Due Diligence Checklist
The due diligence process is a two-way street and any potential seller should have a clear understanding of the items that must be satisfactorily vetted in order for the seller to move to a transaction. That said, sellers should expect a sophisticated buyer to request the following due diligence items.
Financial/Accounting:
Tax returns for the last 3 years, signed and filed (federal & State)
Form of company (Sub S, C, LLC, etc.)
Cash or accrual basis
Detailed Income statement last 3 years - broken down by account and unadjusted (from general ledger?) – Excel format
Detailed Cash Flow Statement last 3 years – Excel format
Detailed Balance Sheet last 3 years – Excel format
Accounts Receivable aging analysis
Accounts Payable aging analysis
List of the chart of accounts in general ledger
Name of accountant who prepared tax returns
Date of last tax audit
Agreements/Contracts:
Company Operating Agreement, or any other agreement between owners or partners in company as well as any investors
Purchase terms with suppliers (non-telecom related, if any)
List of supplier/providers in portfolio and indication if direct or through another party
Copies of supplier/provider agreements
Customer agreement – provide any agreements you have directly with end customers
All lease agreements on real estate, equipment and vehicles
Funding:
All bank agreements, notes payable agreements if different from bank, or debt of any kind
Capitalization table – chart of owners, percent amounts and forms of equity
Summary of any fundraising – amounts, terms, etc.
Managerial Accounting:
Analysis of top twenty customers for each of last 3 years - include an explanation of any changes
Analysis of top ten providers for each of last 3 years - include an explanation of any changes
Annual Revenue last year by carrier, clarify if direct or via a master, and if so, which master
List of agents, monthly revenue last three months for each
Sales:
Length remaining in customer agreements with providers, from largest to smallest, should represent at least 80% of total commissions to your company
Sales by customer, product and provider for last 12 months
Selling method – direct vs indirect - % sales from each compared to % commissions for each
Explanation of any marketing/advertising efforts
Value-added services offered, distinguishing or common place
New markets, opportunities for upsell/cross sell in current customer base or any other possibilities for revenue growth
Liabilities:
Guarantees or contingent obligations, either personal or corporate
Applicable government regulation (include any relevant hold-backs)
Purchase commitments
Outstanding tax liabilities
Assets:
Appraisal of fixed assets - list of fixed assets with purchase price, date of purchase, accumulated depreciation and current value
Provide a summary of any IP, including trademarks, patents, copyrights, etc.
HR:
Organizational chart - individual responsibilities, length of employment, compensation, benefits and background
Copy of any employee materials – handbook, NDA/Non-compete, other
Summary of all insurance policies - type, amount of coverage, cost, carrier and renewal date
Other:
Involvement with any industry associations or conventions
Participation on provider advisory councils
Any litigation during last three years, whether plaintiff or defendant (personal or business)
Potential legal issues that are reasonably foreseeable
Industry as well as company specific risks and opportunities for the growth of the business
The due diligence process is typically an iterative one, with key information examined first and additional information evaluated once the viability of a deal is confirmed. While this list can seem intimidating at first glance, the due diligence items listed (and potentially more, depending on the specifics of the situation) are simply a reality in any transaction process.
