Dr. John Psarouthakis, Founder and former CEO, JPIndusries,Inc., a Fortune 500 industrial corporation. Publisher of www.BusinessThinker.com

This article covers the letter of intent, which should be negotiated and signed prior to the start of formal due diligence and the formal due diligence process itself.

The most extensive and expensive investigation of a company lead takes place during the formal due diligence.  Formal due diligence can be viewed as the fourth filter through which company leads pass.  Because of its expense, you should probably plan to complete formal due diligence on a company you are fairly certain to buy.  Sometimes the process of negotiating the letter of intent itself weeds out some candidates that looked good after preliminary due diligence. Or you may uncover information during the formal due diligence that you were not aware of during the preliminary due diligence phase.  It is likely that during the 18 month to two year period that you scrutinize company leads, if about two dozen leads get subjected to a thorough preliminary due diligence, only four or five will actually follow through to formal due diligence. Some will drop out during the preliminary due diligence phase itself. Other company leads might drop out because buyer and seller are unable to agree on terms in the letter of intent.

                                                               Letter of Intent

The letter of intent is a nonbinding expression of intent, with the exception of certain provisions that are binding, similar in this way to the letter of interest.  However, it is usually much more detailed than the letter of interest.  Generally, a company will not allow the prospective buyer to speak with customers, employees or suppliers or to conduct environmental studies until the letter of intent is signed.  Since many of the details that are described in the letter of intent are addressed in the final purchase agreement, the letter of intent also serves the purpose of moving the buyer and seller toward a meeting of the minds.   .

Purpose of the letter of intent

There are two key purposes of the letter of intent.  First, it is to get a commitment from the seller that he will not negotiate with anybody else or solicit offers during a specified period of time, while the buyer is carrying out formal due diligence. This is very important, since you are likely to spend a significant amount of money and effort during the formal due diligence period, and need protection from the possibility that the seller would sell to someone else.

Secondly, although the letter of intent does not bind either the seller or the buyer to consummate the transaction, its purpose is also to create an atmosphere of good faith between buyer and seller to move forward toward a completed agreement.   Sometimes, this “good faith” is reinforced by an agreement to pay a break-up fee, a penalty paid by either side if it decides not to go through with the sale, regardless.

Timing of the letter of intent

The letter of intent is typically negotiated after you have completed preliminary due diligence but before you embark on formal due diligence.  When an investment banker is involved, the letter of intent is usually stated as a specific requirement to be signed within a relatively short period after the letter of interest is accepted.  Whether or not the seller insists upon it, you should generally negotiate and sign a letter of intent before carrying out formal due diligence, to protect against the possibility that the seller might solicit and/or negotiate deals with other prospective buyers.

Main sections of the letter of intent

The letter of intent has four main sections: the purchase price, break-up fee, contingencies, and exclusivity clause.  Exhibit 10.1 provides a sample for the letter of intent.

Price and what is included in sale The letter of intent, although nonbinding on price, should ideally reflect the agreed upon price as accurately as possible.  Otherwise, you run a greater risk of the deal going sour at the last minute.

In agreeing upon the price, the letter of intent also spells out exactly what you are buying for that price. For instance, in the example in Exhibit 10.1, you should list the assets to be acquired as well as the liabilities to be assumed from the seller.

In paragraph 4 of the sample letter, the letter of intent also spells out the percentage of the total price to be paid at closing, and the percentage to be withheld until after closing pending an audit of the balance sheet as of the date of closing reflecting the exact value of the company at closing.  The actual amount of funds transferred at closing is further reduced by an amount to be negotiated between buyer and seller that is set in an escrow account for a negotiated period after closing to cover any damages resulting from a breach of the seller’s representations and warranties contained in the purchase agreement.

Closing The letter of intent should clarify when closing will take place.  In the sample letter in Exhibit 10.1, closing is tied to satisfactory completion of formal due diligence by the buyer and government approval of the sale, if required by the Hart-Scott-Rodino Act.  Usually the latter is required when the company size of either the seller or buyer is above $100 million in either revenues or assets.  If required, you are advised to file under the Hart-Scott-Rodino Act at the letter of intent stage.  This reduces the delay that might be caused while you wait for approval from the Justice Department or the Federal Trade Commission, as the case may be.

Access to information The letter of intent also spells out the obligations the seller has to provide access to various documents and individuals. For instance, in the sample agreement, the seller is obligated to provide access to the books, records, facilities, personnel, customers and suppliers relating to the business of the seller.  Documents must include collective bargaining agreements and any related collective bargaining materials.

Break-up fee The letter of intent may sometimes specify a break-up fee, an amount of

money to be paid if the sale does not go through.  The break-up fee, if included, can apply to the seller only, the buyer only, or to both buyer and seller, depending upon the wording of the contract.  When there is no break-up fee, as in the sample letter of intent in Exhibit 10.1, you are not liable as a buyer for any damages for breaking off the negotiations unless the seller can prove you did not act in good faith.

A break-up fee is probably not needed in the case of the investment banker brokered deal.  In that case, the seller is clearly motivated to sell and has incurred his or her own expenses in the selling process.  When dealing with a private individual that is not going through an investment banker, especially with a more informal intermediary, it becomes increasingly critical to negotiate this type of clause. You don’t want to be in the position of spending $50,000 or more on due diligence only to have a seller change his or her mind about selling the company.

Exclusivity rights An exclusivity rights clause is usually included in the letter of intent.  This prevents the seller from soliciting other buyers or negotiating in any other way with other buyers.  In the example presented in Exhibit 10.1, the buyer has exclusive rights for ninety days.

Non-disclosure In the case of a publicly traded company, theUnited States securities laws restrict anyone with any non-public information about the possible sale of the company from either  buying or selling stock of the public company or communicating that information to anyone else who is likely to buy or sell such securities.  This paragraph is included to inform the seller that any information related to the possible purchase must therefore be kept confidential and that anyone aware of the transaction be prevented from buying or selling stock. 

Altering the letter of intent prior to closing

Sometimes, as a result of due diligence, you may uncover information which leads you to change your valuation of the company and what price you are willing to pay.  Although the letter of intent itself is usually not amended, you are advised to develop a paper trail of correspondence.  Since the letter of intent is nonbinding, you do not need to formally amend the document as you would a purchase agreement or other document, but written documentation reduces the risk of a misunderstanding later that might prevent the closing from taking place.

                                                        Formal Due Diligence

Due diligence is the most critical phase of the acquisition process for buying the right company. Your decision to proceed further with negotiations, how much to pay for it, and close the deal will depend to a great extend on the detail understanding of the candidate business that will come from a thorough due diligence. Given how critical this phase of the process is, the buyer must be very and appropriately prepared, not to rush, be prepared for surprises, stay cool and go through

the surprises to determine their significance to the business, and keep in mind that over 90% of prospective buyers do not close a deal because they get cold feet when they face surprises, or they run back and forth to the seller to the point that the seller does not want to proceed for a deal. As you will see in this article due diligence is not only a review of financial and accounting information, thought these are extremely important, it involves all the facets of the business, people, suppliers, customers, company / product / services image, technology, management and production processes, etc..

You do not want to embark upon formal due diligence until a letter of intent is negotiated and signed by both parties.  At the same time, you must be prepared to begin due diligence immediately upon signing, especially if the exclusivity rights clause that you have negotiated is set for a finite period of time.

The legal implications of due diligence

Legally, while the seller is responsible for providing you with information, it is your responsibility to review and evaluate this information for accuracy and completeness.  If the seller provides you with information without withholding damaging facts, you will have a very difficult time suing the seller later for damages, even if this information is buried within hundreds or even thousands of pages of documentation.  The law basically only requires the seller to provide the buyer with the information, not to point it out to you. If it is buried within legalese or accounting terminology you do not understand, you will still have no recourse in the courts.  And even if you do have grounds to sue, i.e. that you can prove a problem had been hidden from you,  you may have a difficult time collecting from the previous owner, unless the seller was a very large company.

In short, although a very thorough evaluation of even a mid-sized company can become very costly, it is still less expensive than finding yourself saddled with an under-performing company, or worse, perhaps a lawsuits costing you  several hundreds of thousands or even millions of dollars.

Content and steps in formal due diligence

This section reviews some of the key components of the formal due diligence.

A complete and thorough due diligence can cost anywhere between $50,000 and over $100,000.  Obviously, for a very small business, you may be able to carry out the investigation more economically.  Regardless of company size, certain basic issues should be investigated.

Exhibit 10.2 is an example that lists in more detail the different activities that should be conducted in a formal due diligence, with an estimated budget for conducting the due diligence for a medium-sized company. The main categories in which the information is grouped are: The reason the company is for sale; Key Strategic Factors; Products / services and marketing; Production, purchasing, operations and facilities; Labor and other personnel; Financial and accounting considerations; Management background, experience, style and practices; Legal matters.

           Although a cursory review of many of the issues listed in Exhibit 10.2 may take place during the preliminary due diligence, the coverage during formal due diligence should be thorough and complete.  In our experience, it is not unusual for this phase of effort to cost well over  $100,000 depending on the size and complexity of the business.  However, these are generally for companies with over $50 million in revenues.  The due diligence costs will be somewhat proportionately lower for a smaller company prospect. However, certain fixed costs are involved with the various consultants you may need to do a thorough and accurate job.

Here we list fifteen typical steps for a formal due diligence process. The activities are listed in chronological order although their weight in the overall decision may be different (see priority rating in column three in Exhibit 10.2).

Step 1: Evaluate management To start with, the acquisition team interviews and evaluates key members of management to understand their roles in the prospective company and their effectiveness.  Depending upon the size of company, you are not likely to want to replace all your key people in the organization.  You will benefit from purchasing a company where you can retain a competent management team.

Step 2: Review product lines and marketing The second step is to review and analyze the product lines and other marketing information.  Sales backlog, trends in historical financial performance, including sales and profitability, industry conditions and competition are very important factors that you want to explore early on.

Step 3: Review operations You will also want to review the company’s operations.  The goal is to identify potential cost savings and to corroborate the amount of cost savings you have already estimated.

Step 4: Review compensation and benefits Step 4 involves a review of the company’s compensation structure and benefits programs.

Step 5: Financial audit The next step is to review the financial audit and any accounting or tax issues.

Step 6: Scrutinize unusual tax returns Step 6 involves closer scrutiny of any unusual aspects of the tax returns.

Step 7: Evaluate risk management In step 7, you review the risk management issues.  This includes, but is not limited to product warranty, health care and workers’ compensation.

Step 8: Review inter-company transactions  Step 8 is a review of the company’s

inter-company transactions.

Step 9: Review inventory and production control systems Step 9 is a review of the company’s inventory and production control systems and all other significant management information systems.

Step 10: Prepare a break-even analysis In step 10, you prepare and review a break-even analysis based on your expected cost and capital structure, which may be quite different than the seller’s current structure.

Step 11: Interview customers and suppliers Step 11 is to interview customers and suppliers.  Although often a rich source of information you may be denied early access to customers and suppliers, at least until a letter of intent is signed and accepted.

Step 12: Review research and engineering Step 12 involves a review of the nature and extent of research and engineering expenditures to determine their effectiveness.

Step 13: Identify issues for purchase agreement Step 13 is to compile a list of issues to be considered when drafting the purchase agreement. These might include various representations and warranties and related escrow agreements for potential liabilities and other problems that you may not foresee being resolved by the day of closing.

Step 14: Review valuation of accounts receivables and inventories  Step 14 constitutes a review of accounts receivable and inventories for potential valuation problems.

Step 15: Review corporate controls Step 15 is a review of internal and operational controls and a general assessment of their reliability.

Other items to obtain during due diligence  Exhibit 10.2 also lists the items that you should retain legal counsel to cover. Exhibit 10.3 includes a sample document request list for due diligence, based on the list used by JPI Inc and JPE Inc.

Consultants recommended for due diligence

To carry out due diligence accurately, you are likely to need outside consultants to help you, unless you have this expertise within your management team.  Some key consultants needed are discussed in this section.

Financial Auditor Even if you are a private company buying another private company, it is very useful to have an auditor come in to check the accuracy of the books.  A good auditor might uncover such problems as inflated inventory, understated salaries (Try to get other examples here of why an auditor is needed).

Environmental consultant Current environmental laws have made it almost imperative that you assure yourself that the company you are purchasing does not have any environmental problems even if no real property is involved in the sale. Whether the property is owned or leased, the company would be responsible as an “owner/operator.”  In addition, the company is responsible for its hazardous wastes disposed of off site.

Not all environmental damage is easy to detect.  Problems might be covered over with new buildings. The problems may be buried deep within the earth.  You want to work with a consultant who specializes in requirements of the environmental protection agencies.

Risk specialist You also need to involve someone who can review all the risk insurances, including product liability, fire insurance, property insurance or any other transferable insurance.

Employee benefits You may need  separate consultants to evaluate group medical insurance plans and the transferability of available plans to a new owner, as well as pension and other welfare benefits plans.

Legal You will continue to need legal expertise during the formal due diligence phase, not only to review documents, but also to begin negotiation of the purchase agreement, which should take place concurrently.                                                                              

Other Activities Taking Place During Due Diligence

            While due diligence is taking place, it is strongly advisable to carry out three other activities concurrently:  development of the final purchase agreement;  finalizing your bank loan, if needed;  and development of the operational plan for implementation the day of closing.

The development of the final purchase agreement

As soon as the letter of intent is signed and due diligence begins, you will  usually find it very valuable to begin work on the final purchase agreement.  The exception to this might be if you are really bothered by something that might affect your decision to buy the company, then you might complete that part of due diligence first before you spend legal fees to begin drafting the purchase agreement.  But barring such a problem, you want to move in parallel, both to save time and to obtain information useful to you during the due diligence process itself.

Unlike the letter of interest and letter of intent, the acquisition purchase agreement is a legally binding agreement. There are serious consequences of misrepresenting the business in the purchase agreement.  For this reason, the negotiation process that takes place while drafting the

purchase agreement can contribute to your accurate understanding of the business. In particular, the representations and warranties section of the purchase agreement is a critical part of the due diligence process itself.

For instance, the purchase agreement spells out that there are no liabilities other than those disclosed.  The warranty says that if there are additional liabilities that have not been disclosed, the seller is responsible for reimbursing the buyer, even after the sale, if he or she knew about these liabilities beforehand.  In negotiating this clause, sometimes you find a seller that becomes uncomfortable at this point and does not want to sign such a statement.  You may enter into a dialogue that begins to turn up issues that the seller had been afraid to raise earlier.  In this way, you often hear more about the company in the process.  For instance, the information might relate to disgruntled employees who have threatened (but perhaps not yet filed) a lawsuit.  If indeed that employee later sues, the seller might be held liable for the lawsuit if he or she failed to disclose the problem at this stage.

In sum, the seller frequently waits until he or she is almost ready to sign the purchase agreement before revealing all the known problems about the company.  Up to that point, there is no liability for them as long they are negotiating in good faith and have not disclosed any non-public information to outsiders or solicited deals with other buyers.  It is not until you actually begin negotiating the purchase agreement that you can start putting teeth or muscle into the seller’s representations about their company.  In the process of doing that, you can learn a lot about the company.

Late disclosure is not always a matter of dishonesty.   The questions which surface in formal due diligence may be new to the owner or at least issues he or she has not stayed on top of or thought about recently.  For instance, you may ask whether or not there are any problems conforming with the Occupational Safety and Health Act (OSHA).  The owner may have forgotten that an OSHA inspector was out six months ago and perhaps never talked to the foreman to find out whether a particular problem was fixed.

In sum, negotiating the representations and warranties section of the purchase agreement, which can be several pages in length, often brings out a lot of information useful to the due diligence process. The due diligence benefit of the representations and warranties section may actually outweigh the liability benefit.  If you do learn about the problem later, although the owner is liable for damages, you are probably facing a time consuming and expensive legal process to collect.  You have to prove that the owner knew and intentionally misled you about a problem.  It is much easier to find out about such problems prior to closing, and has the added benefit of allowing you to use such issues in renegotiating the purchase price.

Finalizing the financing

In addition to working on the final purchase agreement, you will also find it useful to work with your lenders during this period.  Even if you have a line of credit, there are certain requirements that a lender might expect for this particular deal. If the company you are purchasing is your first one, the issues will be different than if you are adding the acquisition to an existing company.  In the latter case, the lender will be interested in the impact that the acquisition will have on the your existing company’s balance sheet.

Developing the action plan

The due diligence process, if done correctly, will reveal a variety of areas requiring attention, both in the short term and in the long run.  Thus, the due diligence process provides you with the opportunity to begin development of the operational action plan you plan to implement at closing.

Employees are a valuable source for pointing out areas in need of attention, whether they be improvements in operations or changes in the marketing plan. It is advisable to involve management level people closely, especially those who plan to stay on with the company after the ownership changes hands.


 Exhibit 10.1   




We appreciate the opportunities we have been given to meet with management and visit the facilities of _____________ (“Seller”).  Based upon those meetings and the information you have provided us, _____________ (“Buyer”) is pleased to submit a proposal to buy all of the assets of Seller, shown on the attached balance sheet dated _________________ (“Balance Sheet”), a copy of which is marked Exhibit A and attached hereto.  The following are the basic terms of Buyer’s proposal.

1)    Assets to be Acquired.  [All] assets owned by Seller, including, but not limited to, the assets listed on the attached Balance Sheet as of ________, 1999__; ______________________________________________________________(“Assets”).

2)    Liabilities to be Assumed. ___________________________________________________.
 _______________________________(“Assumed Liabilities”).  Other than as specifically agreed, Buyer shall not assume, and shall be indemnified by Seller for, any liability, whether or not accrued and whether known or unknown, arising from the operation of the Business prior to the Closing.

3)    Purchase Price.  The purchase price will be $_________________ adjusted for changes in the Balance Sheet from ___________­, 1994 to the date of closing; plus the assumption of the liabilities described in Paragraph 2 hereof.

4)    Payment of the Purchase Price.  At the closing, Buyer will pay cash equal to ____% of the Purchase Price (____% being withheld pending the purchase price adjustment provided in Paragraph 5, below), minus an amount to be negotiated between Buyer and Seller which will be placed into an escrow account for a period to be negotiated to protect Buyer in the event of damages resulting from a breach of Seller’s representations and warranties contained in the Asset Purchase Agreement.

5)    Purchase Price Adjustment.  As a public reporting company, Buyer will required audited financial statements of Seller to include in Buyer’s filings with the Securities and Exchange Commission.  Therefore, in order to fulfill such requirements, and to serve as the vehicle for the purchase price adjustment, promptly following the closing, Buyer will cause an audited balance sheet of the business as of the date of closing (“Closing Balance Sheet”) to be prepared at Buyer’s sole expense by Buyer’s independent certified public accountants.  Seller may, at its sole expense, have its independent certified public accountants observe the taking of the physical inventory and audit the balance sheet.  The Closing Balance Sheet shall be prepared in accordance with generally accepted accounting principles and shall fairly present the financial position of Seller as of the close of business on the day preceding the date of closing.  Seller shall have 30 days following its receipt of the Closing Balance Sheet in which to object, in writing and in reasonable detail, thereto.  If within 30 days of Buyer’s receipt of Seller’s objections Buyer and Seller are unable to agree to a resolution of the differences, the Closing Balance Sheet will be submitted to a neutral arbitrator, who shall be partner of a “Big Six” accounting firm, for final and binding arbitration.

6)    Closing.  The closing may e held within the later of (i) days after Buyer’s satisfactory completion of due diligence, and (ii) 10 days following receipt of government approval under Hart-Scott-Rodino or the expiration of the 30-day waiting period there-under without comment.

7)  Other Conditions.

a)    Seller shall have provided Buyer and its principal lender, together with their respective attorneys, accountants and agents, with access to the books, records, facilities, personnel, customers and suppliers relating to the business of Seller, and Buyer shall have reasonably satisfied itself and such lender with respect thereto.

b)    Seller shall have provided Buyer and its attorneys, accountants, and agents with access to Seller’s collective bargaining agreements, records pertaining thereto, and the Union’s representatives, and Buyer shall have reviewed to the contents of the collective bargaining agreement and records, the obligations created by such agreements, the condition of Seller’s labor relations, and the continuity of Seller’s employee base to determine their acceptability to Buyer.

c)    Buyer shall have obtained additional debt [equity] financing in an amount and on terms reasonably satisfactory to Buyer

8)    Exclusivity Rights.  Seller agrees that, unless sooner terminated by the parties, for a period of 90 days, it will not, directly or indirectly, through any officer, director, shareholder, employee, agent or otherwise, (i) solicit or initiate, directly or indirectly, or encourage submission of inquiries, proposals or offers from any potential buyer (other than Buyer) relating to the disposition of the capital stock, assets or business, or any part thereof (other than sales of inventory in the ordinary course of business), or (ii) participate in any discussions or negotiations regarding, or furnish to any person, the information with respect to the disposition of the capital stock or assets of Seller’s business.

9)    Non-Disclosure.  Without the prior written consent of Buyer, Seller will not disclose to any person who does not have a “need-to-know” either the contents of this letter or the fact that discussions regarding the transactions contemplated by this letter are taking place.  Seller, including its officers, directors, shareholders and representatives, are hereby advised that Buyer is a publicly traded company and that the United States securities laws restrict persons with material non-public information about a company obtained directly or indirectly from that company from purchasing or selling securities of such company, or from communicating such information to any other person under circumstances in which it is reasonably foreseeable that such person is likely to purchase or sell such securities.

10)   Non-Binding Contract.  This letter is intended to reflect the general terms of the offer contained herein and upon acceptance shall be deemed a letter of intent pursuant to which Buyer and Seller will negotiate a definitive Asset Purchase Agreement.  This letter shall not be deemed or construed to constitute a purchase agreement and shall create no binding obligations other than the obligations of Seller pursuant to Paragraphs 8 and 9 above.

11)   Acceptance.  If the foregoing general terms are acceptable to Seller, please so indicate by signing the enclosed copy of this letter and returning it to the undersigned.  Upon acceptance, Buyer will promptly begin its due diligence, instruct its attorneys to prepare the necessary contract documents, and seek board of directors approval for the transaction.  If the offer reflected in this letter is not accepted prior to4:00 p.m. local time, ____________, the offer shall be deemed withdrawn without any further action by Seller.

Very truly yours,




By:  __________________________



Accepted and agreed to this _____ day of _____________.






By:  __________________________



Exhibit 10.2






(Should be current)


Interview and evaluate key members of management to understand their roles in the Company and their effectiveness.


$5,000 – 7,000


Review and analyze product lines (i.e., gross profit analysis), sales backlog, trends in historical financial performance, markets, industry conditions and competition to independently support the reasonableness of buyer’s forecast.


$13,500 – 26,500



Evaluate the Company’s operation in the area of plant and facilities, production, purchasing and inventories.  The goal is to identify potential cost savings and to corroborate the amount of cost savings estimated


$5,000 – 9,500


Review the Company’s compensation structure and benefit programs for both salaried and hourly workers to determine whether employee costs will remain reasonably stable and to determine if there are any unrecorded liabilities (e.g., post-employment medical benefits are currently not required to be recorded under generally accepted accounting principles).


$7,500 – 9.500


Review audit and tax work-papers for the last two years, including quarterly review work-papers, to identify potential accounting, tax and internal control issues.


$3,000 – 6,000



Review state and federal tax returns for unusual elections, review IRS audit reports, determine extent of tax exposure issues, identify state and local tax exposure related to non-filing and underreporting.


$7,500 – 8,500


Review risk management issues including, but not limited to, product warranty, health care and workers’ compensation.


$5,000 – 6,500


Review the nature of the Company’s inter-company transactions and transfer pricing.


$5,000 – 6,500


Review the Company’s inventory and production control systems and all other significant management information systems.


$7,500 – 9,500


Prepare and review a break-even analysis based on JPE’s expected cost and capital structure.


$7,500 – 10,000


Interview customers and suppliers.


$5,000 – 7,000


Review the nature and extent of research and engineering expenditures to determine the effectiveness of their programs.


$2,500 – 3,500


Compile a list of issues to be considered when drafting the purchase agreement.


$2,500 – 5,000


Review accounts receivable and inventories a) for potential valuation problems and b) collateral limitations.  Review payable and accruals for age and understanding of content.


$4,500 – 6,000


Review internal and operational control environment and make a general assessment of reliability.


$1,000 – 2,000


$82,000 – $123,000


Retain legal counsel to cover these items-          Review the corporate structure (articles of incorporation, bylaws, minutes books) and identify states in which they are qualified to do business;-          Review all financial agreements;-          Union matters-          Leases-          Intellectual property-          Tangible assets (e.g. status and title of all real estate and perform a UCC search);-          Legal proceedings;

-          Regulatory issues (e.g., environmental and OSHA);

-          Hart-Scott-Roding filing;

-          Prepare purchase agreement.


Exhibit 10.3





Five-year record of product sales performance

Three-to-five year forecast of sales for the Company and estimated share of marke

Summary of special discounts and credit-terms offered to significant customers.

Number of customers and terms of sales.

List of top twenty customers with five year’s sales history (or sufficient number to include 50% of sales).

Special customer price programs, formal or informal.

Customer rebates programs, formal or informal.

Copies of sales collateral material, price books, company brochures, etc.


Appraisals of the Company’s properties and fixed assets.

Location of plant or plants.

Description and layout of plant and property.

Land information including

a. Acreage

b. Cost

c. Assessed value

d. Fair market value (appraisal

detailed schedule of manufacturing overhead for most recent three years.

List of major materials and supplies purchased and annual amounts purchased

List of patents and trademarks owned, licenses granted and amount and history or royalties received


Audited financial statements for last five years, including the independent accountant management letters on internal controls and contingent liabilities.

If more than one subsidiary or division, comparative financial results for each profit and loss or cost unit for at the five years.

Un-audited financial statements for most recent reporting period year-to-date.

Most recent budget and/or projected operating and financial statements.

Trends in inventory levels by reporting category for at least past three years (i.e. raw materials, work in process, finished goods, etc.

Stratification into fast moving, slow moving, excess and obsolete inventory.

Inventory turnover (ratio of average inventory to cost of sales) for at least past three years.

Percentage relation of material costs to sales – last five years.

Relationship of raw material to goods bought for resale.

Accounting manual, instructions and chart of accounts.

Unfunded service costs of pension plans.

Number of persons employed and major areas of activity.

Chart of organization and related salaries, employment contracts, if any.

Policy manual, if any.

Number of employees by sex and age groupings  showing separately those in production, sales, purchasing, engineering, administration, etc.

Approximate total wage and salary cost of each category.

All union affiliations and contracts, including:

-  Name of union(s)

-  Employees covered

-  Length of contract

-  Expiration date

Average pay scale and fringe benefits for production employees for at least three years

Any formal charges pending before federal or state labor agencies.

Details of employment agreements or unwritten understandings.

Pension plans, profit-sharing plans, life insurance, disability insurance, medical benefits, travel and accident plans.  Funding status of plans, if appropriate.

Stock option or stock bonus plans and outstanding options.


Articles of incorporation and bylaws of the Company.

List of officers.

List of directors, affiliations, ages and years as director.

Capitalization; stock distribution – number of shareholders and names of principle shareholders; rights of each class of stock; stockholders’ agreements, etc.

List of subsidiaries and details of business conducted.

Name, addresses, and contacts of Company’s professional advisors:

-  Attorneys

-  Auditors

-  Principle banking relationship

-  Investment bankers

Contingent liabilities:

Warranty policy and current status of outstanding cases

Product liability.

Environmental matters (EPA, state, etc.) – compliance, legal exposure, possible violations, clean up obligations, fines and penalties, etc.

Union contracts.

Any other pending or threatened litigation.


Reference: “How to Acquire the Right Business”

John Psarouthakis & Lorraine Uhlaner

Published by Xlibris, 2009


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