Below, you can download the acquisition due diligence checklist excel version for free.
I created this due diligence checklist for different corporate roles, where we vetted companies to invest in. I created it again here but in this version, I optimized it for small/medium businesses.
The acquisition due diligence checklist makes sure the buyer has considered all the risks and checks the boxes on what they are looking for in a target business. The due diligence period is typically 30 – 45 days of an acquisition process, so there is a lot to do in a short amount of time; hence, a checklist if a must.
How to Use the Acquisition Due Diligence Checklist
In the acquisition due diligence checklist excel file that you can download below, you’ll see different sections and a long list of items to request from the target company.
The due diligence checklist is long and detailed. You might lose the point of going through the checklist. So, for each section, I listed questions below to use as a guide when using the due diligence checklist.
These questions will help you understand why you’re looking for the data in the checklist. It answers the bigger picture question of “so what” as it relates to the acquisition.
At the end of the due diligence checklist, you should be able to answer these questions listed below and those answers should navigate you on whether there is too much risk or if the risk is outweighed by future prospects.
Acquisition Due Diligence Checklist Questions
Click on the section below to read the questions that will help you navigate when using the acquisition due diligence checklist excel file. Make sure to use the questions and the due diligence checklist together for optimal effect.
- Owners and Management
- Employees
- Market and Competitive Landscape
- Offerings
- Customers
- Cost of Delivery
- Sales & Marketing
- Technology & Innovation
- Suppliers
- Historical Financials
- Valuation, Financial Projection, Liquidity Analysis
- Tangible & Intangible Assets
- Legal, Regulatory, and Material Agreements
- Investment ROI
1. Owners and Management
Questions to consider and answer in this section of the due diligence checklist:
- Are the owners very involved in operating the company? Will their absence lead to improper operation of the business?
- Do the shareholders have any conflict in the success of the business? How about with directors?
- Is there a cash drain from the company to the shareholders via dividend or other payouts?
- Are there shareholders or board of directors who will be sticking around and prove to be a pain after acquisition?
- Does the company have a long and reputable history of capability in this industry?
- If management is different from owners,
2. Employees
Questions to consider and answer in this section of the due diligence checklist:
- Do the employees have the skills to grow the company?
- Are the employees highly skilled? Are employees with the skill set needed for this business hard to hire?
- Are the employees properly incentivized?
- Are the employees happy with this company? What is their view of senior management?
3. Market and Competitive Landscape
Questions to consider and answer in this section of the due diligence checklist:
- Is the company operating in a market that is growing?
- Is the total addressable market big enough and growing?
- What are the key drivers for growth in the market and is the company sensitive to those drivers?
- Does the company have uniquely differentiated offerings?
- What has the company done to build a moat around its offerings?
- What is the risk that the company loses its offerings to competitors and the offerings become obsolete?
4. Offerings
Questions to consider and answer in this section of the due diligence checklist:
- What KPIs are tracked in measuring product performance?
- Are the offerings priced optimally?
- Given the experience and knowledge of the company, is there any money being left on the table in terms of products or services that can be sold?
- Is there recurring revenue? What avenues exist to create recurring revenue?
5. Customers
Questions to consider and answer in this section of the due diligence checklist:
- Is there customer concentration risk?
- Are the customers loyal? Is there risk that they can leave if the business has new ownership?
- What is the typical customer profile? Is the right addressable market being captured?
- Are there any bad debts among existing customers?
6. Cost of Delivery
Questions to consider and answer in this section of the due diligence checklist:
- For every sale to a new client, is the cost of delivery (or cost of goods sold) made up more of labor or non-labor?
- Are there any areas to reduce the labor and non-labor cost in order to increase gross margin?
- How can the delivery be scaled to increase gross margin?
7. Sales & Marketing
Questions to consider and answer in this section of the due diligence checklist:
- Is the current sales team effective?
- With changes in sales methodologies and tracking, can sales conversions be even more successful?
8. Technology & Innovation
Questions to consider and answer in this section of the due diligence checklist:
- Is the company investing enough in tech and innovation compared to peers?
- Is the company investing too much and not seeing results?
- What is the company doing to continually innovate and implement tech in order to stay ahead of competition?
- Is this a dying business that has no future to innovate?
9. Suppliers
Questions to consider and answer in this section of the due diligence checklist:
- Does the company have purchasing power or are they at the mercy of the suppliers?
- Can the company diversify suppliers and get cost savings?
10. Historical Financials
Questions to consider and answer in this section of the due diligence checklist:
- Has the company had stable and growing revenues? If not, is it because of the nature of the industry or reasonable hiccups?
- Does the company have positive cash flows? Is there any risk that the company will run out of funds to sustain the business in the long-term even without new innovation?
- Does the company have good working capital management or are they paying their vendors too soon and not collecting receivables from their customers diligently?
- Is there overhead spending reasonable? Are there opportunities to cut costs?
- Does the company have too much debt? Would it be burdensome to take over their debt?
11. Valuation, Financial Projection, Liquidity Analysis
Questions to consider and answer in this section of the due diligence checklist:
- With significant capital investments budgeted, and reasonable assumptions for key drivers, will the company have positive and stable growth in cash flow?
- Looking at the monthly forecast for the next 2 year projection, will there be any risk that the company will be short on cash on hand? I.e. Does the company have enough liquidity and working capital in the forecast?
- Are there any off-balance sheet items and any risk that that might affect the business’s cash flows?
- Can the business withstand a disaster case stress test scenario?
- Is there any liquidity risk event in the next 2 years?
12. Tangible & Intangible Assets
Questions to consider and answer in this section of the due diligence checklist:
- Looking at the existing depreciation schedule, are there any big-ticket property, plant and equipment items that are coming close to the end of its useful life that need to be replaced?
- Do the tangible assets look like they are in good shape or is there risk of dilapidation?
- Does the company have any intellectual property being used? When is the expiration date? Is there risk that after the IP expires, the business could decline?
13. Legal, Regulatory, and Material Agreements
Questions to consider and answer in this section of the due diligence checklist:
- Are there any agreements that could interrupt business operations?
- Are there any agreements that can restrict the company to do business in certain industries or other with clients?
- Are there any past or existing litigation matters?
- Are there any licenses or permits needed for the operation?
14. Investment ROI
Questions to consider and answer in this section of the due diligence checklist:
- Does the acquisition meet the target IRR and payback period?
- Is an exit planned? If so, what is the target ROI? If not planned and the acquisition will be a part of the buyer’s business, what is the incremental IRR over the next 5 – 7 years?
Acquisition Due Diligence Checklist Excel Download Here
Again, I must emphasize that it’s important to also use the due diligence checklist with the questions above. Otherwise, you can get lost in the details and not see the big picture.
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Thanks for reading and hope you find this helpful. Leave me a comment below if it helps or if you have any questions.
