Short Form Due Diligence Request List

We are often approached by small businesses that are seeking capital in connection with strategic and operational advice. For anyone corresponding with us, or frankly for anyone starting to get a handle on an existing business, here’s a short due diligence request list. This list would also serve a new director well to become acquainted with the business and its strengths and weaknesses. (We have steadily maintained that even small private businesses would benefit from outside advice, even if you don’t cede actual control to a board of directors.)

The key insight here is that the due diligence process is not the completion of the checklist. We have seen too many people gather information and fail to review it, or having reviewed it, fail to incorporate it into a transaction (investment or acquisition) plan. The due diligence process starts with a list of documents, that upon review, may trigger additional questions or information requests. One simple goal is to use the diligence process to consider the financial model underlying a proposed business transaction and illuminate the assumptions, stated and unstated, upon which the model rests.

In our framework, we look at due diligence as part of the Informed Decision-Making stage (IDM); even though the analysis of due diligence materials is part of the Data-Driven Analysis stage, the use of that analysis and its impact on the terms, structure, and price of a transaction are squarely within the IDM stage.

Here’s the list. Every transactional lawyer and banker has a vastly more detailed list, as do we. But the purpose of this list is to introduce the process to owners/founders/CEOs/directors of smaller businesses who don’t have ready access to experienced practitioners.

  1. Copies of all historical financials for existing operations: Income Statement, Balance Sheet, and Cashflow statements.

    • The easiest course of action is usually to provide a “backup copy” of a QuickBooks, or other accounting program, file (with the password!). [NB: We will soon replace this requirement with a basic UFS, or unified financial statement, after we write more on that topic.]

  2. A list of property, personal or business, that might serve as security for debt financing

    • Even if the owner’s desire, as one might expect, is not to encumber personal assets, many lenders are more comfortable knowing that a principal in fact has assets at risk, even if those are not security.
  3. A current list of customers (should be in QuickBooks) and any LOI’s/contracts with price and volume commitments (for existing as well as future business).

  4. Management reports for sales rep performance and quotas for future work

  5. Sales pipeline, backlog, or similar analysis, in the format used by management

  6. A capitalization table, showing fully diluted capitalization

  7. Copies of current articles/certificate of incorporation & bylaws

  8. A current list of suppliers (should be in QuickBooks) and any LOI’s/contracts with price and volume commitments (for existing as well as future business)

  9. Other material agreements

  10. Description of any pending litigation, whether company is plaintiff or defendant

  11. Any audit letters from auditors if financials have been audited in last 3 years

  12. Employment terms with employees regarding bonuses, commissions, stock options, profit-sharing, or anything material other than salary reflected in QuickBooks

  13. Copies of all reports provided for board in the last 18 months or similar periodic management reports for the last 12 months

  14. A description of any off-balance sheet obligations or other liabilities
  15. A summary of any related-party transactions, individually or in the aggregate greater than $25,000