Due Diligence Checklist: Legal Documents You Must Have Ready
The importance of due diligence cannot be overstated when preparing for business transactions, particularly in the mid-market space. Preparing a comprehensive set of legal documents ensures a smoother transaction process and builds buyer confidence when selling a business. Here is a review of key categories of legal documents typically reviewed by buyers, including financial records, corporate documents, licenses, permits, registrations, contracts, regulatory records, and employee and HR documents.
1. Corporate Documents
Articles of Incorporation/Organization: Legal documents that establish the business entity.
Bylaws or Operating Agreements: Internal governance rules for corporations or LLCs.
Shareholder or Partnership Agreements: Details of ownership structure and stakeholder rights.
Board Meeting Minutes and Resolutions: Records of significant corporate decisions.
Stock or Membership Interest Ledgers: Documentation of issued shares or ownership interests.
Certificates of Good Standing: Proof that the company complies with state registration requirements.
2. Licenses, Permits, and Registrations
Business Licenses: General licenses are required to operate legally.
Industry-Specific Permits: Regulatory permissions for specific sectors (e.g., healthcare, food service, construction).
Zoning Permits: Authorization to conduct business in specific locations.
Environmental Permits: Compliance with environmental regulations where applicable.
Intellectual Property Registrations: Patents, trademarks, copyrights, and domain names.
3. Contracts and Agreements
Key Customer Contracts: Long-term agreements with major clients.
Supplier and Vendor Agreements: Details of ongoing obligations and payment terms.
Leases and Real Estate Agreements: Contracts for physical premises or equipment.
Employment Agreements: Contracts for key employees, including non-compete and confidentiality clauses.
Loan and Credit Agreements: Documentation of existing debts and obligations.
Joint Venture or Partnership Agreements: Collaborative arrangements with third parties.
Warranties and Guarantees: Any commitments made to customers or partners.
4. Compliance and Regulatory Records
Tax Filings and Records: Federal, state, and local tax returns for the past 3–5 years.
Litigation History: Details of any current or past lawsuits, including settlements.
Regulatory Filings: Compliance documents submitted to government or industry bodies.
Insurance Policies: Coverage details for liability, property, workers’ compensation, and key person insurance.
Health and Safety Compliance: OSHA and other safety certifications or audits.
5. Financial Records and Supporting Legal Documents
Audited Financial Statements: Balance sheets, income, and cash flow statements.
Accounts Receivable and Payable Ledgers: Details of outstanding invoices and obligations.
Asset Schedules: Documentation of physical and intangible assets, including ownership records.
Capital Expenditure History: Records of significant investments and improvements.
Bank Statements and Loan Documentation: Evidence of financial stability and obligations.
6. Intellectual Property and Technology
Patent Filings: Proof of innovation ownership.
Trademark Registrations: Protection of brand identity.
Copyright Records: For creative works, software, or other IP assets.
Technology Licenses and Agreements: The company uses software, hardware, or IT infrastructure.
Confidentiality and IP Assignment Agreements: Contracts ensuring IP ownership rights remain with the business.
7. Employee and HR Documents
Employee Handbooks and Policies: Documentation of workplace rules and procedures.
Payroll Records: Evidence of compensation and tax compliance.
Employee Benefit Plans: Retirement plans, health insurance, and other perks.
Independent Contractor Agreements: Contracts for non-employee workers.
Immigration and Work Authorization Records: Proof of employee eligibility to work.
8. Operational and Business-Specific Documentation
Franchise Agreements: For businesses operating under a franchise model.
Product Liability and Recall Records: History of any product-related issues.
Inventory Records: Detailed list of inventory and its valuation.
Supply Chain Agreements: Contracts with manufacturers and distributors.
Risk Mitigation Through Proper Organization
Properly organization of due diligence materials is crucial to ensure a smooth transaction. A lack of preparation or disorganized documentation can cause delays, raise buyer concerns, and even jeopardize the deal. Sellers can mitigate risks and instill confidence in potential buyers by organizing and reviewing all required legal documents before the due diligence phase begins.
One strategy to assist the organization is establishing a Virtual Data Room (VDR), a secure online repository where all due diligence documents are stored and managed. The VDR allows controlled access to buyers, advisors, and stakeholders. It enhances transparency by providing buyers instant access to necessary documents and centralizing all records in one location for easy reference.
Review and verify documents to identify gaps or inconsistencies and ensure accuracy. Address issues, such as missing records, outdated licenses, or contract discrepancies, before sharing with buyers. Cross-check for regulatory compliance and verify that all licenses, permits, and certifications are current. Work with accountants to confirm the accuracy of financial statements and tax filings.
Try to anticipate buyer concerns and think like a buyer. Highlight your business’s strengths, such as steady revenue growth, clean compliance history, or long-term client contracts. Provide detailed explanations or have solutions ready for any identified risks. Voluntarily disclosing known issues, such as minor legal disputes or operational challenges, with accompanying explanations or resolutions builds trust and minimizes surprises during the transaction process.
You should update documents regularly, particularly during the negotiation process, to reflect recent developments. Maintaining a log of record updates, especially when responding to buyer requests or clarifying discrepancies, is prudent. To ease buyers, ensure all parties can access the most recent versions of critical documents. Once the deal is complete, retain an archive of all due diligence materials for future reference, legal obligations, or tax purposes.
The Role of Advisors in Due Diligence
Because the due diligence process is significant, you must be sure you are working with professionals and experts who can guide you correctly through it. Legal advisors ensure contracts and agreements comply with applicable laws. Financial advisors validate financial records and identify potential risks. Business brokers assist in preparing and presenting documents to buyers.
Due diligence is not something you can just wing or take lightly, so it is best to prepare yourself before that time comes. Being organized and using a checklist like the one provided can help streamline the transaction process and minimize delays. Don’t feel like you need to tackle this alone. Seek advice from professionals like HartmannRhodes to ensure all your legal documents are in order and help your business transaction go as smoothly as possible.
Mark Hartmann is a three-time Inc 500|5000 CEO with a rich sales, operations, and leadership background in the insurance, financial services, and healthcare sectors. With extensive experience growing and selling his own businesses, Mark leverages his expertise to help owners grow and sell businesses valued at $1M —$25M. He’s earned a Master of Business Administration from Eastern University, a master of science degree in organizational change management from St. Elizabeth University, and a graduate certificate in executive coaching from Columbia University. Mark’s professional certifications include Certified Mergers and Acquisitions Professional (CM&AP), Certified Business Intermediary (CBI), Certified Exit Planning Advisor (CEPA), and Certified Value Builder (CVB).