Due Diligence

Due diligence is the process of systematically researching and verifying the accuracy of a statement. Due diligence describes the degree of effort required by law or industry standard.

In the business world, where due diligence is required to validate financial statements. The goal of the process is to ensure that all stakeholders associated with a financial endeavor have the information they need to assess risk accurately.

Businesses are complex institutions consisting of interrelated functions and activities. Potential acquirers or investors must be able to identify, understand, and evaluate the pros and cons of each aspect of their investment as efficiently as possible. Here is a sample list of items required for the financial due diligence on a small business:

  1. Financial Statements for the last 3 fiscal years.
  2. Tax Returns for the last 3 fiscal years and journal entries for book to tax reconciliation.
  3. Detail General Ledger for the last 3 fiscal years.
  4. Current financial statement to last closed month.
  5. W2 and W3 forms for the last three years.
  6. Bank statements, deposit slips and cash receipts journal for last 3 years.
  7. Latest aging reports for Accounts Receivable and Accounts Payable.
  8. Schedule of all operating and capital lease obligations.
  9. List and copies of any service contracts to which the company is a party.
  10. Schedule of sales by customer last 3 years.
  11. Schedule and copy of any royalty, licensing arrangements, or warranty agreements to which the company is a party. Describe warranty provided to customers with product and or service sales.
  12. List of current employees with compensation and description of vacation pay policies, bonus plans and sick pay plans currently in effect. Details of current medical benefit plan (if any) for employees and officers. Details of obligations to employees under current pension plan.
  13. Copies of all non compete agreements involving the company or any of employee of the company.
  14. Copies of all current insurance policies including auto liability and workers compensation.
  15. Schedule of all pending or threatened litigation involving the company, whether as a plaintiff or defendant.
  16. All correspondence within the past three years relating to any government pending or threatened investigation.
  17. Contact information for accounting and bookkeeping firms retained to compile financial statements and prepare tax returns. Provide authorization to these vendors to communicate with us.
  18. Sales Tax Returns for the last three years.