After you reach an agreement in principal to acquire a business and have a Letter of Intent or a Definitive Agreement in place, the next phase of the purchase process, which is the formal "Due Diligence Process", begins. This is the period where you "inspect" the company. This stage is not simply the verification of the company's financial statements; it is the only period during which you have the opportunity to immerse yourself completely in the business to really check it out.

You are looking to find problems with the business and verify that what you've been told is true. Do Not blindly "Fall in Love" with the business, you need to show restraint and not allow your enthusiasm to pollute your judgment. You need to evaluate each aspect of the business with complete objectivity so that you can make a sound decision about its viability. Determine the real "meat" of the business and available opportunities that you will be able to exploit to reap efficiencies and expand the business.

1. FINANCIAL STATEMENTS:
1. Income Statements (The shorter of five years or to inception)
2. Balance Sheets (The shorter of five years or to inception)
3. Detailed list of all off balance sheet transactions & contingent liabilities
4. Chart of Accounts
5. Year-to-Date internally generated Monthly Statements
6. Most recent five year projections
7. Revenue Projections (monthly & quarterly)
8. Comparative report comparing Revenue & Expense items (year to year)
9. Projected Revenue & Expense statements you create
10. Tax Returns going back as far as possible but a minimum of three years (Income tax, Sales tax, Property taxes, Employer taxes with withholding records & proof of payment)
11. Aged reports outlining Receivables from all customers, employees or any other party.
12. Copies of customer invoices


2. OPERATING DATA:
1. Accounts Receivable Turnover
2. Accounts Receivable Controls & Credit Policy
3. Inventory Turnover
4. Inventory Obsolescence Policy
5. Sources of Inventory Supply
6. Method of Inventory Valuation
7. Furniture & Equipment List with Depreciation Schedule
8. Equipment Appraisals (Liquidation & Replacement)
9. Equipment Maintenance & Lease Contracts
10. Historical Tax Rates & Net Operating Losses
11. Backlog by Product Line (5 year history)
12. List of Capital Expenditures (last five years)
13. Create a Detailed Priority List for Future Capital Expenditures


3. BANKING INFORMATION:
1. Listing of all company bank accounts, numbers, institution and signers.
2. Copies of all bank statements for the past 3 years with deposit books
3. Loan Documentation (Terms, Rates & Payment Schedules)


4. CONTRACTS:
1. Copies of all Lease Contracts
2. Copies of all Insurance Policies
3. Copies of Supplier Contracts
4. Copies of all Customer Contracts


5. SALES & MARKETING:
1. Copy of Current Marketing Plan
2. Copy of all Company Marketing Materials
3. Distribution Channels
4. Sales policies (sales manual if available)
5. Discount and Pricing Structure
6. List of Major Customers (5% of revenues or greater)
7. List of Major Customers (by product line)
8. List of major Customers (by market share)
9. Report with sales by customer for current year and previous year
10. List individual salespersons top accounts
11. List the Company's Top Salespeople (Will they stay?)
12. Sales Report by sales rep and their performance to date
13. List Trade Organizations
14. List Trade Publications


6. GENERAL CORPORATE & LEGAL:
1. Articles of Incorporation
2. Bylaws
3. Recent Changes in Corporate Structure
4. Capitalization schedule (outstanding equity & debt issues)
5. Shareholder List (include number of shares & % owned)
6. Stock Option, Warrant or Rights Plans
7. Description of Parent, Subsidiaries and/or Affiliates
8. Copies of Any Shareholder's Agreements
9. Minutes of all Board of Directors Meetings
10. Minutes of all Shareholders Meetings
11. Copies of all documents related to any ongoing or potential legal proceeding (get outside estimates of potential damages)


7. BUSINESS PLANS:
1. Most Recent Five Year Plan
2. Prior Business Plans
3. Product or Service offerings
4. Patents & Other Intellectual Property
5. List any Strategic Relationships with terms


8. SYSTEMS:
1. Provide an outside evaluation of all technology
2. Copy of All Software Manuals
3. Familiarize Yourself with the Company's Web Site if Any
4. How is the Web Site Maintained & by Whom
5. How Much of the Company's Business is Done on the Web
6. Do the Company and/or its Employees Use E-mail
7. Copies of all Reports Currently Being Produced
8. Discover How the Business Operates & the Role Played by the Technology / Systems in Place
9. Will You Need New Systems, Determine What is Needed & Costs


9. REAL PROPERTY:
1. Description of all Real Property
2. Is It Owned (Get tax statements and recent appraisals)
3. How is it Valued?
4. Get Depreciation Schedules
5. Determine the Condition of the Property
6. Is Current Property Sufficient for Expansion


10. ENVIRONMENTAL LIABILITIES:
1. Describe of Potential Liabilities
2. Copies of Phase One Studies
3. Copies of Phase Two Studies
4. Five Year Projected Remediation Cost
5. Five Year Projected Compliance Cost


11. COMPETITION:
1. Names and Contact Information for all Competitors
2. Financial Information on the Largest Competitors
3. Chart of Competitive Advantages & Disadvantages
4. Understand the Market & the Company's Market Share


12. EMPLOYEES:
1. Organizational Chart
2. Job Descriptions, Compensation (itemized salary, bonus, non financial compensation such as car allowance, expense account, etc.), years of service
3. Performance Evaluation Criteria
4. Profit Sharing Policies
5. Copies of any Employment Agreements
6. Copies of any Consulting Agreements
7. Copies of employee files with memos for reprimands or any other disciplinary actions or warnings
8. Copies of any Union Contracts with Contact Information
9. Copies of Employee Benefit Programs (Medical & Retirement)
10. Summary of company incentive plans, including profit sharing


13. PENSION PLANS:
1. Description of Plans & Plan Management
2. Funding Status
3. Balance Sheet Treatment
4. Ten Year Projected Cash Expense


14. RETIREE MEDICAL BENEFITS LIABILITIES:
1. Funding Status
2. Balance Sheet Treatment
3. Ten Year Projected Cash Expense


15. PROFESSIONALS:
1. Interview the Company's Attorneys (Past & Present)
2. Interview the Company's Accountants (Past & Present)
3. Interview the Company's Investment Bankers (Past & Present)
4. Interview all Consultants used by the Company in last Three years