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The Essential Private Equity Due Diligence Checklist

by Georgia Smith December 02, 2021
Corporate Office Checklist Due Diligence

When it comes to investing in a new company, mitigating risk is essential for private equity firms. 

Whether the decision is good or not can be largely attributed to how much due diligence is done before any agreement is signed. That's where private equity due diligence checklists play a vital role; they help firms make smart and safe decisions every time they sign off on an investment. 

A private equity due diligence checklist should cover all the major aspects of a company, from investment strategies to stock and tax checks as well as ownership information. And if the due diligence checklist is thorough enough, it will give investors all of the information they need to analyse every opportunity accurately.

In this article, you'll learn why private equity due diligence checklists are so important, the seven key areas every checklist should cover, and how external due diligence consultants can provide invaluable expertise.

Let's get started.

What is a private equity due diligence checklist?

A private equity due diligence checklist is a tool private equity firms and investors use to evaluate potential business investments, mergers and acquisitions. 

Private equity investment due diligence checklists are a way for investors to assess cost reduction opportunities and revenue growth to get a better idea of a merger or acquisition's potential. It's also a way for potential investors to make sure the company they're about to invest in (or buy) is operating by government laws and being truthful about everything they've told them. 

A company's value proposition, market position, historical performance, and industry trends are also put under the microscope during the private equity due diligence process so investors can assess whether it will be profitable or meet forecasted revenue projections.

Although private equity investment due diligence checklists can be long, the more comprehensive the list is, the less chance investors will find out nasty surprises in documents or operational processes once the deal has already been done. 

That’s why a private equity due diligence checklist is so important. Now, let's take a closer look at seven things every checklist should cover. 

7 areas every private equity due diligence checklist should cover

1. General company information

The first item on your checklist should be collecting general information about the company you are considering putting money into. 

Information like general records, articles of incorporation and the company's business plan should all be gathered in this section, along with details of the company standing. 

Other items to gather here include: 

  • Past board meeting information and minutes

  • Any corporate bylaws and amendments 

  • Certificate of Good Standing (GCS)

  • Information of other entities the company has partnerships or equity in

  • Reincorporation or restructuring documents

  • Market analysis and operational plans

  • Any voting agreements, proxies or trusts in place

  • Transfer restriction and registration agreements 

Once you have these documents, you can start looking at the company's financials. 

2. Overall investment strategy

It's important to gather as much information as you can about the company's current investments, transactions and future spending plans. 

For example, a private equity investment should look at anticipated transaction sizes, holding periods, industry focus, and investment stages to understand the fund's overall strategy and target size. 

This also means looking for other information like:

  • Significant changes in fund size compared to previous funds

  • Detail on the fund’s diversification strategy in terms of number of investments, geographical concentration and sector allocations

  • Whether or not the company/fund's investment strategy will change in the future

  • An overall outlook of the fund/company's equity structures

  • An example of targeted leverage levels 

Gathering these details is really important for getting an accurate idea of the company's financial strength (or fund) and any plans for future investments and equity. 

3. Intellectual Property 

Making sure an investment's intellectual property is in line with copyright laws can save you headaches after a merger or acquisition. 

Some of the main intellectual property items to check are: 

  • Copyright materials: Make sure the company has the necessary trademarks and copyright material in place. It's important to see records of any state, federal, and foreign trademark applications or approvals to ensure they're legally watertight.

  • Patents: Patent reviews are extremely useful when assessing a company's value, as they can reveal big potential or expose cracks in the viability or profitability of a product.

  • Trade secrets: Trade secrets are confidential pieces of intellectual property that can be licensed or sold. These are confidential documents (the clue is in the word "secret") and outline a company's investment decisions. They're kept as either a paper or electronic record, and any information that's deemed commercially valuable can be classified as a trade secret.

Next, check the investment's stocks. 

4. Stock information

It's vital to check a company's stock dilution along with its options and price history. 

This step helps you understand the company's short-term and long-term price movement as well as its volatility. For example, if the company's stocks have been trading smoothly, it could help with future investor confidence, while continuously volatile stocks will signal extra risk for certain parties. 

Some information to gather at this step includes: 

  • Ledgers: Look at any changes in shareholdings as well as who owns a controlling stake within the company. 

  • Information about dividends and options: Stock-related information, such as options, rights, warrants, and dividend plans, should be reviewed because such information gives the current shareholders more control of the business.

  • Treasury documents: Study treasury share documents to track down shares that the business has repurchased. This will tell you whether there's a desire for resale or more significant investments from current investors.

  • Rights, debt-equity and securities: Any preemptive rights held through debt-equity agreements and securities give corporate power the legal tools to block the acquisition of the business. Check to see what agreements are in place and who has controlling stakes over big decisions like these.

Once most of the complex financial documents have been checked, you'll need to do due diligence on leases, employees and credit agreements. 

5. Standard documentation checks

Check any existing agreements a company has with vendors, joint ventures and employees to make sure you are happy with the terms and conditions. 

After all, many enterprise agreements are lengthy, and employee contracts can include share options and benefits, so it's important to know what the company has signed up for. 

Documents to check here include: 

  • Vendor agreements: Prospective investors should verify certain provisions in independent vendor agreements with major suppliers and contractors.

  • Leases: Long-term lease agreements should be reviewed since they may prevent changes in ownership and impact revenue forecasts.

  • Employee contracts: Take a close look at any stock options and benefits along with the total labour-related costs of the currently employed workforce. Depending on how high or low the labour expenses are compared to the total revenues, it may leave the door open for investors to suggest a management takeover.

  • External contractor agreements: Get details about outsourced contracts like legal, IT, accounting, and even cleaning so you can calculate the current costs and their impact on revenue forecasts.

  • Pension plans and trust funds: Any pension plans and trust funds for retiring employees and board members should be reviewed since some provisions can make acquisitions and mergers difficult.

  • Any joint ventures or partnerships: Any agreement with subsidiaries or joint ventures should be taken into account along with current expectations, provisions and clauses that could create problems for new investors.

  • Loans and credit lines: A prospective investor should examine current credit lines, loan agreements and mortgages to check conditions and provisions as well as any clauses that may cause problems for a takeover.

Next, you need to check the company's taxes.

6. Tax documents

Check the company's tax history to understand its filing records and ensure everything is above board. 

This part of the checklist will also give you better insight into your tax obligations if the company operates in different countries. Some documents to check are: 

  • Company filings for (at least) the past two years: Depending on the company's age, a minimum of two years' records will give you a good indication of how seriously it takes its tax obligations. Tax filings are listed publicly on the Company House website.

  • Filing history and officers: Check to see that the company files confirmation statements and full accounts on time. As officers are publicly listed, you should also check who has significant control.  

  • Charges: If a company has an outstanding charge, it'll appear on their tax filing history. You can check when a charge was filed and whether or not it's been resolved.

Finally, wrap up your diligence checklist by tying up some administrative loose ends. 

7. Administrative diligence 

The last part of your private equity due diligence checklist should be to confirm all of the seemingly obvious information about a company, like its number of business facilities or employees. 

Gather any final information like: 

  • A list of the company's owned or leased properties 

  • Current employee numbers

  • Details about the company's corporate structure

  • All government licences, permits, and consents 

  • Citations, correspondences or notices issues about ongoing proceedings issued by a regulatory agency 

And that's it—your hard work is done. 

If this seems like a lot of work, you can hire external contractors to help with due diligence. Freshminds has a large team of quality researchers, consultants, and executives that specialise in helping companies conduct due diligence and evaluate potential mergers and acquisitions.

The best part? It's completely bespoke. Your business can choose to hire help for a day or bring on a permanent advisor to ensure your company makes safe and smart decisions with every deal it makes. Find out more about how Freshminds can help your business here. 

Final considerations

Gathering all of the information listed on this private equity due diligence checklist may seem like a huge task, but it can save you a lot of headache before an investment is finalised. 

Checking everything about a company, from their tax history to company structure and stock information, helps investors get a detailed look at the inner workings and health of the company. It will also help uncover any potential issues with company structure or existing joint ventures that could throw up roadblocks for future acquisitions or mergers. 

Following a private equity due diligence checklist from start to finish will also give you something worth your time: information to help your company make a smart and safe decision about whether or not your investment is the right one. 

Start the conversation — solve your private equity challenges with expertise on-demand. We offer a range of cost-efficient services, including private equity due diligence consulting. Contact the team today, and we'll get back in touch within 3 working hours or a time that you have specified.

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