Administrative Due diligence

Administrative due diligence is the aspect of due diligence that involves verifying admin-related items such as facilities, occupancy rate, number of workstations, etc. The idea of doing due diligence is to verify the various facilities owned or occupied by the seller and determine whether all operational costs are captured in the financials or not. Admin due diligence also gives a better picture of the kind of operational cost the buyer is likely to incur if they plan to pursue expansion of the target company.

Financial due diligence

the financial due diligence that seeks to check whether the financials showcased in the Confidentiality Information Memorandum are accurate or not. Financial due diligence aims to provide a thorough understanding of all the company’s financials, including, but not restricted to, audited financial statements for the last three years, recent unaudited financial statements with comparable statements of the last year, the company’s projections and the basis of such projections, capital expenditure plan, schedule of inventory, debtors, and creditors, etc.

The financial due diligence process also involves analysis of major customer accounts, fixed and variable cost analysis, analysis of profit margins, and examination of internal control procedures. Financial due diligence additionally examines the company’s order book and sales pipeline to create better (more accurate) projections. 

Many acquirers have a separate section of financial analysis focused on the target company’s debt situation, evaluating both short-term and long-term debt, applicable interest rates, the company’s ability to service its outstanding debt and to secure more financing if needed, along with an overall examination and evaluation of the company’s capital structure.

Asset DD

Another type of due diligence conducted is asset DD. Asset due diligence reports typically include a detailed schedule of fixed assets and their locations (if possible, physical verification should be done), all lease agreements for equipment, a schedule of sales and purchases of major capital equipment during the last three to five years, real estate deeds, mortgages, title policies, and use permits.

Human Resources DD

Human resources due diligence is extensive. It may include all of the following:

• Analysis of total employees, including current positions, vacancies, due for retirement, and serving notice period
• Analysis of current salaries, bonuses paid during the last three years, and years of service
• All employment contracts, with nondisclosure, non-solicitation, and non-competition agreements between the company and its employees. In case there are a few irregularities regarding the general contracts, any questions or issues need to be clarified.
• HR policies regarding annual leave, sick leave, and other forms of leave are reviewed.
• Analysis of employee problems, such as alleged wrongful termination, harassment, discrimination, and any legal cases pending with current or former employees
• Potential financial impact of any current labor disputes, requests for arbitration, or grievance procedures pending
• A list and description of all employee health benefits and welfare insurance policies or self-funded arrangements
• ESOPs and schedule of grants

Intellectual Property DD

Almost every company has intellectual property assets that they can use to monetize their business. These intangible assets are something that differentiates their products and services from their competitors. They may often comprise some of the company’s most valuable assets. A few of the items that need to be looked at in a due diligence review are:

• Schedule of patents and patent applications
• Schedule of copyrights, trademarks, and brand names
• Pending patents clearance documents
• Any pending claims case by or against the company in regard to violation of intellectual property

Legal DD

Legal due diligence is, of course, extremely important and typically includes examination and review of the following elements:

• Copy of Memorandum and Articles of Association
• Minutes of Board Meetings for the last three years
• Minutes of all meetings or actions of shareholders for the last three years
• Copy of share certificates issued to Key Management Personnel
• Copy of all guarantees to which the company is a party
• All material contracts, including any joint venture or partnership agreements; limited liability company or operating agreements
• Licensing or franchise agreements
• Copies of all loan agreements, bank financing agreements, and lines of credit to which company is a party