Getting Started
What items should be included in a typical due diligence checklist?
A typical checklist will include a list of key assets, both tangible and intangible. In parallel, the acquisition agreement will often indicate which of these assets will be appraised. There should be a match between the due diligence appraisal checklist and the language of the acquisition agreement with respect to assets. Each informs the other. Take, for example, Section 4.8 of the sample acquisition agreement at the end of Letters of Intent and Acquisition Agreements, on the subject of inventory (a key asset category), which states:
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Most Recent Inventory. The inventories of the Target and the Subsidiaries on a consolidated basis as reflected on the Most Recent Balance sheet consist only of items in good condition and salable or usable in the ordinary course of business, except to the extent of the inventory reserve included on the Most Recent Balance sheet, which reserve is adequate for such purpose. Such inventories are valued on the Most Recent Balance Sheet at the lower of cost or market in accordance with GAAP. |
As the language of this provision implies, it is important for the buyer to know whether the valuation of inventory on the financial statements reflects its actual value. In some cases, the buyer may include a representation that a particular dollar amount is the minimum value of the target’s inventories—a representation that is more common in an asset purchase. To find this dollar amount, the services of an appraiser can be helpful.