A Checklist for M&A Due Diligence

Chris Keefer


February 1, 2022

An illustration of several workers around a giant tablet with a checklist on it. The tablet is also surrounded by a gear, chat box, bar chart, and light bulb.

When approaching any merger or acquisition, it is critical to take the time to carefully examine your target. Where should you begin?

A considerable amount of sensitive business, financial, marketing and intellectual property information will likely be exchanged between parties during the due diligence process. Thus, your first order of business should be ensuring a non-disclosure and confidentiality agreement is negotiated and signed in advance. If you will be providing your own confidential information and documents as part of the evaluation, make sure any such agreement is mutual.

To stay focused and organized, prepare a checklist of information to request from the other side. Unless the transaction is complex enough that the target should be expecting it, it is often counterproductive to inundate the other company with a 20-page list of detailed requests. Instead, consider starting with broad strokes, then narrowing the inquiries as necessary based on potential red flags uncovered.

1. Organizational and Qualification Documents

A red flag should always go up if your business target has not followed appropriate formalities. After setting up business entities, owners are generally required to proactively govern that entity from the initial documentation all the way through growth and expansion. These formalities exist not only in the home state, but also in any other state in which the company has operations.

Depending on the type of entity structure and number of business owners, there may also need to be written rules governing the actions of the owners themselves, as well as minutes, consents and resolutions that can tell the history of your target’s business. Do not get blindsided by compliance surprises or exposure from current or potential owners who could later disrupt the acquisition or merger.

2. Financial Documents

Obviously, your target’s financial performance is important. Do not rely on what your counterpart’s owners are telling you. Instead, get copies of records that you can review yourself to determine performance. Do not be satisfied with just one year of prior records—you should go further back to track any trends. Asking for up to five years of returns and financial statements is typically reasonable. You should also have a seasoned accountant or other financial expert on the diligence team to provide guidance as to any red flags that may exist in those records.

3. Agreements and Contracts

A company’s contracts and agreements with third parties are often the lifeblood of its business, and they may even be a primary reason why you are so interested in this particular target in the first place.

Review these agreements to ensure you will not be assuming onerous, impossible or impractical obligations. You will also want to know whether any one-sided language exists that could limit your opportunities to recover in the event of a breach. You may find that those contracts are not as attractive as you once thought.

In addition to the business contracts, be sure to review agreements potentially affecting your target’s real estate. This will be particularly important if you are acquiring real estate and capital improvements as part of the transaction. Of course, it is also important to know whether your target has been appropriately insured.

4. Licenses and Permits

Depending on the industry involved, your target’s business may require certain federal, state or municipal licenses or permits. It is critical to know now whether your target is appropriately licensed or permitted and to ensure those are current.

5. Assets

In addition to contracts, your target’s assets may be a key driver of your interest in the acquisition or merger. Make sure to request a list of information and documents related to these assets to independently confirm that you will actually receive the assets you expect as part of this transaction.

6. Liabilities

What would assets be without liabilities? You need to know whether there are any obligations, claims, lawsuits or investigations that could blindside you. These can often be deal-breakers, so be sure to uncover everything involving these potential red flags up front.

7. Employee Information and Documents

Turning back to your target’s business practices, learn about its employees. Request information on how many people your target employs, their cost of employment, and which employees are critical during a transition period and for continued operation (in case you were considering “synergies” or downsizing immediately after closing).

In addition, get copies of your target’s internal employment policies and practices, including the employee handbook and any specific work-related policies that may not be included in the handbook. Note these may be particularly relevant when merging with or acquiring a manufacturing target with production lines.

8. Customer Problems and Negative Publicity

Brand reputation and goodwill may be important considerations in your acquisition or merger, particularly if the target is known for its products. Request information related to any customer problems or negative publicity.

 Keep in mind that the items above are a general starting framework. As responsive information and documents start rolling in, you can decide whether you have enough information to satisfy concerns related to a specific subject. Should red flags emerge, you can request supplemental information and documents to aid in getting the answers you need. The ultimate goal is to make an informed business decision related to your target. It is vitally important to get the information you need to do just that. 

Chris Keefer is the principal of Keefer Strategy, a preventive law practice that helps ­businesses proactively address enterprise-wide risks.