M&A Due Diligence Checklist: From Letter of Intent to Closing

What an M&A Due Diligence Checklist Is

The checklist is the acquirer's plan of the investigation, written as a list. It covers every workstream a buyer runs, which the due diligence checklist maps one by one, and adds the lines that belong to the transaction itself: how the deal is structured, what has to transfer, who has to consent or approve, what the purchase agreement must cover, and what the combined company needs on its first day.

That last part is what sets an acquirer's list apart from an investor's. A private equity due diligence checklist weighs the return a fund can earn from the company on its own. A corporate acquirer usually buys to combine, so its list carries the lines a combination depends on: the synergies in the price, the systems and people that have to come across, and the contracts that might not.

Structure Decides What Transfers

The first lines on the list depend on the deal's structure, because the structure decides what comes with the company.

• Stock purchase. Everything the entity owns and owes comes with it, including liabilities nobody has found yet. The legal, tax and compliance lines go deepest.
• Asset purchase. Only the listed assets and the assumed liabilities move. The lines that matter are the schedules themselves, the consent each contract needs before it can be assigned, and the allocation of the price across the assets, which the IRS requires buyer and seller to make.
• Merger. The surviving entity carries both companies' obligations, and when the consideration includes the buyer's shares, the sellers run diligence on the buyer too.
• Carve-out. A business sold out of a larger group leaves shared systems, contracts, sites and people behind. The list needs a line for each one, saying whether it transfers, is rebuilt, or is provided by the seller for a period after closing.

The tax advisers settle how the structure is taxed, including whether a stock purchase will be treated as a purchase of assets by election. The M&A due diligence guide covers how structure sets the scope of each workstream.

People need the same care. Where the integration plan closes a site or lays people off, the federal WARN Act bars a covered employer from ordering a plant closing or mass layoff until 60 days after it serves written notice. In a sale, the seller is responsible for notice of any closing or layoff up to and including the date of the sale, and the buyer for any after it, so the two should settle before signing who gives notice of what.

Consents and Change of Control

Contracts the business depends on can stop when its ownership changes. Customer, supplier, license, lease and financing agreements often require the other party's consent to an assignment or a change of control, or give it the right to terminate. In an asset purchase, nearly every contract the buyer wants has to be assigned.

So the line on the checklist is not "contracts reviewed". It is a list: each contract with a consent or termination right, its counterparty, the revenue or cost behind it measured from billing and payment records, and the date the consent is needed. Read the clause in the contract itself, because a summary in the data room is the seller's reading of it. Licenses and permits the business needs to operate belong on the same list, since many of them do not transfer on their own.

Clearance, and What Not to Do Before Closing

Some deals need government clearance before they can close. In the United States, the parties to certain transactions must notify the Federal Trade Commission and the Department of Justice under the Hart-Scott-Rodino Act, and may not close until the waiting period has passed or the agencies end it early. A foreign buyer may also need clearance from the Committee on Foreign Investment in the United States (CFIUS).

Until closing, the buyer and the company remain separate businesses, and diligence must not change that. The Federal Trade Commission warns that some of what diligence asks for, such as current and future prices, strategic plans and costs, is competitively sensitive, and that sharing it can contribute to unlawful gun jumping if the buyer effectively gains control of the company before closing. Where that information has to change hands, it recommends third-party consultants, clean teams and other safeguards that limit who sees it and how it is used. Agree the rules before the data moves.

From Finding to Purchase Agreement

Every line on the checklist ends somewhere. A confirmed line needs nothing more. The rest go to the price, to the purchase agreement or to the integration plan.

• Disclosure schedules. The seller lists its exceptions to each representation in the schedules. Read them against the findings, line by line: an exception the schedules disclose is no longer a breach the buyer can claim for.
• Specific indemnities and escrow. A known exposure, such as a tax dispute or a pending claim, gets an indemnity of its own, often funded by an escrow or a holdback.
• Deal insurance. Representations and warranties insurance responds to breaches the buyer did not know about, and generally excludes the ones it did. A known finding needs its own answer.
• The price mechanism. A working capital peg set from monthly history, and debt-like items deducted from the price, turn financial findings into dollars. Price adjustments and earn-outs are settled on accounting figures calculated after closing, and they are a well-known source of disputes, so define each measure on numbers the buyer's own systems will produce the same way after closing.
• The bring-down. At closing, the seller confirms its representations are still true. Re-check the lines most likely to have moved since signing.

Business Acquisition Due Diligence: The Same List, Smaller

Buying a smaller business runs the same list with fewer advisers and, usually, an asset purchase, which moves the weight of the checklist onto what transfers and on what terms. A few lines carry more weight than the rest:

• The books, the returns and the bank. Whether the tax returns, the accounting records and the bank deposits describe the same business. Where the owner's personal spending runs through the company, each adjustment for it needs its own evidence.
• The owner's part in the business. How many customer and supplier relationships run through the owner personally, and what the purchase agreement says about the owner after closing: a transition period, and any restriction on competing.
• What has to be assigned. The lease, the licenses and permits, and the customer and supplier contracts, each with the consent it needs.
• The people. In an asset purchase the buyer usually offers employment to the people it wants to keep, so the ones the business depends on need to be asked before closing, not after.
• How the price is paid and allocated. Any part of the price paid later, through a note to the seller or an earn-out, needs a measure both sides can check, and the allocation across the assets has tax consequences for both of them.

The due diligence checklist sets out the small-business lines in full. Trim the template below to the lines that have a subject in a business of that size, and keep the ones about records.

What the Data Room Cannot Tell an Acquirer

The data room is assembled by the seller to support the sale, and the representations are what the seller is willing to stand behind. A checklist worked only from those two confirms that the company is what it says it is on paper. It does not show how the company runs, which is what an acquirer needs to know before combining it with a business of its own.

• Who the work routes through. An organization chart names reporting lines. Approval records and ticket queues show the few people that decisions actually wait on, and those are the people an integration cannot lose.
• Where the work really lives. The systems a team names in an interview and the systems its work runs in are not always the same. An integration plan built on the first breaks on the second.
• Whether the cadence holds. A close that slips a few days each quarter, or delivery that falls further behind plan in one team, shows only across the whole period, in records written before anyone knew there would be a deal.
• How the two companies decide. The way each company meets, approves and hands off work decides how the first joint projects go, and no document in the data room records it.

None of this replaces the documents or the interviews. It argues for naming, on every line, what will confirm it. The template below tags each line as a document, a record in the company's own systems, or an interview, so anyone reading it can see which lines rest on the record and which rest on someone's word.