The use of a data room for due diligence guarantees the security of your transactions. In selling your business, a checklist is one of the most critical steps you should take. Why is this needed? The reason is that step-by-step planning can speed up the process or derail the deal, leaving you confused. Data security plays a key role in this. Therefore, we recommend using data room software to store and transfer corporate information. In addition, in this article, we will tell you how to create a due diligence list when selling a business or in acquisitions and mergers.
What are Due Diligence Checklists?
Due diligence checklists are standardized lists of questions and document requests. The package of documents is intended to verify the feasibility of the transaction before the completion of the deal. These checklists will require the party to provide relevant information, which varies by industry. However, this type of checklist will be used as data pertinent to the decision-making process in all cases. Therefore, using the best data rooms is optimal to store and transfer documentation safely. Also, due diligence checklists help with the following:
- detect fraud committed by suppliers, employees, or customers;
- identify operational deficiencies;
- perform a risk and opportunity assessment;
- Assess the degree of compliance and review the efforts made to ensure compliance.
The planning and control department must check the feasibility or absence of operational investments to conduct due diligence transactions. In this case, electronic data room tools are also used. It is necessary, for example, to analyze what kind of return the investment will bring to the company (ROI) and during what time the profit compensates for the amount spent (payback). Good data also helps a manager make much more sound investment decisions. Depending on the M&A projects to be carried out, people with legal, tax, labor, financial and commercial knowledge may be involved in the same activities.
Due Diligence Checklist: Key Elements
Due diligence is a complex process that requires an interdisciplinary team that can bring together disparate information. With the selected team, an initial step is taken with clear and objective communication to complete the main points of the list. Below is an example of a due diligence checklist that can be compiled within the capabilities of a virtual data room.
Profit and Loss Statements
Profit and loss statements and balance sheets describe the financial performance of a company over time. To determine the business’s profitability, the manager should use the income and expense statement for three years and a list of assets and liabilities available at the audit time. This will help the parties to the transaction see how the business is going. Besides, you can understand what changes have been made during the period under review. Use virtual data rooms for this purpose.
Permits and Licenses
Transaction participants must also ensure that commercial permits and licenses are valid and updated. If the buyer has doubts about the authenticity of any submitted documents, it is necessary to check with the authority that issued them. These documents include:
- contractual provisions for the protection of intellectual property with customers, suppliers, and employees;
- registration of trademarks;
- copyrighted products and materials controlled or owned by the company;
- contractual confidentiality provisions with customers, suppliers, and employees;
- list of intellectual property disputes;
- software used.
If you are a business buyer, then find out if the company depends on only the owner’s skills. In addition, the buyer should contact key employees (since they know more about the business) to see if the company has a history of fair dealings and timely delivery of commitments.
Equipment and other Assets
The buyer must request and review the list of assets to be sold and inspect all company equipment, machinery, and other property. Perform a data room comparison if you are going to store and transmit information through a VDR service. This is done to preserve the confidentiality of data and the company’s reputation.
This is a study of the company’s current and future tax liabilities. This study requires the review of certain tax documents by professionals with specialized knowledge of the tax code of the applicable jurisdictions.
- Income taxes (federal, state, and local);
- State checks;
- Operating losses or loans subject to compensation;
- Distribution of purchase price issues.
The data room services guarantee the security of transactions and will help speed up the process of agreeing. Imagine a room with no windows or doors that hold infinite information. To get into this room, you need to know the magic word. This is what VDR looks like for you.
The buyer should also consider whether rapid technological advances or new environmental regulations could render the company’s equipment obsolete. Undoubtedly, outdated equipment will put a company at a disadvantage, as other companies using newer technologies will leave it behind. You can use online data room software at all stages of the transaction.