This document provides a checklist and summary regarding information and documents
a person should consider when purchasing a business. The sale of a business can be a
complicated transaction and the purchaser should exercise his or her due diligence.
This checklist raises many of the issues that may arise during the sale of a business. It
is important that a potential purchaser review this information to know what assets he or
she is acquiring and what liabilities he or she is assuming. This document also sets
forth some of the state and federal laws which may apply. This checklist should be
reviewed by any potential purchaser of a business.
Due Diligence Checklist when Purchasing a Business
The sale of any ongoing business, even a sole proprietorship, can be a complicated
transaction. The buyer and seller (and their attorneys) must consider the law of contracts,
taxation, real estate, corporations, securities, and antitrust in many situations. Depending on the
nature of the business sold, statutes and regulations concerning the issuance and transfer of
permits, licenses, and/or franchises should be consulted. If a license or franchise is important to
the business, the buyer generally would want to make the sales agreement contingent on such
approval. Sometimes, the buyer will assume certain debts, liabilities, or obligations of the seller.
In such a sale, it is vital that the buyer know exactly what debts he/she is assuming.
In any sale of a business, the buyer and the seller should make sure that the sale
complies with the Bulk Sales Law of the state whose laws govern the transaction. A bulk sale is
a sale of goods by a business which engages in selling items out of inventory (as opposed to
manufacturing or service industries). Article 6 of the Uniform Commercial Code, which has been
adopted at least in part by all states, governs bulk sales. If the sale involves a business covered
by Article 6 and the parties do not follow the statutory requirements, the sale can be void as
against the seller's creditors, and the buyer may be personally liable to them. Sometimes, rather
than follow all of the requirements of the bulk sales law, a seller will specifically agree to
indemnify the buyer for any liabilities that result to the buyer for failure to comply with the bulk
sales law.
Of course the seller’s financial statements should be studied by the buyer and/or the
buyers accountants. The balance sheet and other financial reports reflect the financial condition
of the business. The seller should be required to represent that it has no material obligations or
liabilities that were not reflected in the balance sheet and that it will not incur any obligations or
liabilities in the period from the date of the balance sheet to the date of closing, except those
incurred in the regular course of business.
A sale of a business is considered for tax purposes to be a sale of the various assets
involved. Therefore it is important that the contract allocate parts of the total payment among the
items being sold. For example, the sale may require the transfer of the place of business,
including the real property on which the building(s) of the business are located. The sale might
involve the assignment of a lease, the transfer of good will, equipment, furniture, fixtures,
merchandise, and inventory. The sale may also include the transfer of the business name,
patents, trademarks, copyrights, licenses, permits, insurance policies, notes, accounts
receivables, contracts, cash on hand and on deposit, and other tangible or intangible properties.
It is best to include a broad transfer provision to insure that the entire business is being
transferred to the buyer, with an itemization of at least the more important assets to be
transferred.
In making this allocation, the buyer's interests will often conflict with the seller's. The
seller will ordinarily seek to maximize its capital gain and ordinary loss by allocating the price to
items producing such a result. The buyer will normally seek to have the price allocated to
depreciable assets and to inventory in order to maximize ordinary deductions after the business
is acquired.
Due Diligence Checklist
1. Business Information
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Reasons business is for sale
Amount of business for sale (all or part)
History of business
Description of products and/or services
Address of business
Date and state of incorporation
States in which the company is qualified to do business
Minute books, bylaws, certificate of incorporation, and stock certificate book
Shareholder agreements
Any special restrictions on the sale
Shareholders and their holdings
Rights of each class of stock and other securities
Capitalization
Fiscal year
Accountants- name, address for each
Attorneys- name, address for each
Location of company records
Credit rating
Bank depositories
Bank references
2. Operations
Description of business, including manufacturing, distribution, and marketing
activities
Manufacturing history and agreements
Distribution history and agreements
Marketing history and agreements
Advertising history and agreements
Public relations history and agreements
Principal vendors and terms
Government contracts
Seasonal factors
Branch offices and associated operations
Subsidiaries, associated operations, and intercompany dealings
Documentation on systems & processes
3. Sales
Description of the market
Relative size in the industry
Major competitors
Industry trends and recent developments
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Industry advantages and disadvantages
Long-range industry prospects
Client names and address
Number of customers
Principal customers
Customer repeat business
Pricing policies and fluctuations in the past three years
Sales backlog
Sales materials
Sales personnel compensation
Effectiveness of advertising and other sales promotion programs
Gross and net sales for the past three years and for the last twelve months
Sales comparison with the industry for the past three years and for the past twelve
months
4. Personnel
Organization chart
Number of employees and their positions
Employee contracts
Independent contractor agreements
Condition and accuracy of employee records
Union contracts
Morale and human resource issues
Consultants - terms and payments
Pension, profit-sharing, insurance, stock bonus, deferred compensation, and
severance plans
Accident history, worker's compensation costs
Industry comparison as to wage rates and number of employees
5. Intellectual Property
Status of patents
Status of trademarks
Status of copyrights
Status of trade secrets
Status of domain names
Use of name issues
Intellectual property ownership - company or individual
Licensing agreements
Infringement and other intellectual property litigation
Protection policies
United Sates/ international strategies
Brand management strategies
Research and development strategies
6. Business Facilities
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Location
Status of leases
Assignability of leases
Land owned or leased - description, value, taxes, future plans
Buildings owned or leased - description, value, taxes, future plans, depreciation
Furniture, fixtures - description, value, condition, depreciation, useful life
Insurance coverage
Ownership of title
All Uniform Commercial Code (UCC) filings
7. Computer Systems
Network system - type, setup
Computers networked - how many, description
Computers- condition, value, depreciation- owned or leased
Computer programs installed - owned or leased
Vendor and service arrangements
8. Financial and Related Data
Tax returns for the past three years
Annual and quarterly statements, including balance sheets, income statements
Earnings record, including gross and net profit margins
Earnings record compared to the industry
Break-even analysis
Payroll - federal and state(s)
Annual and quarterly payroll report