credit, performance guarantees, and performance bonds.

  • Debts and arrangements that will result in a loss.

  • Hedging policies.

  • Report that will reflect all aged accounts receivable trial balances.

  • Summary of the policies related to inventory and target's inventory costing system.

• Operations and Insurance:

  • Summary of all capital expenditure projects and the ones planned for the next 12 months.

  • Schedule of equipment that should be split by capital and operating lease.

  • Copy of the latest physical inventory equipment.

  • Summary of all current insurance policies documents and coverages.

  • Summary of all the claims made against any insurance policy.

Human Resources Due Diligence Checklist

It is very important that during diligence, the company that you are trying to acquire provides information on current policies and employees. It will help to plan how to blend both work cultures effectively.

HR due diligence checklists typically pull out agreements, employee contracts, and a summary of current recruitment initiatives.

The data you need to do a proper Human Resources checklist should be organized under the next sub-categories:

• Human Resources Agreements:

  • Copies of all consulting agreements

  • Copies of compensation agreements.

  • Copies of all severance and employment agreements indicating those which will be affected by the transaction.

  • Summary of any current initiatives related to recruitment.

  • Collective bargaining agreements, nondisclosure, non-competition, or similar agreements.

• General HR:

  • Headcount by location and role.

  • Summary of litigations against the company done by current or former employees.

  • Description of any court judgment in respect of any employee dispute.

  • Details of any grievance brought by an employee or any disciplinary action taken against an employee.

  • Schedule of employees, including the ones suspended (and their reasons why).

  • Summary of absence from work due to long-term illness, disability, or otherwise.

• HR Policies and Benefits:

  • Copies of all employee policies and manuals.

  • The company’s hiring practices and policies.

  • Schedule any loans with all the sums owed.

  • Summary of any changes.

  • Breakdown of all the benefits and the company’s compensation policy.

  • Plan documents for all the benefits plans.

  • Summary of all pension plans.

  • Summary of incentive stock alternative plans.

  • Summary of any award documents related.

  • Details of bonus and beneficiaries participants.

Intellectual Property Due Diligence Checklist

The intellectual property that you acquire through the M&A process is one of the major aspects of the deal. The IP creates immense value for the transaction, and with due diligence, you will check their trademarks, patents, and digital domains.

While it is pretty straightforward, you will separate the information regarding IP into the next sub-categories:

• IP Registration and Contracts:

  • All the websites and domains are owned.

  • Summary of all the registered patents and trademarks.

  • Any IP that isn’t solely owned by the company.

  • Agreements that allow a third party the right to use an IP owned, and vice-versa.

• IP Litigation and Development:

  • Summary of all IP litigation that involves the company.

  • Any restrictions to which IP assets of the company are subject.

  • Past or current instances where a third party allegedly infringed on the company’s IP.

  • Summary of the process for developing, capturing, recognizing, and protecting IP assets.

IT Due Diligence Checklist

IT will include a detailed description of their main practices, policies, resources, and any security threats.

In today's digital age, collecting and storing this information in an online data room is vital to create cultural synergy and to lay down everything on a due diligence checklist. You will be able to ensure that key IT projects fit well with the potential buyer's initiatives.

For the IT section, the data collected is usually divided into two sub-categories:

• IT Administration:

  • Details of any planned or current IT initiatives.

  • Key IT resources (such as hardware, software, and IT experts).

  • Summary of all the software used by the company.

  • Practices and policies related to the purchase and maintenance of hardware and software.

  • Material hardware used by the company and their locations

  • Diagram of technical architecture (it will include storage devices, servers, databases, and operating systems).

  • Any vendor support services to which the company is entitled.

  • Specific hardware configurations and description of the networking systems.

  • Contracts related to software and IT services.

  • Potential growth in the company’s current IT environment.

  • Summary of how the company acquired technology and its role in strategic planning.

  • Company’s help desk effectiveness and approach.

  • Description of the level of automation and online-facing applications.

• IT Security:

  • Key security protocols.

  • Backups and recovery policies and procedures.

  • Data privacy policies and procedures.

  • Summary of all sensitive information.

  • The company’s procedures and policies related to data storage and data encryption.

  • Summary of any issues.

  • Results of stress test analysis and the resolution of any issue identified.

  • Details about monitoring measures to ensure safeguards are working as expected.

  • Procedures and policies regarding mobile device security.

  • Description of any cyber attack.

Environmental, Health, and Safety Due Diligence Checklist

It is important to assess environmental and health risks, allowing to raise conscious M&A discussions in regard to the environment. Target companies must provide information about past and present health, safety, and environmental liabilities, citations, or environmental investigations.

Most of the information collected will be separated between "Environmental" and "Health and Safety," depending on what it is asked for:

• Environmental:

  • Environmental citations, investigations, or notices of violation.

  • Information related to enforcement actions against premises owned by the company.

  • Information regarding the treatment, disposition, and storage of hazardous substances.

  • Environmental studies and assessments in respect of land.

  • All dedicated reserves for management of environmental liabilities.

  • Results of environmental audits.

  • Permits and governmental approvals for environmental matters

  • Description of any existing storage tanks.

  • Risks from arrangements for the treatment of the company's materials, liquids, and gases.

• Health and Safety:

  • Citations, investigations, and notices of violation that are related to human services and employee health.

  • Emergency response procedures and policies.

  • Accidents within the last five years.

  • Results of health and safety audits.

  • Summary of all workers' health care and compensations.

  • All material safety data sheets.

Tax Due Diligence Checklist

This checklist will include audits, returns, property taxes, tax assets, and overseas activities. Target companies must provide extensive documentation in this regard to prove their legality and legitimacy.

All the information will be collected under the umbrella of "Tax Summary" and "Returns." And it will require the following:

• All tax audits conducted in the last five years.

• Property taxes paid in the last five years.

• Any tax sharing, tax allocation, or intercompany agreements.

• Policies regarding taxes.

• Summary of deferred tax assets and liabilities and valuation allowances.

• Summary of sale, leaseback transactions, and overseas activities.

• Tax filing position.

• Tax planning.

• Previous audits related to employment taxes.

• All federal, state, and local tax returns.

• All agreements and communications between the company and any tax authorities.

A due diligence checklist template is quite an extensive document. So, the best way to make  one of your own is by using a pre-designed template and adjusted to fit your needs.

Luckily, you don't need any specialized software, as you can use simple programs such as Microsoft Excel or Word.

If you need an Excel CD key or a Word CD key, Microsoft Office 2021 Professional Plus Key Retail Global, you can buy one at a discounted price from the RoyalCDKeys store. It includes the latest version of the Office packages, which comes with programs such as Excel, Word, Outlook, Access, PowerPoint, and more.

Due Diligence Data Collection Template for M&A Process

This template will allow you to effectively manage the whole M&A process, as you can assign tasks, set alerts for incomplete items, and share the document with your team members or external auditors.

Download this Excel spreadsheet from Smartsheet.

Due Diligence Checklist Template

This template sets every section and category between tables and comes with user notes to better guide your way through it.

Download this Word document from Kindrik.

M&A Due Diligence Report Template

After the M&A process has been completed, you should analyze the results and lay them into a report to summarize key discoveries. It allows you to make recommendations on how to proceed.

You can download this template as an Excel spreadsheet or as a Word file from Smartsheet.

A due diligence checklist is an extensive document that seems quite overwhelming at first glance. But it will help you to better organize and understand the M&A process immensely.

Using any of the templates provided above, you are already making a big first step in making your own.