| Introduction: | | | | category, (i.e., materials, labor, overhead) if applicable. |
| The following is a list of questions as part of the | | | | Schedule of overhead costs by component. |
| overall company due diligence focusing on gathering | | | | A schedule of the top ten suppliers and |
| documentation for Finance/Accounting. The outcome | | | | subcontractors (ranked by total annual purchases) |
| of this investigation is to validate the accuracy of the | | | | detailing the amounts due them, what they supply, |
| records as part of the overall company due diligence | | | | volume supplied and the relationship that is maintained. |
| process. | | | | Please provide in Excel format for the last five fiscal |
| Due Diligence Definition: | | | | years, year to date for the most recent interim and |
| Due Diligence is the verification process of information | | | | year to date for the prior year comparable interim. |
| and its associated documentation to ensure a | | | | Material contracts or agreements concerning |
| reasonable individual "that they get what they are | | | | business or services performed for, or materials |
| paying for". When buying, selling or forming a joint | | | | supplied to, the Company or its subsidiaries. |
| venture it is very important that the books and records | | | | Selling, general and administrative expenses broken |
| are verified and tested to ensure the historical financial | | | | down by significant components. Explanations for |
| results are validated. If your company has a team of | | | | significant fluctuations. |
| professionals who have experience in multiple | | | | Detailed breakdown of other income and |
| transactions and a detailed checklist to follow that is | | | | expenses. |
| probably an exception to the rule, most companies due | | | | Detail on any management proposed add-backs |
| these type of transaction infrequently. Therefore, it is | | | | to historical EBITDA. Details on any other events |
| recommended that due diligence be a coordinated | | | | charges considered by management to unusual or |
| effort with members of the company and an outside | | | | nonrecurring, including development costs. |
| firm who has experience with the due diligence | | | | Listing of all current customers. |
| process. | | | | Listing of bids submitted (e.g. RFPs extended) |
| The following are examples of the information to be | | | | including customer name, type of service, amount of |
| assembled from key members of the management | | | | bid, status (e.g. won, lost), if lost please include the |
| staff as part of the due diligence process. | | | | name of competitor who won the contract and |
| FINANCIAL DOCUMENTSa. Accounting Controls and | | | | amount of winning bid. |
| Policies | | | | New product launches during past three years |
| Overview of the Company's accounting/finance | | | | including: description of each product's revenue annually |
| department and responsibilities by employee. | | | | since launched; R&D expenditure relating to each new |
| Description of major accounting policies in place | | | | product launch; internal and external development |
| and any changes over the last five years (revenue | | | | expenses relating to each new product roll out. |
| recognition, fixed assets, A/R reserves, inventory | | | | Planned new product launches for the next two |
| obsolesce, accruals, etc.). Please note any polices | | | | years including: development expenses to date; |
| which may be controversial. | | | | estimated development expenses to complete; |
| Description of differences in accounting policies | | | | estimated revenue and it's timing. |
| and procedures for interim versus year-end results. | | | | Identify any material warranty claims that have |
| Overview of the accounting policies and controls in | | | | been made against the Company (or any partnership |
| place regarding revenue, purchasing, R&D and cash. | | | | or joint venture involving the Company) and the |
| Sales/credit terms and conditions. Documentation | | | | resolution of any such material claim.d. Historical |
| of policy on rebates, cancellations, discounts, etc. | | | | Balance Sheet Information (last five fiscal years, year |
| Description of product pricing. | | | | to date for the most recent interim and year to date |
| Purchasing policies and procedures. | | | | for the prior year comparable interim) |
| Purchase order terms and conditions, including | | | | Summary of banking relationships including number |
| samples of all forms of purchase orders, invoices, etc. | | | | of accounts, amounts on deposit in each account and |
| Accountant's management letter or controls | | | | purpose of accounts. |
| observation summary for the last five fiscal years. | | | | Summary of the Company's cash management |
| Procedures for costing jobs. | | | | system (forecasting, budgeting, etc.) and procedures. |
| Internal audit reports issued for the last five fiscal | | | | Please include borrowing base certificates on a |
| years. | | | | monthly basis for past two years. |
| Summary of the Company's cash management | | | | Accounts receivable aging schedules for the last |
| system (forecasting, budgeting, etc.) and procedures.b. | | | | four quarters as well as reconciliations to the general |
| Financial Statement Information (please provide | | | | ledger. |
| information in Microsoft Excel if available) | | | | Schedules of the top ten individual accounts |
| Audited financial statements for the last five fiscal | | | | receivable balances. |
| years, including accountants' report. | | | | Schedules of the ten largest accounts over 90 |
| Internal financial statements for the last five fiscal | | | | days with explanations for the delinquencies. |
| years on an annual basis and the last two years on a | | | | Summary of credit memos, returns, and other |
| monthly basis. | | | | adjustments. |
| Correspondence with outside accountants | | | | Summary of all accounts in dispute or in process |
| pertaining to special consulting projects or | | | | of legal collection. |
| disagreements over any accounting issues. | | | | Analysis of allowance for bad debts, including |
| Detailed internal financial records (i.e. general ledger | | | | annual roll forward of the allowance (bad debt |
| summary by major account) for the last five fiscal | | | | expense, write-offs). |
| years, year to date for the most recent interim and | | | | Summary of all receivables from other than normal |
| year to date for the prior year comparable interim (by | | | | trade accounts. |
| division and consolidated). | | | | Schedule of capitalized software costs by |
| Summary of adjustments to reconcile from internal | | | | platform including amortization schedules. Schedule of |
| financial records to audited financial statements for last | | | | capitalized R&D costs, including amortization schedules. |
| five fiscal years. | | | | List of all inventory by type, amount, age, location |
| Monthly management package, including financial | | | | (please identify consignment, slow moving and |
| statements and explanatory comments (e.g. variances | | | | obsolete inventory). |
| from budget standards, performance highlights, etc.) for | | | | Detail of inventory reserve calculations for the last |
| the last five fiscal years, year to date for the most | | | | five fiscal years, year to date for the most recent |
| recent interim and year to date for the prior year | | | | interim and year to date for the prior year comparable |
| comparable interim. | | | | interim. |
| All auditor's letters and opinions for the Company. | | | | Copy of last five physical inventory exams. |
| Auditors' reports to management concerning internal | | | | Summary of property and equipment and |
| accounting controls and procedures and other matters | | | | accumulated depreciation broken down into category |
| and any management responses thereto, and internal | | | | totals (i.e. land, building, equipment, etc. and location) as |
| memoranda (particularly internal audit or regulatory | | | | well as any PP&E additions or deletions. |
| compliance memoranda) concerning the Company. | | | | Schedule showing capital expenditures by |
| Internal audit reports to management or the Board of | | | | category including description of significant items. |
| Directors. | | | | List current or proposed initiatives/opportunities for |
| Copies of all outside corporate and/or subsidiary | | | | sales growth or margin improvement or working capital |
| valuations for all other purposes, performed during the | | | | improvements and the expected capital investment |
| past five years. | | | | required. |
| Copies of all federal and state tax worksheets | | | | Details on any note receivables including a copy of |
| including book vs. tax differences, tax accruals, etc. | | | | the note, amount, duration, rate, payment terms, |
| Identify and describe all contingent liabilities not | | | | covenants, payment schedule and rationale for issuing |
| reflected on the Company's financial statements, | | | | the note. This includes both notes to trade and |
| including, but not limited to, the following: a) Contracts | | | | employees. |
| and agreements, b) Price re-determination or | | | | Schedule of major prepaid expenses, deferred |
| renegotiation, c) Sales subject to warranty or service | | | | charges, "other" assets and liabilities providing a detailed |
| agreements, rebates or performance guarantees, d) | | | | breakdown and description of what is contained in |
| Product liability, e) Unfunded pension plan liability, f) | | | | each account. |
| Equal opportunity matters, g) Environmental matters. | | | | Accounts payable listing and reconciliations to the |
| Management's letters together with any reports, | | | | general ledger. |
| letters or correspondence prepared by accountants of | | | | Description of cancellation policy, calculation of |
| the Company, if any. | | | | reserve and past cancellation experience. |
| Schedule describing any ongoing tax disputes, | | | | Schedule of other accruals and liabilities |
| together with copies of revenue agents' reports, | | | | (commissions, bonus plans, utilities, marketing programs |
| correspondence, etc., with respect to pending federal | | | | and deferred revenue) with description of their |
| or state tax proceedings regarding open years or | | | | calculation methodology. |
| items for the Company. | | | | Schedule of long-term investments showing the |
| Reports of any outside consultants, analysts or | | | | name, percentage of ownership, original cost, basis at |
| others concerning the Company.c. Historical Operating | | | | which stated and current market value. |
| Information (last five fiscal years, year to date for the | | | | Schedule of long-term debt which includes security |
| most recent interim and year to date for the prior year | | | | description, principal amount, interest rate, payment |
| comparable interim) | | | | schedule, advance payment privileges or penalties, late |
| Sales (units & dollars) and gross margin analysis by | | | | payment penalties, renewal and conservation privileges, |
| key product or service. | | | | sinking fund requirements, principal repayment loans |
| Sales (units & dollars) and gross margin analysis | | | | and other covenants. |
| for the Company's 10 top customers for the last five | | | | A listing of major leased facilities and equipment |
| fiscal years, year to date for the most recent interim | | | | showing locations, annual rentals for the next five |
| and year to date for the prior year comparable interim | | | | years, expiration dates, renewal options, ownership, |
| in Excel format. If a customer was in the top ten in one | | | | square footage and age. |
| period, but not in the other please provide comparative | | | | A summary of property taxes for the last three |
| totals. Please provide explanations for significant | | | | years and evidence of payment. |
| fluctuations between periods. | | | | Summary of major outstanding commitments such |
| Sales (units & dollars) and gross margin analysis by | | | | as commitments for fixed asset purchases, advertising |
| product and distribution channel. | | | | campaigns, construction, employment contracts and |
| Details of any other income earned e.g. | | | | profit sharing and similar plans.e. Forecasted Financial |
| commissions, referrals, licensing fees, etc. | | | | Statements (next five fiscal years on a monthly basis) |
| Schedule reconciling gross sales to net sales, | | | | Projected balance sheets and income statements. |
| detailing discounts, cancellations, etc. | | | | Projected cash flows. |
| Volume of inter-company sales. Description of | | | | Projected capital expenditures. |
| transfer pricing methodology and elimination of | | | | Detail of all assumptions used in projections, |
| inter-company revenues and profits. | | | | identifying key success factors. |
| Analysis of any seasonal or cyclical sales patterns. | | | | Business plan for each year for the past five |
| Summary of research and development | | | | years. |
| expenditures by project type. | | | | Conclusion: |
| Cost of sales broken down by component. If not | | | | The due diligence process is very financially oriented, |
| tracked separately, please provide detail of payroll | | | | but professionals in legal, tax, human resources, |
| costs, benefits, etc for job-related versus | | | | insurance & risk, sales and operations are typically |
| administrative (non-job related) salaries, and other | | | | involved in the process and responsible for difference |
| expenses. Provide a separate schedule of | | | | areas of the validation process. |
| subcontracting costs by line item within each cost | | | | |