Due Diligence Cheat Sheet
A quick and dirty bullet point list to prepare for your Due Diligence.
The Due Diligence process is conducted by prospective investors in or potential buyers of your business to ascertain the credibility of your financial statements and projections.
You will have to justify the values on your Balance Sheet, Income Statement, and Cash Flow Statement. Depending on your industry, further information might be needed about HR, Production Processes, Q&A Processes, Health & Safety Policies, Regulatory Compliance, or more.
Without further ado, here are the documents you need to prepare and the things you need to look out for.
CASH & CASH EQUIVALENTS
- Bank statements
- Record of petty cash on hand
- Summary of available liquidity at a given date. This must tie in with your Cash Flow Projections.
- List of outstanding Trade Debtors, outlining amounts overdue. Split between local and international debtors (to see exposure to foreign currencies).
- If a client is also a stakeholder in your company (shareholder, subsidiary or parent company, partner in a joint venture), you must highlight it.
- Provisions already made for losses on debtors. How did you come up with your number? Is it enough? Is there any related ST Liability that you can net against overdue receivables?
- Explain usual payment terms, and how you expect to recover overdue amounts
- Updated inventory values
- Is your inventory perishable? If yes, specify average age of inventory, quantities and values at risk,…
- Do you expect any losses on your inventory? Have you made the proper provisions for those?
- Provide list of all fixed assets, including Acquisition Value, Accrued Amortisation, Current Net Value
- Explain your amortisation policy (rate, duration)
- List all potential depreciations in the foreseeable future (eg, you decided to amortise a design over 3 years but changed your branding one month ago. This design should be depreciated to 0 if you’re not going to use it anymore.)
TRADE CREDITORS / SUPPLIERS
- List of all Trade Creditors, outlining amounts overdue. Split between local and international creditors (to see exposure to foreign currencies).
- If a supplier is also a stakeholder in your company (shareholder, subsidiary or parent company, partner in a joint venture), you must highlight it.
- Explain your usual payment terms. Any discounts / rebates available? Are you taking advantage of them?
- Outline your key suppliers, the ones that you rely on. How much do you owe them? Is there a risk?
- List all employees. Are they full-time or part-time ? Base salary + variable? Bonuses? ESOP?
- List all unpaid compensation items that are on your balance sheet (salaries, bonuses, social charges, pension funds, insurance,…)
- List all unpaid compensation items that are not currently on your balance sheet (promises for bonuses, options, shares,…)
- List all pending claims against employees or against you in HR related disputes. Have you made provisions for legal costs/ damages?
OTHER ST LIABILITIES
- Do you owe VAT? Excise taxes? How much and when is it due?
- Do you have credit card debt? How much, when is it due and what is the interest rate?
- Accrued liabilities / Deferred revenues — What are they? Do they have a cash impact?
- On top of the ones already discussed above, have you made any provisions on your balance sheet, and what for?
- Provide a table of all your financial liabilities (loans, leases, credit lines). Split them between bank, supplier, shareholder.
- Specify the interest rates, maturity dates, repayment schedule, conversion terms.
- Any special clauses in the contracts? Any warrantees? Have you given liens on your assets?
- Provide a cap table. How much do the founders own? How much do the employees own?
- ESOP? What are the terms?
- Conditional Capital? Warrants? Liquidation preference? Explain away any pre-existing terms linked to previous funding rounds.
- Status of current litigations, if any
- Disclosures related to key people of the company
- Risk analysis of key clients / suppliers
- Risk analysis of the company (SWOT matrix / competitive landscape)
I hope this straightforward list helps you in your upcoming Due Diligence. If you have any comments or questions, please feel free to ask!