You can't afford to be lax and make mistakes with Mergers and Acquisitions (M&A). Due diligence is an absolute must, no matter how well you think you know your subsidiary or partner organization. As a result, you need an M&A due diligence checklist to ensure you are successful any your deals.
Below is everything we will cover. Feel free to skip ahead.
- Why you need an M&A due diligence checklist
- How due diligence works
- Sections to include in your M&A due diligence checklist
- M&A due diligence checklists
- M&A due diligence checklist templates
Why you need an M&A due diligence checklist
Proper due diligence before and during an M&A transaction can be stressful and overwhelming. It is, however, necessary. If you want to ensure that all parties agree to an equitable deal, you need to ensure that you've checked and double-checked everything.
This is why having an actual physical checklist is so vital. It gives each of the responsible parties an itemized list of all the info they need before they can comfortably proceed with the M&A deal.
How due diligence works
The bulk of due diligence activities consists of gathering information from each party involved in the merger or acquisition. This information must be reviewed and verified for complete accuracy. Otherwise, the consolidated company may face financial or legal repercussions.
The information required from each party spans multiple business activities and departments. The best way to ensure that all of the necessary information has been collected is to obtain copies of documented evidence. Examples of due diligence documents include financial statements, tax paperwork, and legal agreements.
Sections to include in your M&A due diligence checklist
Based on these due diligence activities for collecting business data, your checklist should contain at least the following sections:
This is not a static list. It is just a guide. You may need to add sections or remove them from the list.
It depends on the industry/industries the M&A parties belong to and how many departments will be involved.
Regulations and compliance
This section refers to the regulatory policies with which each party in the M&A must comply. It includes both internal regulations and external regulations (ex. American National Standards Institute).
Legal matters cover everything from identifying information to existing agreements between each party and external entities.
These documents are among the most vital for M&A due diligence. This is because they provide insights into how legitimate, viable, and trustworthy an organization may be. In other words, how risky is each M&A party as a potential party?
Numerous factors could indicate that an organization is high-risk. These include multiple pending lawsuits and a history of broken agreements.
Before completing any M&A activities, you want to ensure that the organizations you plan to interact with have a respectable financial standing. The best way to do that is to collect each organization's financial statements.
Financial statements describe the gross profits, revenue, income, assets, liabilities, equity, and cash flow for each organization. As such, they are the best way to glean long-term market value for each organization. They also portray how capable and stable each organization is.
Taxes are the responsibility of the financial team behind M&A activities. Defining and calculating taxes is a complex process, however. For the interest of everyone involved, you should separate your tax activities into a separate section of the checklist.
An organization's commercial position forms the bridge between its financial standing and marketability. It describes how well the organization performs in the market and what kind of organizations it interacts with as customers, suppliers, and competitors. Both of these go a long way in describing the organization's public appeal.
Intellectual property rights
Intellectual property rights are a subset of legal matters that warrant their own section in the checklist. They are non-physical assets, meaning that they can be challenging to define in comparison to other assets. However, they are within the full ownership of each organization involved in the M&A activity.
Health and safety protocols
Environmental health and safety (ES&H) is closely related to legal matters. ES&H protocols describe each separate party's health and safety measures.
There are three components to ES&H protocols. They don't just cover the party's efforts to keep its employees safe. They also concern about their efforts to protect their customers and the overall operating environment.
Human Resources (HR)
M&A ventures inherently require organizations to integrate differing workforces and organizational cultures. No matter how similar these cultures may seem at the forefront, there will always be disparate areas that could cause potential conflict.
To avoid this, the best action is to compare the HR policies for each party in the M&A. This helps executives and HR managers understand how each organization differs in the treatment of its employees. As such, it also helps them determine which policies will cause the least friction when adopted by all organizations as a whole
Information Technology (IT)
As mentioned with intellectual property rights, M&A activities combine more than just physical assets for multiple organizations. They also combine technology and technological processes. Therefore, understanding how each organization conducts itself in the IT-sphere and secures its intellectual assets is necessary.
Finally, your checklist should cover any strategic marketing decisions made by each party involved in the M&A.
M&A due diligence checklists
We have compiled the following items for a thorough M&A due diligence checklist. Bear in mind that, while comprehensive, this checklist may not cover the entire gamut of operations involved in your specific M&A activity. You may need to tailor this list to make it fully applicable to your organization.
Legal due diligence checklist
- Current state organizational chart of each party corporate structure of the target, subsidiaries, and affiliates
- Annotated list of all joint ventures that require shared profits or technology between any of the parties and an entity external to this M&A activity
- Articles of Incorporation for all parties
- Articles of Organization for all parties
- Bylaws for all parties
- Operating/LLC Agreements for all parties
- Articles of Association for all parties
- Information for all board, shareholder, and member meetings
- Contracts relating to any material acquisitions, equity divestitures, assets.
- Professional biography of each board member and executive of the M&A activity
- Professional biography for any other key managers, employees, and shareholders
- Listing of all related sale transactions, including the review and approval procedures
- Listing and analysis of shares outstanding for each party
- Documented evidence of private equity for each party
- Summary of any equity rights for each party (ex. warrants, convertible notes)
- Description of all shares owned delineated by branch/district
- Copy of all outstanding debt instruments
- Future state (post-close) organizational chart detailing the full corporate structure, including subsidiaries and affiliates
- List of jurisdictions in which each party can conduct business activities
- Current contracts involving material acquisitions and other asset acquisitions
- Review and approval procedures for addendums to the M&A agreement
- Material litigation documents
- Copies of permits and licenses for domestic and international business
- Copies of permits and licenses for import and export control
- Copies of obligatory contracts (ex. indemnification, covenants)
- Copies of other indemnification agreements
- Copies of any documents that are terminable upon M&A activities and other corporate transactions
- Listing of all officers and significant shareholders subject to "Bad Actor" disqualification regulations
- Summary of all product recalls initiated in the last five fiscal years
- Copies of any communications with regulatory authorities
- Confirmation of direct and indirect engagements between any of the parties and external organizations
Regulatory and compliance
- Copies of each party's compliance program and related documentation
- Summary of asset restrictions for each party
- Address for each party's corporate headquarters
- Listing and description of each additional property owned by each party (ex. manufacturing facilities, offices, storage, warehouses)
- Copies of property surveys for each property
- Copies of real estate paperwork for all parties (ex. title papers, appraisals)
- Copies of lease agreements, purchase agreements, and/or sale agreements for each property
Financial due diligence checklist
- Copies of all financial statements for all branches of each party and each party as a whole
- A complete listing of assets, liabilities, and financial obligations that do not appear on the parties' balance sheet
- A detailed schedule of prepaid deposits and expenses
- A complete listing of contingent liabilities that do not appear in any of the parties' financial statements
- Copies of each party's accounting policies
- Copies of material changes to accounting policies
- Thorough budget and operational plan with financial projections for each party
- Copies of audited and unaudited financial statements for all parties
- Copies of official financial communications (ex. Management Representation Letters)
- Description of material changes to any party's accounting policies
- List of gross profits, sales, and revenue for each party
- Breakdown of gross profits, sales, and revenues for each party, delineated by geographical region, product/service type, demographic, etc.
- Copies of each party's cash management policies
- Copies of each party's investment policies
- Reports of aged accounts receivable balances for each party
- Copies of inventory costing systems and related procedures for each party
- Full listing of expected losses for each party (ex. existing unpaid debts)
- Copies of performance documentation (ex. performance bonds, letters of credit)
- Copies of bank statements and reconciliations for each party for the last six months before the M&A activity
- Summary of all capital expenditure projects
- A complete listing of expected capital expenditures for the next fiscal year
- Full listing of all long-term assets for each party delineated by type (i.e., capital or operating lease)
- Copies of insurance claims against each party
- Copies of insurance policies for each party
Tax due diligence checklist
- All tax audits conducted in the last five fiscal years (including results and findings)
- Summary of property taxes paid in the previous five fiscal years
- Signed and notarized copies of inter-company tax agreements (ex. tax allocation agreements)
- Summary of deferred tax assets and liabilities for all parties
- Overview of tax policies (ex. pricing transfer policies, audits)
- A complete listing of all losses/surrenders made in exchange for research and development tax credits (including confirmation of receipt from the relevant tax authority)
- Full listing of tax assets
- Summary of all sale and lease transactions
- Summary of overseas and international activities
- Description of tax filing position and any current investigations into tax activities
- Description of tax base cost of assets (only relevant for non-original cost base costs)
- Summary of tax plans for all parties
- Copies of all tax returns (at all levels—federal, state, and local)
- Copies of all tax agreements with partners outside of this M&A activity
- Copies of all communications between all parties and tax authorities
Intellectual property due diligence checklist
Intellectual property registrations
- Full listing of all registered patents and trademarks for each party
- A complete listing of all websites and domain names owned by each party
Intellectual property contracts
- Full listing of all intellectual property utilized but not solely owned by each party
- Copies of agreements between each party and external entities for the right to use intellectual property
Intellectual property development
- A thorough description of each party's process for developing and protecting intellectual property
Intellectual property litigation
- Summary of intellectual property restrictions for each party
- Overview of actual and alleged infringements upon each party's intellectual property by external organizations
- Summary of prior and current intellectual property litigation in which each party has been involved
Health and safety due diligence checklist
- A complete listing of each party's emergency response protocols
- Full listing of all safety incidents and accidents for each party in the last calendar year
- A thorough description of each party's healthcare, disability, and workers' compensation policies
- Copies of all investigations, notices, and citations related to employee health and safety for each party
- Copies of all investigations into each party's environmental practices
- Copies of all citations and notices of violation incurred by each party
- Summary of all health and safety audits for each party, including findings and resolutions
- Full listing of all current and prior legal claims related to health and safety filed against each party by a current or former employee
- Full listing of all environmental litigation each party has been involved in
- A thorough description of each party's policy for disposing of hazardous substances
- Full listing of all dedicated locations for waste disposal
- Summary of all environmental audits, including results
- Description of on-ground and underground storage tanks for each party
- Copies of government approvals and permits for environmental matters pertaining to each party
Human Resources (HR) due diligence checklist
General Human Resources
- Copies of each party's HR plan documents, including benefits
- Full listing of any HR claims (i.e., disciplinary actions, grievances) filed against each party by a current or former employee, including the status and ruling of each claim
- Summary of each party's recruiting initiatives and related financial commitments
- Headcount for each party, delineated by geographical location and business function
- Headcount of absences for each party on an annual, quarterly, and monthly basis
- A complete listing of current and ongoing investigations into each party's HR policies and other employment matters
Benefits and compensation
- Summary of each party's benefits programs and packages
- Overview of each party's retirement plans, including pensions, 401Ks, and incentive stock options
- Summary of additional non-monetary bonuses and benefits for employees of each party
- Copies of each party's nondisclosure agreements (NDAs), non-competitive agreements, and other proprietary release documentation
- A complete listing of all current consulting engagements
- Full listing of any existing Collective bargaining agreements, non-competition, nondisclosure, or similar agreements
- Copies of each party's employee manuals and policy documents
- Copies of each party's hiring policies and procedural documentation, including a comprehensive list of all pre-employment screening activities (ex. background checks, drug screens, citizenship statuses)
- Copies of each party's termination and leave policies and procedural documentation
- Copies of each party's diversity commitment and disability accommodation documentation
Information Technology due diligence checklist
- Full listing of each party's current and planned IT initiatives
- A complete listing of each party's IT resources, including hardware, software, intellectual property, and staffing
- Full listing of each party's proprietary IT resources
- Full listing of each party's hardware storage locations
- Copies of each party's policies and procedures for procuring and maintaining IT resources
- Copies of each party's technical architecture with references to databases, physical hardware storage, servers, and operating systems
- Copies of contracts related to IT-specific projects for each party
- Copies of contracts pertaining to IT-specific purchases made by each party
- Summary of each party's vendor support agreements and other support service contracts with external vendors
- Description of each party's public internet presence
- Description of each party's automation level
- Description of each party's help-desk/support service implementation, including staffing and approach
- Description of each party's disaster recovery and backup procedures
- Analysis of each party's IT growth potential
- Stress test analysis and results for each party
- Summary of IT costs (including technology procurement, maintenance, updates, and replacements) for each party
- Description of each party's security protocols
- Full listing of all confirmed cybersecurity attacks and intrusions for each party, including the results of those attacks (i.e., pass or fail)
- Full listing of litigation related to each party's loss or misuse of confidential information
- Description of each party's noted security issues
- A complete listing of each party's anti-malware and anti-virus software protections
- Full listing of all known malicious users identified by each party
- Description of each party's data encryption and storage policies
- Description of any sensitive data hosted by each party
- Description of each party's data privacy procedures, especially those related to personally identifiable information (PII)
Commercial due diligence checklist
- Full listing of the top suppliers for each party
- Copies of any contracts between each party and its material suppliers, contractors, and subcontractors
- Summary of each party's policies and procedures for reviewing and evaluating suppliers, contractors, and subcontractors
- Copies of all material supplier contracts, delineating those with terms longer than one fiscal year
- Copies of strategic plans for the current fiscal year
- Copies of marketing plans for the current fiscal year
- Copies of advertisements for the current fiscal year
- Summary of upcoming new products and services
- Summary of anticipated product and service improvements
- Copies of all marketing materials, including brochures, presentations, infographics, and pamphlets
- Full product and service descriptions for all product/service lines
- Summary of all current research and development projects, including the timeline for each project's completion
- Overview of all market risks, opportunities, and growth
- Full listing of the top customers for each party, including the revenue earned from each customer
- A complete listing of customers that have ceased business activities with each party
- Full listing of all material sales for each party
- Copies of all customer contracts
- Copies of all contracts with corporate customers
- Copies of all contracts with government customers
- Copies of policies for pricing, account credits, returns, warranties, customer claims
M&A due diligence checklist templates
You know the information you need, but formatting and tracking your due diligence checklist might be a little more complicated. To that end, why should you try to reinvent the wheel and cause yourself more stress by developing your template? It's much simpler to base your checklist on a template that already exists.
A variety of programs offer M&A due diligence checklist templates. On the simpler end of the spectrum, examples include Excel templates and program add-ons. These perform the full functionality of a checklist but do not enable any integrations with project data.
If you want an interactive list that connects to live data for your M&A activities, you'll want to use a more robust template.
TrueNxus: The single platform solution for all of your project management needs
In the virtual age, M&A activities and other sensitive projects require a high degree of sophistication and detail. A flat M&A due diligence checklist is no longer sufficient for proper project management at any level.
For more information on our product, offers, and pricing, contact us today.