Due diligence checklist: Preparing for the process

Due diligence is a process completed by a third party, usually potential buyers or investors, where the interested party does research into your company before moving forward with a transaction. It assures the buyer or investor that your company would be a worthwhile acquisition or a safe investment. As such, the manner in which you handle any hurdles presented during this process can go a long way toward showing your professionalism, preparedness, and capable leadership. 

Unfortunately, any fumbles or missteps — such as being unable to find important documents, sending outdated information, or otherwise displaying a lack of preparedness — can reflect poorly on your company. The time to put together the due diligence items in this article is well before any requests for information hit your inbox.

The following due diligence checklist contains information and documents you should always have at the ready — especially if you anticipate receiving due diligence email or paper requests anytime soon.

A due diligence checklist to prepare for major transactions

Before we jump into the long list of documents you will need to find, a quick explanation is in order: 

Each type of transaction will require different documents for the due diligence phase. You will encounter different requests for information when you are trying to secure funding, for example, than you will if you’re preparing to sell your business. Because “due diligence” is such a broad term and may vary based on the parties involved, it’s best to maintain a highly organized system to keep track of almost every important document your business generates. 

While you will probably never need every single document on this list all at once, it is likely that you will eventually need each of them at some point during various transactions your business will encounter in the future. So, it’s always a good idea to have the following documents finalized and ready to send at a moment’s notice. 

All documents related to corporate records, general business, or legal matters

• Incorporation documents/Articles of incorporation
• Shareholder certificates
• Business licenses (federal, state, local, and any others)
• Organizational charts
• Information about securities holders
• Stockholder agreements
• Warranty information
• Building, zoning, and land permits
• Registration documents
• Employee licenses
• Any legal cases, whether current or past
• Documents related to the purchase or sale of other businesses
• Purchase agreements
• News and press releases related to the company
• Board and shareholder minutes
• Locations of properties owned
• Company bylaws
• Company mission
• List of all affiliated companies
• List of countries in which the company operates

Financial documents

• Tax returns (international, federal, state, local) for at least three years
• List of shareholders and the percentages owned by each
• Stock options and plans
• Financial statements
• General ledgers and balance sheets
• Statements of income (aka Income Statement or Profit and Loss Statement)
• Records of cash flow (aka and Cash Flow Statement)
• Records and schedules of accounts
• List of outstanding debt
• List of debtors and creditors
• Liabilities
• Debt collateral
• Correspondence with auditors or other tax authorities
• Audit records
• Tax settlements
• Loan and credit agreements
• Capital structure tables
• Financial projections
• Budgets
• Explanation of financial plans and goals/KPIs
• Gross Revenue
• Revenue per client, if this information is available
• Revenue by region, service, or any other applicable metrics
• List of revenue streams
• Records of increasing or decreasing revenue trends for at least one year
• Explanation of pricing philosophy and methodology
• Margin analyses
• Expense analyses
• List of expenses
• IRS forms on file
• 401(k) or other account forms
• Insurance claims
• Insurance coverage

Contract details

• Terms of client/customer contracts
• Dates of contract changes and renewals
• List of clients/customers
• Supplier contracts
• Partnership agreements
• Terms of settlements
• Leases, mortgages, or credit agreements
• Sales and distribution agreements
• Employee contracts
• Advertising agreements
• Contracts with IT companies, HR firms, or other businesses
• List of outsourced workers

Intellectual property, assets, and inventory

• Patents and/or Patent applications
• Trademarks
• Copyrights
• List of equipment
• List of technology (software, systems, versions, anything that might be applicable)
• Domain names
• Any other intellectual or physical property agreements
• Inventory/Stock
• Real estate assets, including deeds to property owned
• Research

Employee information

• List of employees
• Background and summary of executives, founders, and other high-level employees’ histories
• Employee job details, work histories, years of employment, etc.
• Employee tax filings
• Employee benefit plans
• Non-compete or NDA contracts
• Worker’s compensation claims and reimbursements
• Stock purchases and sales
• Stock option plans
• Unemployment claims and payments
• Severance packages
• Union contracts
• Pension plans
• OSHA violations or examinations

Prepare yourself for the due diligence process

Due diligence isn’t just about handing over a stack of paperwork and waiting for a response. 

The goal of this guide is to help you prepare thoroughly so you can present your company in the best light possible to whomever might be interested. Ideally, therefore, your preparation shouldn’t end once you’ve gathered all of the above documents. To maximize your chances of everything going smoothly, organize each document into a system that makes sense to you and to any potential buyers or investors. 

Keep in mind, some interested parties may want to glance through your documents just to make sure you have them, while others prefer to break out a magnifying glass and examine every detail. Read through each document carefully to check for errors, outdated information, and other problems that might have escaped your attention. 

Reading through all these documents will also help you mentally prepare to answer questions on the fly, without needing to pause and refresh your memory. The better you understand your company — from the tiniest details of your lease contracts to the overarching goals planned out in your company’s mission statement — the more confident you’ll be in fielding questions, which makes your company more attractive to buyers and investors. 

It may help to put yourself into the buyer’s or investor’s shoes and anticipate what he or she may want to know about your company. What would you want to ask if you were thinking about spending hundreds of thousands or potentially millions of dollars on a startup founded by someone you’ve never met?

Putting yourself into that mindset before you move forward into the due diligence process can help you understand what information your buyer or investor may request — and how important it is to provide accurate answers promptly. 

Worried about performing well under the stress of due diligence requests? Let Zeni relieve the pressure. 

If you think the above due diligence checklist seems intimidating, you’re not alone. Many startup founders struggle to find, prepare, and organize such a vast amount of information. 

As long as you’ve done a good job managing important financial documents, your company should have no problem with the due diligence phase of transactions. However, unless you’re a financial expert, it can be tough to know whether you’ve managed your finances well and are adequately prepared for information requests. 

The solution is to make sure your finances are managed by professionals such as the ones at Zeni. By handling the in's and out's of your financial statements and transaction records, Zeni helps your startup maintain an audit-ready state, and prepare for due diligence in advance so that you always feel confident going into any type of major transaction.