Basic Merger and Acquisition Due Diligence Checklist:
Purpose: To learn the basic information needed in the analysis of buying or selling a business.
1. The most basic truth & conflict-The Seller typically wants to sell the Company as a whole, whereas the Buyer typically wants to only purchase Assets.
When buying a Company, the Purchaser is also buying all of its liabilities and potential liabilities/lawsuits, including federal and state income taxes, employment taxes, franchise/excise taxes, employee benefits, retirement fund management, health insurance record, etc. Thus, it is easy to see why a Purchaser would want to buy specific assets which would control liability risk.
2. If the Purchaser will be financing part of the purchase price, its Lender will almost always require the following:
- Most recent three (3) years tax returns.
- Balance Sheet, Income Statement, Profit/Loss Analysis for the last three (3) years, and a Year-To-Date for each.
- Appraisal for any Real Estate to be purchased.
- Appraisal or valuation for the assets or business.
- Require that all liens against the assets be removed prior to or at closing.
- Selling Company must be an Active entity with the state Secretary of State.
- Indemnification from the Seller for undisclosed liabilities/losses incurred by the Buyer.
The Buyer will also need the following:
- Representations and warranties that the assets being purchased are free and clear of all liens, unless the lien or liability is expressly assumed, in which case that lienholder must be contacted to complete the assumption by Buyer of Seller's liability.
- Thorough of all assets being transferred.
- Bill of Sale for the assets purchased.
- Copies of all state and federal Tax Returns for the last three (3) years.
- Copies of all necessary licenses and government authorizations.
Some authorizations are not assumable. This is an often overlooked area that can delay closing the transaction.
- Proof of Seller's authority to enter into the transaction.
- Often the Buyer will want or need the Seller to continue to work in the business for some period of time to ensure a smooth transition and to alleviate customer fears of change in ownership, thus many times the Seller, or key employees of a Seller will either remain as employee's or partial owners of the Buyer, or will enter into a Consulting Agreement or Employment Agreement for a set period of time. The purchase price will include compensation under the Consulting Agreement.
- Seller will agree to a Non-Compete covenant for a specific geographic area and time period.
- Seller's Indemnification from grossly negligent, reckless or willful disregard for the completeness of the statements contained in the purchase agreement. The Seller will usually limit the amount of the potential Indemnification or Cap its potential loss.
- When the transaction involves the purchase of the entire entity and an infinite pool of liability, we must all be careful to examine all potential liabilities. Thus, these transactions will almost take longer to complete than an asset purchase.
- Copies of all contracts being assumed. The Buyer and his agent must have sufficient time to analyze all such contracts, these include any contract from software licensing, copier & phone leasing to contracts with clients, vendors, to lenders and landlord.
With an office in Germantown, Tennessee, the Bradley Law Firm PLLC assists clients with Estate Planning, Wills, Trusts, Special Needs Planning, Conservatorships & Guardianships, Probate and Estate Administration, Business Law, Mergers and Acquisitions, Self-Directed IRA's, VA Pension Planning, Commercial Real Estate and Residential Real Estate throughout the Memphis area, West Tennessee, North Mississippi and Eastern Arkansas. The Firm is also licensed in Kentucky.