ACQUISITION FINANCE

DUE DILIGENCE CHECKLIST

Reviewer I. GENERAL INFORMATION AND BACKGROUND

_________ A. Exact name, date and state of incorporation.

_________ B. Form of Organization.

_________ C. States in which qualified to do business.

_________ D. Corporate organization – subsidiaries, divisions and branches:

1. Names and locations.

2. Description of operations.

_________ E. Changes in corporate setup through the years.

II. ACQUISITION TRANSITION ISSUES

_________ A. Impact on operations.

1. Change in management.

2. Divestiture from Parent – what services did parent provide and

what are the costs going forward.

_________ B. Any ties to parent after transaction.

1. Supply agreement.

2. Service agreement.

3. Ongoing sales

4. Non-compete Agreement.

5. Imdemnification.

6. Seller note.

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 7. Guarantees

8. Earnouts, severance, etc.

III. MANAGEMENT AND EMPLOYEES

_________ A. Organizational Chart showing reporting structure.

_________ B. Background and experience of the Company’s key managers and

directors. (Any gaps in the management team.).

_________ C. Management compensation and contracts.

_________ D. Number of employees: trend; turnover.

_________ E. Unions, contract expiration and unusual terms, history of strikes,

compare with competition.

_________ F. Wage and benefits rates.

_________ G. Pension Plan.

1. Description

2. Funding status.

_________ H. Description of bonus, profit sharing, retirement, stock option or

other incentive compensation plans.

_________ I. Description of consulting agreement, if any.

_________ J. Comparison with industry as to number of employees, hours per

week, wage rates, training programs, etc.

IV. PRODUCTION ORGANIZATION

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_________ A. Centralized or decentralized

_________ B. Reporting relationships between headquarters and plants.

_________ C. Rationale for product sourcing decisions (i.e., why are certain

products produced at certain plants and not at others).

V. PRODUCTS

_________ A. Description of the Company’s principal products.

_________ B. Proprietary products.

_________ C. Substitute products.

_________ D. Risk of obsolescence.

_________ E. Patents trademarks, licenses, and royalties.

_________ F. New Products under development.

_________ G. Product warranties and customer’s claims.

1. History.

2. How handled.

3. Insurance.

4. Financial implications.

_________ H. Description of policies on costing and pricing of products.

_________ I. Copies of product catalogs, brochures and other marketing material.

_________ J. Degree of Custom formulation.

_________ K. Can product line be focused on or expanded to higher margin

business.

VI. THE MARKET AND CUSTOMERS

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_________ A. Current and potential size of market for the Company’s principal

products.

1. Market size.

2. Market share.

3. Historical growth.

4. Projected growth.

5. External factors that might change forecasts.

_________ B. General description of customers and market.

_________ C. Major concentration of customers.

1. Who.

2. Geographic concentration.

3. % of total sales.

4. Strength of the Company’s position as a supplier versus its

competitors.

5. Order backlog.

_________ D. Existing contracts with customers.

_________ E. Existing government contracts.

_________ F. Seasonality.

_________ G. Cyclicality.

_________ H. Trading terms (discounts, allowances, etc.)

_________ I. Description of present marketing/sales approach and organization.

VII. MARKETING

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_________ A. Distribution channels.

_________ B. Sales system.

_________ C. Compensation of salespeople and/or reps.

_________ D. Sales terms; compare with competition.

_________ E. Policy for returns, allowances, warranties.

_________ F. Pricing; compare with competition.

_________ G. Advertising and promotion (cost past five years).

_________ H. On what basis does the Company compete (quality, price, service,

brand loyalty) and how does it compare to the competition.

_________ I. Transportation costs.

_________ J. Marketing strategy.

_________ K. Potential for increase in sales through existing lines.

VIII. MANUFACTURING

_________ A. Description of the Company’s manufacturing processes.

_________ B. Importance of engineering, technology, research and development.

_________ C. Recent cost-cutting measures and impact.

_________ D. Recent productivity enhancements and impact.

_________ E. Incentive system.

_________ F. Availability of raw materials.

_________ G. Major supplies of the Company.

1. Who.

2. Contract terms.

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 3. Cost.

4. Availability.

5. Alternative sources.

_________ H. Summary of existing supply contracts.

_________ I. Capacity and capacity utilization.

IX. FIXED ASSETS

_________ A. General description of the Company’s property, plant and

equipment.

_________ B. Facilities.

1. Owned or leased.

2. Location.

a. Accessible to sources of raw materials, labor and

transportation.

3. Size.

_________ C. Summary of major lease agreements and other contractual

liabilities.

_________ D. Historical and future capital expenditures.

1. Maintenance.

2. Expansion (over next 5 years).

3. Government/regulatory compliance.

4. Condition.

5. Depreciation.

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_________ E. Copies of most recent appraisals.

_________ F. Potential land values.

_________ G. Potentially obsolete facilities – cost of disposition.

X. RESEARCH AND DEVELOPMENT

_________ A. Historical and projected R&D expenditures.

_________ B. Proprietary technology by company or industry.

_________ C. Importance of R&D vis-a-vis existing products or the creation of

new ones.

_________ D. R&D versus competitors.

_________ E. Cost of R&D over the past 5 years.

_________ F. How important is the rapid change in technology to the Company’s

position.

XI. COMPETITION

_________ A. Description of the Company’s major competitors, domestic and

foreign by product segment.

1. Size.

2. Financial strength.

3. Particular competitors in each product or market segment.

_________ B. Relative market shares.

_________ C. Have the Company’s competitors gained or lost market share over

the last five years.

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_________ D. Competitive trend.

_________ E. Low-cost producer.

_________ F. Price leader.

_________ G. Competitive advantages, disadvantages. What does competition do

differently?

_________ H. Barriers to entry.

_________ I. Relative strength of the Company versus customers or suppliers.

_________ J. Key factors in competition (e.g., price, quality, service).

XII. FINANCIAL CONTROL

_________ A. Accountants; how long with present firm.

_________ B. Most recent audit

_________ C. Disagreements with accountants on issues such as:

1. Transfer pricing.

2. Import duties.

3. Reserves.

4. Taxes.

5. Foreign exchange accounting.

_________ D. Description of accounting policies.

_________ E. Recent changes in accounting policies (audited and unaudited).

_________ F. Internal audit and control procedures.

XIII. GENERAL FINANCIAL INFORMATION

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_________ A. Audited four year historical financial statements, plus year to date

financials for the Company.

1. Income statement.

2. Balance sheet.

3. Funds flow.

4. Equity reconciliation.

_________ B. Explanation of past and projected trends.

_________ C. Relationships with commercial banks, lines of credit.

_________ D. Key insurance items: coverage (including self-insurance), limits,

premiums, claims experience.

_________ E. Review previous financing by product line.

_________ F. Company historical credit data, present credit rating.

XIV. SPECIFIC FINANCIAL INFORMATION

_________ A. Income Statement.

1. Revenues and contribution margin.

a. By major product lines (dollar and unit volume).

b. By major facility

c. By geographic region

d. Intercompany transactions.

e. Exchange rates for foreign sales.

f. Revenue recognition.

2. Gross margin analysis (labor, raw materials content, trends).

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 3. Corporate overhead – what is included/not included?

a. Describe services provided by corporate.

b. Approximate amount of any unallocated expenses.

4. Description of S, G & A expense.

5. Fixed vs. variable cost analysis/breakdown

6. Pension expense.

a. Amount by year.

b. Description of pension plan.

c. Status of pension plan (over/underfunded).

7. Interest expense.

a. Relating to actual debt obligation.

8. Extraordinary expenses and income

a. non-recurring items to be recast

b. history of adjustments

9. Taxes.

a. Tax sharing agreements.

10. Earnings and key operating ratios compared to industry and

comparable companies

_________ B. Balance Sheet.

1. Cash Management System.

2. Accounts Receivable.

a. Concentration.

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 b. Aging.

c. Credit collection.

d. Write-off history.

e. Turnover.

3. Inventory.

a. Inventory controls.

b. Method (LIFO/FIFO).

c. Turnover.

d. Obsolescence policy.

4. Other Current Assets.

5. Property, Plant and Equipment.

a. Average age.

b. Depreciation.

c. Capital expenditures; historical and projected.

i.) Expansion.

ii.) Maintenance.

iii.) Compliance.

d. Condition.

6. Description of investments.

7. Description of any other assets.

8. Required levels of working capital.

9. Description and terms of notes payable.

10. Accounts payable payment policy.

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 11. Review of accruals for reasonableness

12. Description and terms of existing short-term or long-term debt

to remain in place.

a. Direct obligations; secured by parent?

b. Due to parent.

c. Intercreditor issues

13. Capitalized leases – summary of lease agreements and other

contractual liabilities.

14. Contingent liabilities, guarantees.

15. Other liabilities.

16. Deferred taxes.

_________ C. Funds Flow.

XV. PROJECTIONS

_________ A. Revenue assumptions solidly supported by historical growth rates,

acquisitions or disposals, new products, industry outlook etc.

_________ B. Anticipated economies of scale, cost savings, synergies, margin

trends reviewed and incorporated accordingly.

_________ C. Projected capital expenditures and maintenance level reviewed for

reasonableness vs. historic expendatures, expansion plans, business

model, etc.

_________ D. Sensitivity analysis performed to produce realistic base case and

downside scenarios.

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 1. Include interest rate sensitivity.

2. Include working capital sensitivity.

_________ E. Proforma balance sheet reflecting contemplated transaction and

review of adjusting entries.

XVI. GENERAL

_________ A. Has the Company experienced any significant fundamental changes

(prices, wages, customers, and personnel vacancies) not reflected in

financial statements?

_________ B. Effect of economy, and political risk on the Company and the

likelihood of occurrence.

_________ C. Strategic direction, including most recent 5-year plan, budget

process and diversification plans.

_________ D. References from various sources such as customers, suppliers and

competitors, analysts and internal sources.

_________ E. Meetings with and background checkings on key members of

management.

_________ F. Tour of key facilities

_________ G. Description of any environmental issues faced by the Company

during the last 5 years.

_________ H. Any material public announcements about the Company or its

employees during the last 5 years.

_________ I. Copies of all significant reports sent to senior management

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 concerning operation or performance of the Company during the

last three years.

XVII. VALUATION ANALYSIS

_________ A. Comparable analysis based on public market valuations and

applying liquidity discount if appropriate.

_________ B. Comparable analysis based on public or private acquisitions

transactions and adjusting for any deal specific issues.

_________ C. Discounted cash flow analysis.

_________ D. Market capitalization analysis, if applicable.

_________ E. Company strengths supporting minimum valuation or EBITDA

multiple.

XVIII. LEGAL AND REGULATORY CONSIDERATIONS

_________ A. Material litigation and expected impact and cost.

_________ B. Position vis-a-vis regulatory agencies, including EPA, OSHA,

EEOC, and other state and local agencies.

1. Results of recent inspections.

2. Descriptions of any government regulation.

3. Pending legislation.

_________ C. Patents, licenses, trademarks.

_________ D. Importance or product liability.

_________ E. Description of licenses and third part confidentiality agreements on

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 technology and proprietary material.

_________ F. Estimates of current value of material patents, trademarks, licenses

and other identifiable intangible assets.

XIX. Underwriter’s Initial’s __________

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