M&A Checklist for Private Equity

Nicholas J Price
Cloud technology has evolved to support deal rooms in a virtual space where private equity firms can quickly and effectively use an M&A checklist to better hone in on their next investment. A virtual data room gives private equity companies going through a merger or acquisition a secure online space for due diligence where the parties can communicate and share files securely. Here's a checklist of due diligence items to get your company started.

M&A Checklist: Due Diligence

1) Overview and History of the Company

Begin your M&A checklist with a brief overview and history of your company. List the location, date incorporated, information on the founders and major milestones. Add an organizational chart that shows subsidiaries, joint ventures and corporate divisions. Include biographies of the executive team and board. List banking, financing and investing relationships and add details on existing options, warrants or redemption plans.

2) Products

Create a checklist of product information that includes the product line, SKUs, pricing, pricing dynamics and trends, and estimated market share. List sales in dollars and units as well as total revenue. This section should include forecasted growth rates, cost structure and profitability, gross margin details, plans for expanding the product line, plans for product launches and an explanation of declining products.

3) Market

Provide an overview of the main target markets. Estimate the sizes of markets and note how they're segmented. Summarize the prospects for growth. Write a description of the outlook in the industry, along with quantitative forecasts, profitability drivers and growth drivers.

4) Competition

Compile a list of core competitors, along with a short background on products and their competition. Break down the market to show the company's market share versus its primary competitors. Review the competitors' strengths and weaknesses. Add insights on future competition, if known.

5) Customers

Offer an overview of the top customers for each product, along with their total sales. Note any major batch purchases and large orders. Provide an overview of all marketing and distribution contacts along with their terms, revenue contribution and the status of the relationship. Describe any severed business relationships, along with an explanation. This section should include samples of customer agreements and a description of the collections process. Add a schedule of all loans or advances to any customer and include any agreements that reflect pricing commitments for products or services.

6) Marketing, Commercialization and Distribution

This section should include an overview of marketing, including commercialization strategies, promotion, pricing and distribution channels by line. Include all major marketing plans, location-specific strategies, past and current research, customer surveys, and any other research and analyses. Add all marketing and advertising agreements. Provide an overview of direct and non-direct sales efforts, regular trade show participation, sales commissions, core sales collateral, price lists, brochures and literature. If applicable, add a schedule of all loans or advances to dealers, retailers or other third parties.

7) Public Relations

List all public relations agreements and commitments. Include copies of all press releases that refer to the company or related companies for the last three years. This section should include any analyst or industry reports for the last three years and a list of customer complaints for the last five years.

8) Suppliers and Vendors

Provide a list of major production materials, along with quantities and pricing. Describe pricing dynamics, drivers and trends, as well as major risks around pricing. Add a list of primary suppliers and the status of your relationship. Include a schedule of all substantial purchasing and supply contracts and schedules of loans or advances to suppliers. In addition, include a schedule of all major vendor agreements.

9) Properties and Real Estate

Describe all company property, offices, buildings and information on the functions of each property or a list of the products produced or sold at each site. Include details such as size, location, age and current ownership of each property. Include a list of employees at each property by job function and union status. Be sure to include a schedule of agreements to purchase or sell property in the future.

10) Operations

Describe operations for all product lines. Include a quantitative evaluation of the capacity of each facility that's used for production. Include a discussion on utilization as a percentage of full capacity and number of shifts for each facility. If applicable, add an overview of any backlog in orders. Summarize plans for new production equipment or facilities. Itemize an estimate of costs by land, building, equipment and operating costs. Describe the impact of improvements that technology makes possible. Describe the company's approach to quality assurance and compliance, including manuals, minutes and other correspondence.

11) Inventories

Construct a list of raw materials, work in process, finished goods, age by product line and inventory controls. Include a schedule of inventory reserves, write-offs and provisions for losses.

12) Historical Financials

Provide three to five years of historical financial statements, along with a recent statement and a comparison of the same from the prior year. Include a breakdown of fixed and variable expenses, budgets for the last three fiscal years and a comparison of projected vs. actual performance for the same period. Detail financial outliers, cash flow statements, accounts receivable and payable, and aging accounts. This section should include write-offs and provisions for losses.

13) Projected Financials

Provide at least three years of projected financials, including income statements, balance sheets, cash flow statements and the details of capital expenditures.

14) Liabilities, Security Interests and Related Financial Restrictions

In this section, include details about indebtedness, including loans, loan commitments, letters of credit, bonds, mortgages, deeds of trust, security agreements, guarantees, debt securities, leases, installment sales contracts, schedules of long- and short-term debts, schedules of operating leases, and compliance certifications and calculations that relate to the covenants. Include off-balance-sheet liabilities not yet mentioned, proposed terms for current funding, agreements for prior rounds and stock purchase offerings, grant funding, schedule of security interests, and a schedule of contracts or arrangements that restrict the company's ability to distribute cash. This section should include consents, approvals and filings from all third parties, including government bodies.

15) Accounting

Gather auditor review letters, management letters and internal audit reports and a schedule of major accounting changes for the last five years.

16) Taxes

Combine all tax information, including examinations, determinations and assessments for the last five years, including income, withholding, excise, payroll, gross receipts, property, sales and use taxes. Provide a schedule of tax return extensions, pending tax liabilities, NOL carry-forwards, tax sharing agreements, corporate tax filings, and other tax agreements and correspondence.

17) Employee Relations

Provide a list of employees, compensation, benefits, union agreements, confidentiality agreements, non-compete agreements, retirement plans, employee claims and material labor disputes.

18) Acquisitions, Divestitures and Reorganizations

This is the place to list material documents that relate to acquisitions or divestitures of business or assets over the last year and a summary of any corporate reorganizations that occurred over the last five years.

19) Legal

Your legal checklist should include pending lawsuits against or initiated by the company, along with all the details. Include a schedule of patents, copyrights, licenses, trademarks, trade names, service marks, joint-venture agreements and insurance coverage.

20) Regulatory

Provide a list of foreign, federal and state regulations and statutes that relate to the company and copies of licenses required by any government entity.

21) Environmental and Related Matters

Under this section, include all internal and external reports that cover environmental matters related to past and current properties owned by the company. Include information on waste disposal, waste disposal compliance, communications with regulatory authorities and claims related to environmental protection laws.
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Nicholas J. Price
Nicholas J. Price is a former Manager at Diligent. He has worked extensively in the governance space, particularly on the key governance technologies that can support leadership with the visibility, data and operating capabilities for more effective decision-making.