In a merger or acquisition (M&A), two companies combine forces by agreeing to a deal. Whether you are the company that is acquiring a competitor or the acquisition target, the process can be highly involved. Organization is important for both sides, particularly during the due diligence phase. This M&A documents checklist can be used to stay on track and ensure completeness throughout the M&A process.
In due diligence, the seller provides key information about their operations, finances and structure. They review the information provided by the seller to fact check that things are in order and that nothing was exaggerated. As you might guess from this description, it is important to have all the proper documentation in the right order. Without it, the due diligence process may slow down, parties may lose faith and the deal could be at risk.
M&A Due Diligence Checklist
This checklist covers everything you need for M&A due diligence. It explains what each item is and why it is important, using the following organizing categories.
- Corporate Documents/Legal Information
- Financial Records
- Tax Information
- Sales & Marketing
- Human Resources
- Intellectual Property/Product Development
- Technology & Operations
- Employment Practices
Merger and Acquisition Due Diligence Checklist Explained
Corporate Documents/Legal Information
Make sure to gather up-to-date copies of all corporate documents. These outline the business entity, structure, key stakeholders and capitalization records. you should have copies of the following corporate documents:
- Articles of Incorporation
- Shareholder agreement, plus any other agreements relating to shareholder transactions, etc.
- Stock certificates for common and preferred stock
- Directors' meeting minutes
- Shareholders' meeting minutes
- Company bylaws
- Summary of R&D intellectual property
Financial reports provide an overview of the company's financial health, including assets, liabilities and cash flow. Over a three-year lookback period, gather the following information:
- Bank statements for all business bank accounts
- Business lines of credit agreements
- Business credit card statements
- Business financing, loan or debt agreements
- Statements that reflect business debt, loans, etc.
- Trial balances
Gather comprehensive tax records for the last three years. State and federal tax filings are included on this list. However, there are many more tax documents you will need to gather than merely tax returns.
Necessary tax documents include:
- State tax returns
- Federal tax returns
- Statements of property taxes paid by the business
- Tax credits the business received, with supporting documentation
- Copies of agreements to reduce or defer local tax liability, such as PILOT agreements
Sales & Marketing
Sales information is essential during M&A deals. A company may claim it is the market leader and have ambitious business plans to dazzle potential acquisition partners. However, sales data is necessary to prove the bold claims.
These documents help the potential partner understand the company's commercial potential based on its past and current performance, in addition to those big claims:
- Revenue by customer, product line, and geography (state/province)
- Billings, bookings, and revenue recognition support
- Sales pipeline and win rates
- Churn analysis
- List of product lines
- Strategic plans or SWOT analyses that reflect market risks and the competitive landscape
- Compensation plans and targets for the salesforce
M&A integrates two companies that have their own way of doing business, their own organizational hierarchies and their own corporate cultures.
Accordingly, you will want to gather appropriate HR documentation in advance of the deal.
Have copies of the following:
- Employee and contractor agreements contracts
- Consulting agreements
- Recruiting policies
- Hiring policies
- Employee benefits policies, including information on employee bonuses, profit sharing, retirement or pension plans, stock options, etc.
- HR policies, including employee handbooks and other employer policies
- List of all employees, their roles and their schedules
- List of any disciplinary matters, including employee suspensions, disciplinary hearings, disputes, mediations, etc.
- Summary of the actions taken in disciplinary matters as outlined above
Intellectual property is one of the biggest determinants of a business valuation in M&A deals. As a reminder, intellectual property or IP refers to intellectual creations of the business: the ideas behind the products or services offered.
Business trademarks, patents and platforms (such as a business website or podcast) all fall under the domain of IP.
Make sure to gather intellectual property documentation such as:
- List of websites, trademarks and patents
- List of assets classified as intellectual property but not solely owned by the business, such as jointly held patents
- Agreements that dictate how the company's IP can be used, such as agreements that spell out when and how a third party may use a company trademark
- List of pending and current litigation having to do with intellectual property, such as copyright infringement lawsuits, challenges or restrictions on intellectual property
Technology & Operations
Technology plays a pivotal role in business operations. When two businesses are combined, outlining the technologies used, their security risks and other IT initiatives in advance is necessary to safeguard cyber security.
Key documents to gather for technology and operations due diligence include:
- List of IT resources, including hardware and software
- List of IT personnel
- Technology policies including data storage policies, data encryption policies, bring your own device (BYOD) policies, etc.
- Summary of IT initiatives and projects, current and pending
- Copies of all IT policies
- List of key technology vendors, including vendor agreements
- Financial cost of technology, maintenance, upgrading and the like
- Copies of vendor contracts and contractor agreements associated with technology and IT
- Summary that describes the way the company uses technology
- IT security information including policies, disaster recovery plans
- IT assessment such as cyber stress test or cyber threat assessment
- Summary of issues such as malware, ransomware or phishing incidents that took place
- Summary of data breaches that occurred (if any) and how they were handled
While the new company may develop its own way of doing things upon completion of the deal, savvy companies provide information on employment practices to help the potential M&A partner understand their way of doing things.
If you have followed this M&A due diligence guide, gathering information on HR, technology, marketing and the like, chances are you already have a robust set of documents outlining employment practices. For now, focus on filling in any of the gaps in the record regarding employment and operations.
Things to gather here include:
- Internal reports run by the business, such as quarterly reports or monthly profit and loss statements
- Company organizational chart (org chart) that lists all employees and their roles
- List of job titles and job descriptions
- List of any open positions and their status, such as interviews in process or offers extended
Stay Organized During M&A With a Data Room
This checklist for M&A due diligence will help your company identify the right documentation to gather for the deal's due diligence phase. When it comes to sharing information with a potential acquirer, so it can review the materials in privacy, a due diligence data room is essential.
These days, most companies use a virtual data room to review documents in a secure and convenient manner. The virtual setup allows parties to access stored material anytime, from anywhere with the total privacy and end-to-end security expected with sensitive M&A deals. Virtual data rooms and other M&A solutions from DFIN help companies stay organized, protect sensitive data and intellectual property, and bring deals to a successful close.