M&A due diligence checklist: definition, examples, and usage

Successful due diligence ensures a win-win deal for both M&A parties.

It helps the buy-side dive deep into sellers’ financial and legal records while making sure the sell-side is presented in the proper light as well. Consequently, both parties engage in a transparent business relationship to avoid legal trouble.

The due diligence process for M&A can be tedious. It can take weeks, if not months, to complete. Therefore, buyers create due diligence checklists to simplify document collection and ensure that important details won’t get overlooked.

What is a due diligence checklist?

A due diligence checklist is a detailed list of documents a buyer requests from a seller during the due diligence stage. 

The Cambridge Dictionary defines due diligence as “the detailed examination of a company and its financial records, done before becoming involved in a business arrangement with it.”

You can structure due diligence documents by investigation areas, including but not limited to legal, financial, intellectual property, and marketing.

List of due diligence documents for M&A

You should focus on the following information while conducting due diligence.

General information documents

Buyers collect general information documents to familiarize themselves with target businesses.

Organizational documents

• Organizational chart
• Articles of incorporation and corporate structure documents
• Restructuring and reincorporation documents
• Certificate of Good Standing
• List of authorized jurisdictions
• List of subsidiaries, partnerships, and joint ventures
• List of company’s shareholders
• Agreements relating to preemptive and registration rights

Business materials

• Business plans and board packs
• Annual reports for the last three-five years
• Corporate bylaws and their specifications

Legal due diligence documents

Companies collect legal due diligence documents to eliminate the risks of inheriting legal issues of acquired businesses.

Legal disputes

• Concluded, active, or pending litigation against or initiated by the target company
• Judgments, injunctions, consent decrees, governmental investigations, and similar documents

Agreements and material contracts

• Company contracts and consulting agreements
• Franchise and licensing agreements
• Copies of all guarantees provided to or by the target company
• Indemnification agreements and contingent liabilities
• Auditor’s correspondence and corporate attorneys’ letters to auditors

Accounting and financial due diligence documents

Financial information due diligence helps verify whether acquiring a company will be profitable for your business in the long run.

Financial documents and income statements

• Market capitalization and equity documents, including stock purchase agreements, balance sheets, cash flow statements, and deferred revenue
• Three years of audited financial statements
• Budget plans, including operating and capital budgets 
• Copy of the general ledger, including accounts payable and accounts receivable
• Tax structure and tax returns for the last three years

Control methods and material agreements

• List of internal control procedures
• Insurance coverage
• Insurance policies and audit reports
• Accounting methods, including amortization and depreciation methods for the past five years
• Credit agreements, including lines of credit and loans

Sales and marketing due diligence documents

Buy-side companies collect sales and marketing due diligence documentation to ensure that the target company can generate forecasted profits.

Customer insights

• List of top active and former customers with revenue records
• Customer analysis
• Copies of material customer contracts and long-term sales contracts
• Records and summaries of warranty claims

Marketing Insights

• List of top suppliers, distributors, and resellers
• Market research records
• Marketing agreements, strategies, and plans

Products and advertising materials

• List of existing and unreleased company products and services.
• Advertising materials, including sales sheets, press releases, brochures, and TV commercials
• Sales analytics

Human resources due diligence documents

Human resources due diligence documents help you determine a target company’s key talents and integration opportunities.

Employee insights

• Current employee demographics
• CVs of key employees
• Employee benefits and handbooks

HR contracts

• Non-disclosure, non-compete, and non-solicitation agreements
• Employee skills and competence evaluations
• Employment contracts
• Payroll documents, deferred compensation plans, and pension plans
• HR policies and practices

Intellectual property due diligence documents

Conducting due diligence of the target company’s intellectual property structuralizes its IP portfolio and ensures there are no hidden IP rights issues. You should focus on the following information.

Patents and software

• Patents, patent applications, proprietary software and IT systems, trade secrets, and their descriptions
• Copies of patent research and development, licensing, and collaboration files
• Licensing revenues and expenses

Ownership information

• Trade names, trademarks, and copyrights (both material and unregistered)
• Chain of title records
• List of websites and social media accounts

IP protection information

• Documents regarding IP protection measures
• Claims and threats around IP

Property and equipment due diligence documents

Property due diligence helps you verify the target company’s tangible physical assets to determine the acquisition value. You should request the following information.

Company’s property audits

• Copies of inventory listings at the end of the fiscal month and year
• Documents regarding inventory storage practices
• Lists of leased and owned properties, real estate, and fixed assets with specifications (date acquired, location, cost, etc.)

Legal information

• Equipment leases and property deeds
• Copies of equipment appraisals
• UCC filings

Strategic due diligence documents

Strategic fit due diligence helps a buyer understand the target company’s total value and determine whether the deal is profitable in the long run. You should decide whether the target company fits your strategic plans by evaluating due diligence findings in other areas.

To do so, you need to evaluate the following information:

• Acquisition value drivers, including technology, markets, products, and intellectual property
• Assessments of marginal costs following the company’s acquisition
• Evaluations of synergies in sales, management, production, and other areas
• Review of acquisition risks

How to collect due diligence documents?

Businesses employ a step-by-step approach for collecting due diligence documentation:

1. Time frame negotiations
   
   You should decide on approximate due diligence deadlines and discuss guidelines for emergencies.
   
2. Team formation
   
   Delegate document collection to accountants, attorneys, and M&A experts. Each due diligence team might follow a dedicated due diligence checklist in financial, legal, marketing, and other investigation fields.
   
3. Document collection
   
   Collaborate with sell-side teams, send request checklists, and collect documents in a virtual data room.
   
4. Findings evaluation
   
   Carefully analyze due diligence findings to minimize overlooked benefits and risks of the upcoming merger or acquisition.

Three common issues to be aware of while collecting due diligence documents

Here are three of the most common mistakes to avoid while collecting due diligence documents.

1. Treating document collection as a simple audit

Around 70-90% of M&A deals fail because buyers misevaluate the benefits and risks of anticipated acquisitions. These failures often originate from improper, rushed investigations and misleading conclusions about business sellers.

It happened to Bank of America, which lost over $50 billion due to the collapsing mortgage market and fraud settlement after acquiring Countrywide Financial.

You can avoid many M&A issues by emphasizing and evaluating the deal’s benefits and risks discovered during the due diligence process.

Completing checklists for due diligence is crucial, but the whole process is a deep analysis of the target company, not a simple audit.

2. Failing to involve industry experts

It’s okay if your compliance team lacks experience in all dedicated due diligence areas. However, you might risk overlooking critical issues if you delegate due diligence document collection to general analysts.

Instead, hire third-party professionals to compensate for your team’s knowledge gaps.

3. Failing to recognize inapplicable documents

There is no one-size-fits-all approach to collecting due diligence documents, even though it might seem that way when using due diligence checklist templates.

You can use them as a reference to set the due diligence direction and speed up the process by developing organization-specific checklists. Otherwise, you may end up reviewing irrelevant documents.