RE:IP - needanewBRAIN111 - do some DD and not POLOs Why Due Diligence Matters
Due diligence helps investors and companies understand the nature of a deal, the risks involved, and whether the deal fits with their portfolio. Essentially, undergoing due diligence is like doing “homework” on a potential deal and is essential to informed investment decisions.
Reasons For Due Diligence
There are several reasons why due diligence is conducted:
Financials
Examining historical financial statements and related financial metrics, with future projections
3. Technology/Patents
The quality of the company’s technology and intellectual property
4. Strategic Fit
How the company will fit into the buyer’s organization
5. Target Base
The company’s target consumer base and the sales pipeline
6. Management/Workforce
The company’s management, employee base, and corporate structure
7. Legal Issues
Pending, threatened, or settled litigation
8. Information Technology
Capacity, systems in place, outsourcing agreements, and recovery plan of the company’s IT
9. Corporate Matters
Review of organizational documents and corporate records
10. Environmental Issues
Environmental issues that the company faces and how it may affect the company
11. Production Capabilities
Review of the company’s production-related matters
12. Marketing Strategies
Understanding the company’s marketing strategies and arrangements
- To confirm and verify information that was brought up during the deal or investment process
- To identify potential defects in the deal or investment opportunity and thus avoid a bad business transaction
- To obtain information that would be useful in valuing the deal
- Are the financial statements audited?
- What do the financial statements imply about the financial performance and condition of the company?
- Are margins for the company increasing or decreasing?
- Are future projections reasonable and believable?
- What amount of working capital is required to run the company?
- What are the current capital expenditures and investments?
- What amount of debt is outstanding and what are its terms?
- Is there any unusual revenue recognition?
- Does the company have enough financial resources to cover the cost of transaction expenses for the deal?
- What patents does the company have?
- What trademarks does the company have?
- What copyrighted products and materials does the company use or own?
- How are trade secrets preserved?
- What synergies will be obtained?
- What products or services will be provided that the buyer does not already have?
- Will there be a strategic fit?
- Who are the company’s top customers?
- What consumer risks are apparent for the company?
- Are there warranty issues, and what is the customer backlog?
- What is the current compensation structure for officers, directors, and employees?
- What are the current employee benefits?
- What are the management incentives or bonuses?
- What are the policies and employee manuals?
- Detailed background on the company’s CEO and CFO
- What is the nature of any pending or threatened litigation?
- What claims, if any, are there against the company?
- Settled litigations and the terms of settlements
- Are there any governmental proceedings against the company?
- What software packages are being used by the company?
- What are the annual IT maintenance costs?
- What is the capacity of the usage level of existing systems?
- Is there a disaster recovery plan in place?
- Charter documents of the company
- Who are the current officers and directors?
- Who are the security holders (holders of options, preferred stocks, warrants) of the company?
- Are there subsidiaries of the company?
- Current stockholders and voting agreements
- Are securities properly issued and in compliance with applicable laws?
- Are there any recapitalization or restructuring documents?
- Are there hazardous substances/materials used in the company’s operations?
- Does the company have environmental permits?
- Are there any environmental claims or investigations related to the company?
- Are there contractual obligations relating to environmental issues?
- Who are the company’s most significant subcontractors?
- Who are the company’s largest suppliers?
- What is the monthly manufacturing yield?
- What materials are used in the production process?
- Are there agreements or arrangements related to testing of company products?
- Are there any franchise agreements?
- What are the current marketing strategies in place?
- Sales representative, distributor, and agency agreements?
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