M&A Due Diligence Checklist

Start with a clear understanding of what you need to know.

Due diligence is a critical stage in any merger or acquisition because it helps ensure that both parties understand each other well enough to make decisions based on facts rather than emotions. Planning which specific documents and data to request from the target company can save a lot of time and money, ensuring that you gather all critical information to make an educated decision on whether or not to acquire the business.

Disclaimer: The list below is only intended to be a guideline and not an all-inclusive list.  It should be reviewed and modified based on the scope of your specific acquisition , regulatory requirements, and strategic intent.  We highly recommend you work with an experienced advisory firm or consultant to assist you with the planning and execution of your due diligence process.

Learn more on how to run a successful M&A on our M&A Management Playbook and Toolkit page.

Due Diligence Information Request List​

General Discussions

Sales and marketing

• Product demonstration
• Sales organization structure and incentive plan
• Major accounts
• Pipeline review
• Market strategy and plans

Product development, implementation & support

• Software development and technology Inventory
• Professional services and implementations for new customers
• Support for existing customers

Finance/ HR

• Comprehensive review
• Payroll, compensation and benefits

Legal/Corporate Overview

• Corporate overview
• Intellectual property
• Contracts
• Employment matters
• Regulatory issues
• Claims, disputes, litigation

Tax

• Federal and state tax
• Sales and use tax

Technology and Operations

• Data center and application hosting
• Internal information technology
• Security and privacy

1.  Corporate Documents

1.1.  General

• Provide a comprehensive Company chart of entities and ownership.
• Provide minutes of the Boards of Directors (and all Committees thereof) and stockholders of the Company for last 3 years and YTD.
• Provide all agreements relating to the purchase, ownership or sale of, or voting rights pertaining to, the capital stock of the Company, including any shareholders’ agreements, voting trust agreements, restricted stock agreements, and registration rights agreements, and all agreements or arrangements relating to the issuance/disposition of additional shares of the Company, including any warrants, options, or pledges.
• Provide a list of jurisdictions in which the Company is qualified to do business or is otherwise operating.
• Provide any information memoranda or similar documents provided to lenders or potential investors relating to the Company.

1.2.  Claims and Litigation

• List and describe all material litigation, proceedings, investigations, claims or inquiries currently pending or threatened, as well as any material judgments, injunctions, orders or settlement agreements affecting the Company.
• Provide all letters from the Company’s legal counsel to the Company’s independent auditors regarding litigation.
• Provide summaries of and documents relating to material claims with respect to intellectual property that have been asserted by or against the Company.
• To the extent not included elsewhere, list and describe any pending, past, or threatened litigation, claims, or protests by any employees against the Company in the past 5 years. (e.g. all labor and employment matters relating to wrongful termination, discrimination, sexual or other forms of harassment, EEOC, OFCCP, DOL, OSHA, FLSA, etc.). Privileged material may be redacted. If any exist, provide list of actions and status.
• List and describe all intellectual property disputes, threatened or actual.

1.3.  Regulatory Filings and Correspondence

• Provide copies of all material correspondence (including comment letters) from or to any federal, state, local or foreign regulatory, governmental or administrative authority or stock exchange (whether pending or resolved), including any documents concerning any alleged violation or infringement or any law, rule or regulation, all consent decrees as well as copies of any compliance policies or other material related documents.
• Provide a schedule of material governmental permits, licenses, authorizations etc. used or held for use in connection with the Company.
• Provide a list of all permits, licenses, authorizations etc. which have been revoked or suspended in the past five years.
• Provide a schedule of any federal, state, local or foreign governmental consents that would be required for the consummation of the proposed transaction.
• Provide copies of all regulatory audits for last 3 years and YTD.

2.  Financial Records

2.1.  General

• Provide audited financial statements for the last 3 years. Include any external audit reports and passed audit adjustments.
• Provide a schedule of charges that may not continue under different ownership as well as any additional charges that may result from new ownership (e.g. change in control costs or replacement cost for shared services).
• List and describe all other significant inter- and intra-company, related party and shareholder transactions.
• Provide current financial outlook with revenue, expense, capital expenditure (including capitalized labor) and headcount detail for the next 3 years including a bridge analysis from the current year to the projected years showing expected revenue impact from wins, losses and other revenue changes as well as related expense changes.
• Provide budget for last 3 years and YTD that shows actual results compared to budget for each year and quarterly, if available.
• Internal audit reports for last 3 years and YTD.
• Copies of account reconciliations for the current balance and prior year end.
• Provide copies of any reports and management letters from the auditors to the Company and any management representation letters by the Company to the auditors.
• List and describe payroll related information (pay cycle, use of third parties, etc.), including payroll processes, payment frequency, dates, and paid current or in arrears.
• List and describe all commercial insurance policies, including description of coverage, premiums, and term.
• Provide five year loss history for workers compensation, auto liability, general/product liability and as applicable, professional, technology and privacy liability claims. For each policy year, indicate the applicable retention level by line of coverage.
• Trial balances for the years last 3 years and YTD

2.2.  Tax

• A summary of the book and tax bases of assets by major category.
• Copies of federal tax returns for the Companies, or in which any of the Companies was included, for the last three fiscal years.
• Copies of all state, local and foreign tax returns for the Companies, or in which any of the Companies was included, for the last 3 fiscal years.
• Copies of any tax returns filed with respect to foreign jurisdictions for all years for which the statute of limitations is not closed.
• A list of the amounts of any settlements with any foreign tax authorities, including a description of the settlement.
• A description of all audits of any of the Companies by the Internal Revenue Service or any other federal, state, local or foreign taxing authority, which description should include the dates of the audits and a summary of each audit.
• Copies of all correspondence between any of the Companies, as taxpayer, and the IRS with respect to any pending tax case.
• A list of all countries in which the Companies are doing business or are otherwise liable for taxes, including a list of countries and amounts involved where inventory is held on consignment.
• A list of states in which the Companies have qualified to do business.
• A list of states in which the Companies have registered for sales tax purposes.
• Copies of all state and local real, personal, and intangible property tax returns and/or assessments within the last three years.
• A list of all state payroll/unemployment tax filings within the last three years.
• A list of states where the Companies have offices and/or employees.
• A list of states where property is owned or leased (including inventory on consignment or stored in a public warehouse).
• A list of states in which the Companies’ significant customers are located.
• A copy of any state and local tax apportionment schedules (e.g., property, payroll, and sales) by state for the past three years.
• Copies of all revenue ruling requests and any rulings received, or any correspondence received denying rulings requested by any of the Companies relating to the tax consequences of operations (past, present or proposed).
• Copies of any tax sharing or tax allocation agreement involving the Companies or other members of an affiliated group, including any joint venture agreements that have the effect of tax allocation agreements, and a statement setting forth how any agreement was implemented for the last five tax years.
• Copies of all legal or accounting tax opinions received by any of the Companies during the last three calendar years from outside advisors that relate to any Company’s tax reporting.
• Copies of all agreements and undertakings, including indemnification agreements, between any of the Companies and any third party relating to tax matters, including undertakings or agreements in connection with an acquisition or disposition.
• List and describe any state or local grants or tax related incentives.

2.3.  Revenue

• Provide revenue and profitability by product or SKU for last 3 years and YTD.
• Provide revenue and profitability by source (recurring license, one-time fee, services contract, etc.) for last 3 years and YTD. Note which sources are not included in backlog calculations.
• Provide current backlog of closed sales not yet reflected in revenue. Provide current backlog by product or source (recurring license, one-time fee, services contract, etc.) with schedule of expected revenue runoff (or waterfall) by year.
• Provide accounts receivable (A/R) aging schedule.
• Deferred revenue detail for last 3 years and YTD.

2.4.  Expenses

• Provide detailed breakdown of expenses by type and/or functional area for last 3 years and YTD.
• Provide a detailed breakdown of expenses by vendor for last 3 years and YTD.
• Provide capital expenditures (including any capitalized labor expenses) with description of purpose for last 3 years and YTD.
• List and described planned capital expenditures for this year and next, including routine equipment replacement cycle.
• Provide accounts payable (A/P) aging schedule.
• Provide a schedule of restructuring activities, non-recurring or one-time charges over the last 3 years including costs already incurred and any costs yet to be incurred.
• Provide a schedule of restructuring activities, non-recurring or one-time charges planned for this year and next.

2.5.  Assets

• Provide a schedule of fixed assets by location showing acquisition date, original useful life, book and tax depreciation method, original and tax cost, accumulated depreciation, current net book value and tax basis. Include and indicate as such, any fixed assets that are considered idle or held for sale.  Provide a list of fixed asset impairments and accelerated depreciation recorded for last 3 years and YTD and the results of the last physical inventory.
• Provide a schedule of any material equipment or other material personal property used by the Company, indicating the ownership and nature of such equipment and the material terms of any related finance lease or security agreements, and any related material correspondence.
• Provide monthly, or quarterly, detailed balance sheets for last 3 years and YTD.
• List and describe all intellectual property, indicating whether it is owned or licensed, including without limitation: (a) patents filed or approved, including the jurisdiction (if other than United States), date filed and patent number; (b) patent applications under development; (c) copyrights claimed or filed; and (d) trademarks or service marks.
• List and describe any employee invention/intellectual property assignment agreements and any other assignment/work-for-hire agreements for non-licensed intellectual property
• List and describe any planned or proposed dispositions or purchases of real property, including any plans to construct new facilities.
• For all real estate (leased or owned), provide square footage and configuration and any property appraisals.
• List and describe licensed assets or products
• Provide the most recent inventory breakdown, including reserves for obsolete and slow-moving inventory.
• Accounting lease schedules that support the balance sheet amounts.

2.6.  Liabilities

• Provide a schedule and explanation for any unrecorded contingencies
• Provide notes payable details.
• Provide a schedule of indebtedness (or guarantees thereof), including any “off balance sheet” arrangements.
• Provide agreements, instruments and material correspondence related to outstanding debt or other financing arrangements, including any arrangements providing for a pledge of assets or securities.
• Provide agreements and instruments evidencing or otherwise related to any derivative securities, forward contracts or hedging arrangements.
• Provide agreements and instruments evidencing or otherwise related to any inter-company loans or debt-related agreements with affiliates or employees.

3.  Contracts

3.1.  Corporate

• Provide a company history, including any acquisitions or dispositions of any business or entity or the purchase or sale of assets or securities
• Provide all agreements relating to acquisitions or dispositions of any business or entity or the purchase or sale of assets or securities, and any current plans relating to the same (“company history”).
• Provide all joint venture and partnership agreements, or any other agreements requiring significant investments or asset contributions by the Company.
• List and describe agreements containing “most-favored nation”, non-competition, non-solicitation or exclusivity provisions.
• Provide agreements containing “most-favored nation”, non-competition, non-solicitation or exclusivity provisions.
• Provide agreements containing material indemnification or warranty provisions.
• List and describe standard contract provisions regarding privacy/data security, including contracts which provide for recovery for data breaches beyond actual damages.
• Provide material or form of confidentiality or non-disclosure agreements.
• Provide agreements with “change of control” or other provisions that could be triggered by, or may otherwise require consent in connection with, the proposed transaction.
• Provide any other contract or understanding which is material to the Company.
• Provide agreements with third parties involving intellectual property, including license, settlement, confidentiality and other agreements, as well as any representative form agreements.

3.2.  Customer Contracts and Licenses

• Provide copies of standard customer contracts and licenses.
• For top 25 customers, provide copies of contracts and licenses in effect.
• Provide copies of all software escrow agreements (on behalf of customer)

3.3.  Vendor Contracts

• Provide copies of all vendor contracts.
• Provide copies of all software escrow agreements (on behalf of Company).

3.4.  Government Contracts

• Provide copies of contracts with any federal, state, or local governmental, government-controlled, or government-regulated entity.
• List and describe certifications by any federal, state, or local governmental, government-controlled, or government-regulated entity.
• List and describe any required registrations, certifications, or approvals that are required to perform services or license products to any federal, state, or local governmental, government-controlled, or government-regulated entity.

3.5.  Licenses

• Provide copies of all open source 3rd party software licenses, including maintenance and support agreements, if applicable.
• Provide copies of all paid software licenses, including maintenance and support agreements.
• Provide copies of all other licenses.

3.6.  Alliances

• List and describe all reseller, private label or distributor relationships.
• Provide a copy of all related contracts.

3.7.  Employee Agreements

• Provide all stock purchase, stock option or profit-sharing plans, programs, agreements or arrangements sponsored or maintained by or on behalf of the Company.
• Provide copies of all employment agreements, confidentiality or non-compete agreements, and any other agreements between any executives or employees and the Company.
• Provide copies of or list and describe any agreements of any kind with any executives or other employees not disclosed elsewhere including stay or retention bonuses.
• List and describe any non-competition or confidentiality agreements current employees have with previous employers.
• List and describe any agreements with employees for future promotions, salary or other compensation changes that have been agreed to by management but not executed.
• Provide collective bargaining agreements (if any), material grievances, correspondence or other documents relating to union activity or labor relations.
• Provide copies of bonus plans and sales commission plans.

3.8.  Real Estate Contracts

• Provide copies of all lease agreements (including equipment leases), describe any restrictions on assignment of the leases, and note any tenant allowances, rent holidays or asset retirement obligations.
• Provide copies of all documents for the purchase or sale of any real property.
• Provide a schedule of owned and leased real property and copies of any material agreements or other documents relating thereto (including leases, sale-leaseback arrangements, title insurance policies, appraisal reports, surveys, mortgages, liens or other encumbrances and any related material correspondence).

4.  Employees

4.1.  Employee Census

• Provide an employee census (list) of all employees with: name, title, hire date, location, department, exempt/non-exempt status, current salary, bonus opportunity if applicable, history of bonuses and other compensation, benefit elections and premiums, paid time off allotted and paid time off used, including clarification of any bonus plan(s) which employees are eligible for, and census of employee benefit elections and premiums.
• List employees on leave and leave status
• List employees on leave of absence for any reason.
• List employees currently working under an employment visa such as H1-b or L visa with names, type of visa, and status.
• List and describe overall voluntary turnover rate and information regarding turnover of key employees in the past year.
• List and describe consultants and contractors for last 3 years and YTD with annual spending.
• Provide copies of succession plans and departure risk assessments if available.

4.2.  Organizational Chart

• Provide organizational chart of employees and positions for entire company.
• Provide list of job titles and job descriptions for each position, if available.
• List and describe open positions by title, location, and recruiting status (e.g. offer made, interview completed, etc.)

4.3.  Compensation and Benefit Plans

• Provide all plans, programs, agreements or arrangements sponsored or maintained by or on behalf of the Company, relating to (i) employee benefits and compensation, including bonuses, deferred compensation and incentive compensation, (ii) hospitalization or other medical, dental, vision, life or other insurance programs or (iii) pension / retirement
• Provide time off policies and practices, benefit/premium costs (employee and employer), 401(k) match if applicable or other similar pension / retirement employer contributions, and other benefit plan provisions and summary plan description.
• Provide copies of benefit enrollment materials or benefit summaries provided to employees.
• Provide disclosure of any executive benefits or perquisites that may be offered to key employees.
• Provide a schedule of outstanding stock options, restricted stock and other equity-based grants, current valuations, and the material terms thereof.
• List and describe employees and terms of any continuing or outstanding severance obligations.

4.4.  Personnel Policies and Records

• Provide copies of personnel policies, manager guides, personnel manuals and employee handbooks.
• Provide copies of severance, termination or retention policies, plans, agreements or arrangements to include outplacement programs.
• Provide copies of all required compliance documents (EEO-1, Vets 100, Affirmative Action, etc.) and if Affirmative Action is applicable, discuss documentation concerning any internal compliance review or governmental audit of the program.

5.  Plans, Policies and Procedures

5.1.  Finance and Accounting

• Provide documentation of accounting policies and procedures, including but not limited to, policies regarding revenue recognition, software development costs, fixed assets, goodwill and intangibles, reserves / allowances, and inventory.
• List and describe the tools and processes used to quote, sell, fulfill and bill customers.

5.2.  Security and Privacy

• Provide copies of documented security practices and procedures, including physical and information security.
• Provide copies of SAS-70 controls, policy and audit results for last 3 years and YTD.
• List and describe other compliance policies and practices required (Cybertrust, PCI, etc.) with audit results for last 3 years and YTD.
• Provide a copy of any 3rd party security assessment.
• Provide a copy of any 3rd party source code review.
• List and describe any privacy or security breaches, including response, status and outcome.
• Provide copies of all privacy policies with effective dates.

5.3.  Disaster Recovery and Business Continuity

• Provide copies of disaster recovery and business continuity plans, if any.
• Describe back up and redundancy for all off-site storage procedures.
• Provide copies of disaster recovery and business continuity plans of mission critical vendors, if any.

5.4.  Software development Life Cycle (SDLC)

• For each product, provide copies of SDLC documentation or describe the standards, tools, processes and testing results (if applicable and available) including the following:
  1. product roadmap
  2. development environment with version

• requirements

1. Configuration management tools and processes
2. Database management
3. User interface design

• Quality Assurance
• Support and maintenance

5.5.  Project Management

• Provide a list and description of active and planned software and/or product development projects for this year and next 2 years, to the extent available.
• Provide a list of active customer implementation projects and status.
• Provide a list of pending customer implementation projects with contract date and projected start and finish dates.

5.6.  IT Processes

• Provide copies of any documentation for internal IT processes such as incident or change management.
• List and describe standard configuration for workstations, laptops and servers.

6.  Products and Services

6.1.   Marketing

• Provide copies of marketing plans.
• Provide copies of marketing materials, sales collateral and advertising copy.
• Provide copies of corporate and/or product presentations.

6.2.  Development and Technology

• For each relevant product, provide detailed software architecture, including 3rd party software utilized, software language, development environment, version, database software, and middleware.
• List all mission critical source modules.
• List of all open source software applications, programs, packages or libraries, that have been used to develop any of the relevant software, or that have been incorporated into the software.

6.3.  Documentation

• Provide copies of all user guides.
• Provide copies of all technical support documents such as FAQs or help files.
• Provide copies of all training manuals or other materials, such as recorded web-based training.

7.   Reports and Analysis

7.1.  Customers

• List Top 25 accounts by revenue for last 3 years and YTD. For each account and each year, list annual revenue amount, contract type (license, term, or other as appropriate), contract start date and contract expiration. For current customers only, list products each customer licenses.
• List customers where contract renewal is expected in the next 24 months and list customers at risk for any reason.
• List and describe of the customer wins and losses along with effective date and revenue for last 3 years and YTD.
• Report the number of customers by state.
• List number of customers for each product or SKU.
• Provide copies of any customer satisfaction surveys.

7.2.  Sales Pipeline

• Provide current sales pipeline with account, account manager, state, district, stage of sales process, contract value, expected close, and probability of close
• Describe the tools and processes used to track marketing and sales activity and individuals.

7.3.  Operations

• List and describe all vendors with annual spend and contract expiration.
• List and describe internal IT infrastructure used for general business operations, including the following:

1. 1. Email
   2. Employee collaboration

• Voicemail

1. 1. Telephony
   2. Financial (AR, AP, Purchasing, FA, GL, Invoicing, etc.)
   3. Sales force automation

• Customer support
• HRIS (payroll, benefits, time entry)

1. 1. Customer Support
   2. HRIS (Payroll, benefits, time entry)
   3. Project Management

• Desktop applications (Office suite?)
• Mobile/portable device support
• Data Warehouses, BI systems
• E-commerce
• Provide sample copies of available standard weekly, monthly or quarterly reports that management uses to manage the operations of the business.
• Provide schedules or reports demonstrating capacity, cost productivity and quality year over year trends.
• List all products provided to customers developed in part or whole by outsourced development firms. Identify the outsourced components.
• List all services provided to customers that are outsourced.
• Provide reports of service level agreements (SLA’s), key performance indicators, cycle time objectives or general contract performance monitoring for vendors
• Provide reports of service level agreements (SLA’s), key performance indicators, cycle time objectives or general contract performance monitoring for customers
• List and describe all tools used to manage IT resources and processes including internal/back office systems and customer-facing resources.
• Network diagrams showing the WAN (if applicable), LAN and ISP. Include interfaces with external parties (customers and suppliers) as Extranet diagram.
• List and describe data center operations, including location, number of servers, number of racks, SANS, off site backups, encryption of storage, square footage, power sources, telco sources, fire systems and security controls.
• Provide any reports or documentation regarding scalability of the environment (previous throughput compared to current). Include any notes about scalability limitations if known and any designs that allow scalability.
• Provide software and hardware incident reports and service metric for last 12 months.
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Learn more on how to run a successful M&A on our M&A Management Playbook and Toolkit page.