Checklist for a financial due diligence investigation
The review period would typically cover the last three years.
History and commercial activities
Summary of the legal structure and ownership of and any changes since the last annual return
Brief account of history, locations and nature of business
Copy of the latest business plan and/or any corporate brochures
Description of products/services and any other trading activities
Details of main competitors and market position, including estimated market share and any recent industry surveys
Details of key customers including terms of trade and an analysis of turnover by customer during the review period
Details of key suppliers including terms of trade and an analysis of purchases by supplier during the review period
Particulars of any long-term agreements with customers or suppliers and any other significant agreements, contracts or arrangements with third parties
Note of alternative arrangements for important supplies which are currently single sourced
Production methods and techniques and the relative position of the business in relation to the ‘state of the art’ in the industry in which it operates
Summary of premises showing locations, facilities/area, tenure and purpose, premises not currently in use and the availability of any spare land or buildings
Details of any rent payable or receivable and sight of leases or tenancy agreements including details of any onerous lease provisions
Details of any intellectual property and whether the target has taken steps to protect it
Details of any litigation
Copies of all contracts relating to the acquisition or disposal of companies or businesses during the last six years
Organisation structure and employees
Summary of the management structure and division of responsibilities
List of directors and senior executives and particulars as to:
Previous experience and connection before joining business
Formal qualifications
Duties throughout the review period
Age, years of service and date of appointment to the board, if applicable
Current remuneration
Pension arrangements
Other benefits (e.g. use of company car)
Service agreements
Directorships of companies that carry on business of any kind with the target or its subsidiaries
Names of former directors and senior executives who have left during the review period along with reasons for departure
Analysis of staff by department or function and an indication of staff turnover levels
Details of key employees and strategies to retain them
Description of salary/wage structure, terms of employment including holidays, pensions and other benefits, notice period, etc.
Details of recent and imminent salary/wage reviews
Description of recruitment and training policies
Names of active trade unions, if any, and number of staff affiliated to each
Details of any disputes during the review period and current staff relations in general
Details of relationships with self-employed staff, external consultants, contractors and professional advisers
Details of any restrictive covenants placed on staff who have recently joined or left the company
Details of any pension and share option schemes
Accounting policies and audit issues
Copies of audit management letters for the review period
Authority from the target’s auditors to allow access to their working papers for the review period
Management information and control systems
Details of the IT systems architecture (including web, ERP and accounting systems), the interfaces between each and the extent to which each is used for the reporting of financial and non-financial operating data
Details of the back-up and disaster recovery procedures
Details of the management information reporting procedures, including the consolidation process where applicable
Details of the budget-setting process and results of previous comparisons to actual results
Summary of the key internal controls in place
Trading results
Where possible the following analyses should be provided on a monthly basis:
Copies of financial statements produced during the review period including interim and non-statutory accounts, if any
Analysis of turnover and gross profit by principal product groups, customers and geographic destination for the review period
Analysis of overheads by nature
Management accounts and other management information used in monitoring the business for the review period, with a reconciliation to the financial statements
Details of any special features which have influenced the trading results in any year
Details of any intragroup or related-party transactions
Details of any currency exposure and hedging arrangements.
Assets and liabilities
The following analyses need only be provided at year ends in the first instance:
Description of fixed asset capitalisation, revaluation and depreciation policies
Sight of any recent independent or internal valuations
Analysis of valuation, cost, depreciation/amortisation and net book value of fixed assets by major category, age and whether owned or leased for the review period
Details of grants received, capital commitments and any significant capital expenditure anticipated but not contracted for
Analysis of stock (gross and net of any provisions) by type and age
Analysis of debtors (gross and net of any provisions) by type and age
Analysis of creditors by type and age and a description of their repayment bases
Details of hire purchase, leasing and rental agreements
Details of loan or overdraft facilities, security provided, interest and repayment terms and any payment clauses stipulated for withdrawing from such agreements
Details of any warranty liabilities and recent claims history
Details of any contingent, off-balance sheet financing or other liabilities not covered above.
Cash flow
Cash flow statements for the review period if not included in the financial statements
An explanation of the major variances in the net cash position over the review period
Financial projections
Any budgets, forecasts and projections available
Description of basis on which the projections have been derived and supporting evidence where available
Current trading
Monthly management accounts since the review period
Analysis of the management accounts in line with that provided for the review period, including a commentary on variances to budget
Taxation
Tax computations and sight of correspondence covering the review period
Details of current status of tax computations and disputes with tax authorities
Analysis of brought-forward tax losses and advance corporation tax (ACT), if any, by date of creation
Sight of any apportionment clearances which have been obtained
Summary of the findings of the most recent VAT and PAYE/NIC inspections
Details of any reconstructions, reorganisations and tax clearances during the review period
Other
Copies of any circulars to members
Sight of minute books, other statutory books and of the memorandum and articles of association