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Administrative Due Diligence

Administrative due diligence involves verifying administrative-related items such as facilities, occupancy rates, number of workstations, and other operational aspects. The purpose of this process is to review the facilities owned or occupied by the seller and determine whether all operational costs are properly reflected in the financial statements. Administrative due diligence also provides a clearer picture of the operational costs the buyer may incur if they decide to expand the target company.

Financial Due Diligence

Financial due diligence seeks to verify whether the financial information presented in the Confidentiality Information Memorandum is accurate and reliable. It aims to provide a comprehensive understanding of the company’s financial position, including, but not limited to, audited financial statements for the last three years, recent unaudited financial statements with comparable prior-year statements, company projections and the assumptions behind them, capital expenditure plans, inventory schedules, debtors, creditors, and other financial data.

The financial due diligence process also includes analysis of major customer accounts, fixed and variable costs, profit margins, and internal control procedures. In addition, it examines the company’s order book and sales pipeline to develop more accurate financial projections.

Many acquirers also conduct a separate review focused on the target company’s debt position, evaluating both short-term and long-term debt, applicable interest rates, the company’s ability to service existing debt, its ability to secure additional financing if needed, and the overall capital structure of the business.

• Intellectual Property Due Diligence

Almost every company owns intellectual property assets that contribute to the value of its business and differentiate its products or services from competitors. In many cases, these intangible assets represent some of the company’s most valuable resources.

A due diligence review of intellectual property may include:

• Schedule of patents and patent applications
• Schedule of copyrights, trademarks, and brand names
• Pending patent clearance documents
• Review of any pending claims by or against the company related to intellectual property violations

Legal Due Diligence

Legal due diligence is a critical part of the due diligence process and typically includes the examination and review of the following:

• Memorandum and Articles of Association
• Minutes of Board Meetings for the last three years
• Minutes of shareholder meetings or shareholder resolutions for the last three years
• Share certificates issued to Key Management Personnel
• Guarantees to which the company is a party
• Material contracts, including joint venture agreements, partnership agreements, and operating agreements
• Licensing or franchise agreements
• Loan agreements, bank financing agreements, and lines of credit to which the company is a party

• Asset Due Diligence

Another important type of due diligence is asset due diligence. Asset due diligence reports typically include a detailed schedule of fixed assets and their locations, where possible through physical verification, as well as lease agreements for equipment, records of major capital equipment purchases and sales over the last three to five years, real estate deeds, mortgages, title policies, and use permits.

• Human Resources Due Diligence

Human resources due diligence is extensive and may include the following:

• Analysis of total employees, including current positions, vacancies, employees nearing retirement, and employees serving notice periods
• Review of current salaries, bonuses paid during the last three years, and years of service
• Review of employment contracts, including non-disclosure, non-solicitation, and non-competition agreements
• Review of HR policies related to annual leave, sick leave, and other employee benefits
• Analysis of employee-related disputes, such as wrongful termination, harassment, discrimination, and pending legal cases involving current or former employees
• Assessment of the potential financial impact of labor disputes, arbitration requests, or pending grievance procedures
• Review of employee health benefits, welfare insurance policies, or self-funded arrangements
• Review of ESOPs and grant schedules