“Buyer Due Diligence Checklist ”		«BACK
	by Mark J. Moxness
	from Krass Monroe, P.A.

1. Review of financial statements for three (3) prior years as well as current year through last available month. Also review any financial statements for affiliated entities not reflected in seller's statements.
2. Review copies of three (3) prior years Corporate Income Tax Returns and any IRS or State tax audit reports.
3. Review major loan agreements with financing terms [if assumption is possible] and compliance reports issued to lenders on financial covenants (if any).
4. Analyze G & A to determine cost savings after acquisition [unnecessary components].
5. Review S.O.P. trends by store; determine opportunities for greater S.O.P. [food costs, labor, other controllables].
6. Analyze prior 5 years trends in ADI.
7. Review sales tax returns for 24 months and audit reports.
8. Prepare tax analysis for planning opportunities.
9. Determine effect of weather/seasonal impact on sales and cash flow.
10. Prepare proforma showing effects of 5% decline / growth in sales, by year and by month. Determine R.O.I.

B. Review of corporate documents.

1. Articles of Incorporation
2. Bylaws
3. Certificates of Good Standing
• Date of Incorporation
• Any foreign jurisdiction where seller is qualified to do business.
4. Stock records
5. Corporate minutes from date of incorporation
6. Stock option plans or agreements
7. Shareholder agreements
• Buy/Sell Agreements
• Voting or Control Agreements
8. Predecessor companies, prior transactions, former business names and addresses.

Note: Review of these records is recommended in all transactions, but, is very important in stock purchase transactions.

C. Review of assets and liabilities.

1. Review balance sheet.
2. Review equipment and fixture schedules.
3. Review real estate, surveys, abstracts, certificates of title.
4. Summarize insurance coverages indicating the following:
• Type of coverage
• Company issuing coverage
• Limits of coverage
• Policy dates
• Annual premiums
5. Examine and walk-through of each store.
6. Review all leases for real and personal property; prepare lease summaries.
7. Review UCC, bankruptcy, tax lien and judgment searches.
8. Address environmental concerns and obtain environmental assessment(s).
9. Review key intangibles: signage rights, trademarks, trade names, copyrights, licenses, trade secrets, etc.
10. Review all franchise documents, correspondence with franchisor, development agreements, etc.
11. Review accounts payable reports, accrued liabilities and accounting policies.
12. Review all loan agreements and contracts resulting in liabilities.

D. Review Personnel and Employment Matters.

1. List of employees and duties
2. Employment or Consulting Agreements
3. Vacation policies
4. Summary of fringe benefits; obtain copies of 401(k) plan and summary documents
5. ERISA compliance or exposure
6. Unemployment insurance rating information
7. Deferred Compensation Agreements (if any)
8. Noncompete and Confidentiality Agreements
9. Analysis of employees that will be retained and those that will be terminated; rate each store manager.
10. Personnel files
11. Policy manuals
12. Copies of all Federal Form 940's and 941's for last 8 quarters.

E. Review of material contracts and agreements.

1. All real estate and personal property leases
2. Corporate guarantees
3. Management service, consulting or maintenance agreements
4. Agreements or contracts relating to prior purchase or sale of business by the target company or its subsidiaries
5. Inquire regarding oral contracts and agreements
6. Government licenses, permits and renewals
7. Internal policy and operations manuals
8. Prohibitions on assignments of material contracts, leases or agreements

F. Inventory.

1. Physical count
2. Test for quality, age, obsolescence
3. Schedules of suppliers

G. Pending claims, suits.

1. Obtain list seller lawsuits, governmental proceedings or investigations, pending or threatened.
2. Review footnotes to financial audit.
3. Review attorney letters to auditors in response to annual request for information on claims.
4. Analyze liability exposure and adequacy of insurance coverage.

H. Product and Marketing Information.

1. Review copies of all marketing materials, advertisements, press releases and news media articles.
2. Determine impact of advertising efforts in the ADI.
3. Determine and analyze competitive openings.
4. Review market studies and customer surveys - assess demographic trends near each store.
5. Analyze products and competitive products.
6. Interview other franchisees in ADI.

I. Suppliers.

1. Review all agreements and correspondence with suppliers.
2. Review economic history with suppliers (payment terms, discounts, etc.)

J. Miscellaneous.

1. Review zoning and licensing laws and regulations.
2. Review documents relating to probate proceedings, trust or other estate planning agreements, divorce and property settlement agreements, and other unusual agreements applicable to seller(s).

K. Due Diligence Procedures.

1. Develop an action plan and time line for due diligence.
2. Assemble a due diligence team.
3. Determine the appropriate due diligence report or plan for collecting, analyzing and summarizing due diligence information.