Due diligence checklist for an acquisition or investment, with an expert-call workstream

A due diligence checklist splits the review of a company you might buy or invest in into workstreams: financial, legal, commercial, technology, people and operations. Each workstream has an owner, a list of documents to request from the seller and a list of questions to answer before you sign. Most checklists stop at documents. This one adds a workstream for outside expert calls, because customers, former customers and industry operators can test claims that documents cannot.

This is a general planning list, not legal, tax or accounting advice. Once you have found a business to buy, the SBA suggests considering an attorney and an accountant, and they should own the legal, tax and financial workstreams. SBA: Plan your business

A worked example: buying an automation integrator

Suppose you are buying a 40-person company that designs and installs factory automation systems for mid-sized manufacturers. The company, its size and the findings below are hypothetical. The seller says revenue is spread across many customers, the backlog is strong and the two founders who run the largest accounts will stay for two years. Each of those statements belongs to a different workstream, and each needs different evidence.

Size the review to the risk

Do not run every item at full depth. Spend the most time on the items that would change the price or stop the deal. Guidance on vendor due diligence from U.S. banking regulators makes two points that carry over well to acquisitions. The depth of diligence should match the risk and complexity of the relationship. When you cannot get information you asked for, write down the gap, understand the risk it leaves and decide how to cover it. Interagency Guidance on Third-Party Relationships

Keep a single tracker with one row per item: owner, date requested, date received, finding and open question.

The checklist

Financial

• Income statements, balance sheets and cash flow statements for recent years, and the tax returns that go with them
• Revenue by customer, to test how concentrated it is
• Backlog and signed contracts, compared with revenue actually recognized
• Debts, leases and other obligations that stay with the business
• How the price was set. The SBA lists several valuation methods, including capitalized earnings, excess earnings, cash flow, tangible assets and the value of specific intangible assets. SBA

Legal and regulatory

• Customer, supplier and employment contracts, including change-of-control clauses
• Leases, licenses and permits, and whether they transfer to a new owner
• Zoning and, if real property is included, environmental review (both on the SBA's list for buyers of an existing business)
• Pending or threatened litigation
• Ownership of intellectual property and software
• Sanctions screening of the company and its owners. OFAC's Sanctions List Service includes a search tool for the SDN List and the consolidated non-SDN lists.
• Whether the deal needs a premerger filing. Under the Hart-Scott-Rodino Act, parties to certain larger transactions must notify the FTC and the Justice Department and wait before closing. FTC Premerger Notification Program Your attorney will check whether it applies.

Commercial

• Market size and growth, the company's position against alternatives, and whether customers stay and spend more. Commercial due diligence covers scope and questions.

Technology

• Systems, code, security, open-source licenses and the people who maintain them. See the technology due diligence checklist.

People

• Organization chart, key people and what happens if one leaves
• Compensation, open disputes and retention agreements
• Who holds customer relationships. In the example, if the founders run the largest accounts, you want to hear from those customers directly.

Operations and suppliers

• Key suppliers and any single point of failure
• Insurance coverage
• For outsourced services the business depends on, use the questions in vendor due diligence.

Deal documents

The SBA lists documents an attorney and accountant typically help create and evaluate: letter of intent, confidentiality agreement, contracts and leases, financial statements, tax returns, sales agreement and purchase price adjustment. SBA

Add an expert-call workstream

Documents show what the company says. Calls with people outside the company show whether customers and the market agree. Run this as its own workstream with an owner and a tracker, not as calls squeezed in at the end.

1. List the claims to test. In the example: "revenue is spread out," "customers come back for new projects" and "the founders' relationships will transfer."
2. Pick roles, not names. Current customers you choose yourself, one or two former customers, plant or engineering managers at manufacturers who used a competing integrator, and a former project manager from the industry.
3. Set limits in the invitation. Say what the call is about and that you will not ask about anyone's current employer's confidential information.
4. Run short calls. Thirty minutes is usually enough for one topic. Ask about what people did, not predictions.
5. Log findings against the claims. Record who said what, so you can weight a seller-introduced reference differently from a customer you found yourself.

Check the terms of any call source. GLG, for example, says its experts sign terms agreeing not to share confidential or material non-public information, and that employed experts may not take part in projects about their own employer. GLG compliance

If you are new to this kind of call, how to prepare for an expert interview and how to choose the right expert cover the basics.

Write down what you could not verify

At the end, list every item you could not confirm and why: the seller would not share it, it did not exist or you ran out of time. Decide for each whether to lower the price, add protection in the purchase agreement or accept the risk. This list is often more useful to your attorney than the list of items that checked out.

Your next step

Copy the workstreams into a tracker and assign an owner to each. Circle the three claims the price depends on most, and put them at the top of the expert-call workstream.

If you need people outside your network, Instant Expert finds people who match a description, such as "plant engineering managers at mid-sized manufacturers who have hired an automation integrator." You review who it finds, it sends your invitations, and you pay only for calls that get booked. The directory pages for operations professionals in industrial automation and sales professionals in industrial automation are a place to start.