This post is the second post of a series dedicated to the issues to take into consideration when buying a business. Today we will discuss the matter of due diligence.
Due diligence is a broad term that refer to the inspection and investigation of a property or a business before the buyer makes the final decision whether or not to buy.
Here below is a complete checklist of information and documents that need to be reviewed in the context of a complete due diligence. There is a lot of information available on the net on this subject and I found the due diligence form below on: www.smallbusiness.findlaw.com
I would like to comment on this form as follow:
Of course the extent of the due diligence will depend of the value and the size of the business you will purchase. Because at the end of the day a due diligence is a costly work and a lot of investors will as a result not do the due diligence.
Another problem in Thailand is that a lot of services businesses (entertainment, restaurants, consulting) have a double accounting so a financial due diligence will not tell you a lot as the financial status of the business you are actually purchasing and you will have to trust the seller. And do not let the Seller bring you to see his lawyer to handle the formalities because the Seller lawyer is the Seller lawyer and there is nothing he can do for you.
One thing for sure, is that the Golden Goose is the exception, so do not believe to easily those who are selling you the moon. You might get the lucky one but I know more unfortunate buyers than fortunate one.
Another thing, it is not because you are purchasing a business from another foreign investor that the guy is not trying to cheat you. In my experience most foreign investors that have lost money in Thailand have lost it into the hands of other foreign investors.
Finally, the fact is that is that in certain sectors of activities (entertainment, services, …) foreign businessmen will be offered to purchase businesses which exercises is either prohibited or submitted to authorization. In other words you will be offered to purchase a business which you may not legally exercise for the time being (Please read my posts on the Foreign Business Act). In addition in the entertainment business most of the pub, bar or discotheque on the market are not properly licensed and are operated illegally. But this licensing problem is not only related to the entertainment industry, small factories may be operated without licenses and small hotels may also be operating without the proper authorizations.
Despite my remarks above as to the limit of the due diligence I still think that an investor should not purchase a business without some form of investigation prior to the purchase.
Tomorrow we will discuss how to actually proceed to the purchase:
Due Diligence Check List
A. Organization and Good Standing.
The Company’s Articles of Incorporation, and all amendments thereto.
The Company’s Bylaws, and all amendments thereto.
The Company’s minute book, including all minutes and resolutions of shareholders and directors, executive committees, and other governing groups.
The Company’s organizational chart.
The Company’s list of shareholders and number of shares held by each.
Copies of agreements relating to options, voting trusts, warrants, puts, calls, subscriptions, and convertible securities.
A list of all provinces, or countries where the Company owns or leases property, maintains employees, or conducts business.
A list of all of the Company’s assumed names and copies of registrations thereof.
B. Financial Information.
Audited financial statements for three years, together with Auditor’s Reports.
The most recent unaudited statements, with comparable statements to the prior year.
Auditor’s letters and replies for the past five years.
The Company’s credit report, if available.
Any projections, capital budgets and strategic plans.
Analyst reports, if available.
A schedule of all indebtedness and contingent liabilities.
A schedule of inventory.
A schedule of accounts receivable.
A schedule of accounts payable.
A description of depreciation and amortization methods and changes in accounting methods over the past five years.
Any analysis of fixed and variable expenses.
Any analysis of gross margins.
The Company’s general ledger.
A description of the Company’s internal control procedures.
C. Physical Assets.
A schedule of fixed assets and the locations thereof.
All leases of equipment.
A schedule of sales and purchases of major capital equipment during last three years.
D. Real Estate.
A schedule of the Company’s business locations.
Copies of all real estate leases, deeds, mortgages, title policies, surveys, zoning approvals, variances or use permits.
E. Intellectual Property.
A schedule of domestic and foreign patents and patent applications.
A schedule of trademark and trade names.
A schedule of copyrights. (check if the company computers software are licensed)
A description of important technical know-how.
A description of methods used to protect trade secrets and know-how.
Any “work for hire” agreements.
A schedule and copies of all consulting agreements, agreements regarding inventions, and licenses or assignments of intellectual property to or from the Company.
Any patent clearance documents.
A schedule and summary of any claims or threatened claims by or against the Company regarding intellectual property.
F. Employees and Employee Benefits.
A list of employees including positions, current salaries, salaries and bonuses paid during last three years, and years of service.
All employment, consulting, nondisclosure, nonsolicitation or noncompetition agreements between the Company and any of its employees.
Resumés of key employees.
The Company’s personnel handbook and a schedule of all employee benefits and holiday, vacation, and sick leave policies.
Summary plan descriptions of qualified and non-qualified retirement plans.
Copies of collective bargaining agreements, if any.
A description of all employee problems within the last three years, including alleged wrongful termination, harassment, and discrimination.
A description of any labor disputes, requests for arbitration, or grievance procedures currently pending or settled within the last three years.
A list and description of benefits of all employee health and welfare insurance policies or self-funded arrangements.
A description of worker’s compensation claim history.
A description of unemployment insurance claims history.
Copies of all stock option and stock purchase plans and a schedule of grants thereunder.
G. Licenses and Permits.
Copies of any governmental licenses, permits or consents.
Any correspondence or documents relating to any proceedings of any regulatory agency.
H. Environmental Issues.
Environmental audits, if any, for each property leased by the Company.
A listing of hazardous substances used in the Company’s operations.
A description of the Company’s disposal methods.
A list of environmental permits and licenses.
Copies of all correspondence, notices and files related to EPA, state, or local regulatory agencies.
A list identifying and describing any environmental litigation or investigations.
A list identifying and describing any known superfund exposure.
A list identifying and describing any contingent environmental liabilities or continuing indemnification obligations.
Local, and foreign income tax (if any) returns for the last three years.
VAT returns for the last three years.
Any audit and revenue agency reports.
Any tax settlement documents for the last three years.
Employment tax filings for three years.
Excise tax filings for three years.
Any tax liens.
J. Material Contracts.
A schedule of all subsidiary, partnership, or joint venture relationships and obligations, with copies of all related agreements.
Copies of all contracts between the Company and any officers, directors, 5-percent shareholders or affiliates.
All loan agreements, bank financing arrangements, line of credit, or promissory notes to which the Company is a party.
All security agreements, mortgages, indentures, collateral pledges, and similar agreements.
All guaranties to which the Company is a party.
Any installment sale agreements.
Any distribution agreements, sales representative agreements, marketing agreements, and supply agreements.
Any letters of intent, contracts, and closing transcripts from any mergers, acquisitions, or divestitures within last five years.
Any options and stock purchase agreements involving interests in other companies.
The Company’s standard quote, purchase order, invoice and warranty forms.
All nondisclosure or noncompetition agreements to which the Company is a party.
All other material contracts.
K. Product or Service Lines.
A list of all existing products or services and products or services under development.
Copies of all correspondence and reports related to any regulatory approvals or disapprovals of any Company’s products or services.
A summary of all complaints or warranty claims.
A summary of results of all tests, evaluations, studies, surveys, and other data regarding existing products or services and products or services under development.
L. Customer Information.
A schedule of the Company’s twelve largest customers in terms of sales thereto and a description of sales thereto over a period of two years.
Any supply or service agreements.
A description or copy of the Company’s purchasing policies.
A description or copy of the Company’s credit policy.
A schedule of unfilled orders.
A list and explanation for any major customers lost over the last two years.
All surveys and market research reports relevant to the Company or its products or services.
The Company’s current advertising programs, marketing plans and budgets, and printed marketing materials.
A description of the Company’s major competitors.
A schedule of all pending litigation (if any).
A description of any threatened litigation.
Copies of insurance policies possibly providing coverage as to pending or threatened litigation.
Documents relating to any injunctions, consent decrees, or settlements to which the Company is a party.
A list of unsatisfied judgments.
N. Insurance Coverage.
A schedule and copies of the Company’s general liability, personal and real property, product liability, errors and omissions, key-man, directors and officers, worker’s compensation, and other insurance.
A schedule of the Company’s insurance claims history for past three years.
A schedule of all law firms, accounting firms, consulting firms, and similar professionals engaged by the Company during past five years.
P. Articles and Publicity.
Copies of all articles and press releases relating to the Company within the past three years.
About the Author:
The author Rene-Philippe DUBOUT is a lawyer since 1990 when he was admitted to Geneva bar (Switzerland). He practiced as a litigator there for 10 years until he moved to Thailand in 1999. In 2002 he founded with a group of Thai lawyers Rene Philippe & Partners Ltd a local law firm that specialized in Cross Borders Investments and Real Estate. He has been lecturing in several Thai Universities and a speaker to numerous conferences and seminars. He is the author of a must read book:”How to Purchase Real Estate Offshore Safely: The Case of Thailand”.
© Copyrights 2009 – Rene Philippe Dubout – This article may be reprinted if information about the author, the websites, and the URLs remain intact.
Originally posted 2009-09-09 04:26:16.