(618) 687-2376 rhc@rhc.legal


The following is provided by Reed, Heller & Cannell, LLC for general informational purposes only and may NOT be relied upon as legal advice.

In the sale of a business, the prospective acquirer will want and expect to learn as much as possible about the business before committing to a transaction. The due diligence process is frequently the most time-consuming, effort intensive and stressful part of the overall sale process for the selling business owner. A business that integrates the practices below into its operations and maintains the documents, records and other information below in an organized manner will significantly reduce the work and stress of the due diligence process on the owner in the event of a sale transaction.

  1. Financial Statements. Maintain monthly and year-end financial statements (i.e., balance sheet and profit and loss statement, at a minimum) that fairly and accurately represent the financial performance of the business for the applicable dates and time periods. If appropriate and relevant given the nature of the business, maintain up-to-date schedules of work in progress, accounts receivable (including aging), accounts payable (including aging) and warranty liabilities.
  2. Capitalization Table. Maintain an updated written table setting forth the name of each record owner of the equity interests of the company, setting forth with respect to each such owner the number of equity interests owned (broken out by class if there are multiple classes of equity interests). The capitalization table should include any outstanding options, warrants or other rights to acquire equity interests in the company.
  3. Equity Documents. Maintain signed copies of documents verifying the equity ownership of your company set forth in the capitalization table. Such equity documents should provide the company’s principal decision-maker(s) with the authority to sell the business.
  4. Valid Contracts. Maintain signed copies of all contracts that are material to the business (customer contracts, vendor and supply contracts, employment agreements, software license agreements, etc.).
  5. Contract Terms. With respect to each material contract, understand and track the applicable expiration and/or renewal dates, the material business terms (and whether such terms have been complied with or breached), and whether the counterparty’s consent would be required to assign the contract to an acquirer of the business.
  6. Indebtedness and Liens. Maintain signed copies of all documents evidencing any indebtedness of the business and/or liens or encumbrances on any of the equity or assets of the company.
  7. Intellectual Property. Take all necessary steps to ensure that the company owns all rights in (or holds a valid license to use) the intellectual property used in the business and that all employees, contractors or other persons who contribute to the development of intellectual property used in the business effectively assign to the company all of their rights in such intellectual property.
  8. Employee List. Maintain a census of all employees and independent contractors of the business, indicating for each such employee or independent contractor their hire date, title, salary or wage rate, other compensation and benefits, and whether they are exempt or non-exempt under the Fair Labor Standards Act regulations (i.e., whether they are entitled to overtime pay).
  9. Employment Policies. Maintain copies of the employee handbook (if any) and other written employment policies and practices.
  10. Employee Benefits. Maintain a written list of all employee benefits offered to employees and copies of all written benefit plans and summaries.
  11. Real Estate. Maintain records of ownership of any owned real estate used in the business and signed copies of lease agreements for any leased real estate used in the business. With respect to leased real estate, understand and track the applicable expiration and/or renewal dates, the material business terms (and whether such terms have been complied with or breached), and whether the landlord’s consent is required to assign the lease to an acquirer of the business.
  12. Insurance. Maintain adequate insurance coverage for the business in light of the industry and size of the company, maintain copies of all insurance policies, and ensure that all policies are in effect and enforceable.
  13. Legal Actions. Be prepared, if requested, to provide a list (and summary description of) of any legal actions initiated or threatened by or against the company, material disputes with customers, vendors or other third parties, investigations or audits of the company by any governmental authority, or other potential claims by or against the company. NOTE THAT YOU SHOULD CONSULT AN ATTORNEY BEFORE DISCLOSING OR CREATING A WRITTEN RECORD OF ANY INFORMATION THAT CONTAINS AN ADMISSION TO OR ACKNOWLEDGMENT OF ANY ACT OR OMISSION THAT COULD GIVE RISE TO LEGAL LIABILITY OF THE COMPANY.
  14. Customer and Vendor Lists. If appropriate and relevant to a potential acquirer given the nature of the business, maintain a list of the top customers (based on total revenue) and vendors (based on total expenditures) of the business each year.
  15. SOPs. Maintain copies of all written operational policies and procedures used in the business.
  16. Affiliate Transactions. With respect to any contract or other transaction between the company and any owner (or any family member or affiliate of an owner), maintain a signed copy (if in writing) or a summary (if not in writing) of such contract or transaction.
  17. Tax Returns. Maintain copies of all tax returns filed by the company and confirm that the company has made all tax filings and paid all tax liabilities required of it.

If you’re interested in learning more about how to prepare your business for sell-side legal due diligence, contact RHC.