When acquiring a company, due diligence is of the utmost importance. It should ideally be conducted by a team of experts. This information is a very general bird’s eye overview. The following information is focused on acquiring a private company. Please note that publicly traded companies do not fit into this category. In general, as a business owner, even if you are not looking to acquire or be acquired, the sale of a business is an important potential exit strategy. Organizing your record-keeping functions so you are prepared for due diligence for acquisition is a good practice.



Basic due diligence can be divided into 3 separate areas: legal, financial and operational. Therefore, it is advisable for both the seller and the buyer to work with their own attorney, CPA or chartered accountant, and either CFO or other hands-on operational supervisor. Due diligence begins AFTER a letter of intent has been executed and signed. Once the letter has been completed, due diligence has 2 parts. First, there is a request for information and a response to this request. Second, the information is reviewed and verified on-site.


Documents and Information Needed:

Here is a list of examples of the types of documents and items to be aware of when requesting and putting together documents for due diligence (NOTE: this is by no means comprehensive and exhaustive list.):



  • Corporate structure and associated documents
  • Corporate filings
  • Verify that the company is in good standing
  • Make sure it is properly registered
  • All annual reports.
  • Look at Corporate Record books. Watch for red flags concerning ownership
    and transferability.
  • Comprehensive list of officers/directors along with their duties and responsibilities.
  • Insurance policies. Certain provisions may affect the acquisition adversely.
  • Customer complaints. Check agencies and associations.
  • 3rd party contracts (can dramatically affect the
    business post acquisition.)
  • Pending, threatened, past and potential future litigation
  • Licenses and Permits



(NOTE: All publicly held companies have to have audits and cash flow statements, but private companies are not always held up to SEC standards. Therefore, the information may not be as reliable or as dependable. Be very careful.)

  • All accountant reports and correspondence
  • Management letters to the company
  • Fiscal plans, budgets, and projections. This is an area for both
    huge potential liability and negotiation.
  • Revenue and gross profit by category
  • Detailed accounts
  • Listing of all equipment
  • Tax returns. Can present red flags.
  • Incentive programs and options. (can impact the profitability
    of the acquisition.)



Operations deals with the how the company is run. It is best to have the CFO or some other person responsible for and knowledgeable about the company’s specific operations to work with. Ideally, the buyer will also want to consult with
someone who is familiar with operations of companies operating in the same market:

  • Employee compensation.
  • Information on the management team and key staff
  • Organization charts.
  • Intellectual property documentation. How IP is owned and used can fundamentally
    affect the legal and financial consequences of an acquisition.
  • Goodwill.
  • Employee manual
  • Examples of potential operational material matters include: limitations on marketing/sales, real estate ownership, etc.


After Due Diligence:

Once due diligence has been completed, generally the buyer has 3 options:

  • Accept as is and move to closing
  • Request corrections, or
  • Negotiate for an adjusted price. Because these are generally the options it is critical that both parties ensure the letter of intent has an option to take corrective actions, otherwise the second option above may not be available under the letter. It is important to note that the time between due diligence and closing should be as short as possible because the due diligence must be up-to-date at the time of closing. Typically this means the due diligence is updated the day before closing.