PE Due Diligence Checklist

Private equity due diligence is the comprehensive investigation a buyer conducts before completing an acquisition. It validates the representations made about the business, identifies risks, and determines the final purchase price and deal structure.

Due diligence spans multiple areas: financial, operational, legal, commercial, technology, and human resources. Each area has specific requirements and potential issues that can affect the transaction.

The process typically begins after a letter of intent is signed and lasts 4-8 weeks for middle-market transactions. Buyers engage specialized advisors including accountants, lawyers, and industry experts to conduct thorough investigations.

Preparation is the key to a smooth due diligence process. Companies with organized documentation, clean financials, and prepared management teams move through due diligence faster and with fewer issues than those that are unprepared.

Financial due diligence is typically the most intensive area of investigation and receives the most attention.

Financial Statements

Provide three to five years of audited or reviewed financial statements, including balance sheets, income statements, and cash flow statements. Include quarterly financials for the current and prior year. Ensure consistency in accounting policies and treatments.

Tax Returns

Provide federal, state, and local tax returns for the same period. Include supporting schedules and any correspondence with tax authorities. Be prepared to explain any positions taken or disputes ongoing.

Working Capital Schedules

Prepare aged receivables, inventory schedules, and payables aging. Document significant reconciling items between tax and book reporting. Show the趋势 of working capital components over time.

Revenue Detail

Provide revenue by product line, customer, geography, and channel. Document revenue recognition policies and any significant contracts. Include customer concentration analysis and renewal rates.

Fixed Assets

Prepare fixed asset registers showing cost, accumulated depreciation, and book value by asset category. Document capitalization policies and any assets held off-balance-sheet.

Legal due diligence examines the company's legal standing and potential liabilities.

Corporate Records

Organize formation documents, bylaws, board minutes, shareholder agreements, and corporate resolutions. Ensure all entity registrations and good standing certificates are current.

Contracts

Compile all material contracts including customer agreements, vendor agreements, lease agreements, employment contracts, and loan documents. Note any contract that requires consent for assignment or contains change-of-control provisions.

Intellectual Property

Document all intellectual property including trademarks, patents, copyrights, and trade secrets. Provide registration status, licensing agreements, and any infringement claims. Include IP assignment agreements from employees.

Litigation

Prepare a comprehensive litigation summary including pending, threatened, and concluded matters. Include demand letters, complaints, and settlement agreements. Document any litigation reserves or contingencies.

Compliance

Document compliance with relevant regulations including environmental, health and safety, data privacy, and industry-specific requirements. Include any audits, inspections, or citations.

Operational due diligence assesses whether the business can support planned growth and identifies operational risks.

Facilities

Provide facility schedules including locations, square footage, lease terms, and utilization rates. Include property condition assessments and any environmental reports.

Systems and Technology

Document all technology systems, software, and infrastructure. Include licensing agreements, support contracts, and any proprietary systems. Assess technology adequacy for growth plans.

Suppliers

Provide key supplier list with contact information, spend levels, and contract terms. Analyze concentration risk and identify any sole-source dependencies.

Processes
Document key business processes, procedures, and workflows. Include process maps, standard operating procedures, and quality management documentation.

HR due diligence examines the workforce, compensation structures, and key person risks.

Employee Data

Provide complete employee roster including position, tenure, compensation, and benefits. Include organizational charts and identify key personnel. Document any employment agreements or severance arrangements.

Compensation and Benefits

Document all compensation including salary, bonus, equity, and benefits. Provide benefit plan documents and any collective bargaining agreements. IncludeWorkers compensation and insurance coverage.

Key Person Risk

Identify any employees upon whom the business depends critically. Document succession plans and assess coverage for key roles.

Compliance

Document compliance with employment laws including wage and hour, discrimination, and immigration. Include any audits, claims, or settlements.

Due diligence is demanding, but proper preparation and process management minimize disruption to your business.

Designate a Point Person

Assign one senior person to coordinate due diligence responses. This individual should have authority to gather information quickly and respond to buyer requests. Avoid having multiple people respond to different advisors without coordination.

Prepare Your Team

Ensure finance, legal, and operational leaders understand their roles during due diligence. Conduct mock presentations and prepare for detailed questions. The management team should present confidently and consistently.

Maintain Business Operations

Due diligence cannot disrupt customer service or operations. Ensure the team can respond to due diligence requests while maintaining normal business functions. Set realistic expectations with buyers about response times.

Document Everything

Keep records of all information provided and responses to buyer questions. This documentation helps if questions arise later and demonstrates organizational thoroughness.

Modern PE transactions include significant technology and intellectual property scrutiny.

Software and Systems

Document all software licenses, subscriptions, and SaaS tools used in the business. Provide evidence of ownership or appropriate licensing. Identify any proprietary systems or internally-developed technology.

Cybersecurity

PE buyers increasingly focus on cybersecurity. Document your security measures, incident history, and any certifications (SOC 2, ISO 27001). Provide evidence of data protection policies and employee training.

Intellectual Property

List all patents, trademarks, copyrights, and trade secrets. Provide registration documents and evidence of ownership. Document any licensing revenue or restrictions.

Data and Privacy

Document data collection practices, storage locations, and privacy compliance. Provide evidence of compliance with relevant regulations (GDPR, CCPA, industry-specific rules). Document any data breaches or incidents.

Physical assets and environmental matters receive careful attention in PE transactions.

Real Estate Ownership

If you own real estate, provide property information including deeds, surveys, title policies, and lease agreements. Document any encumbrances or restrictions.

Environmental Reports

For industrial or manufacturing businesses, provide Phase I and Phase II environmental assessments if available. Document any past or current environmental issues, permits, or violations.

Facility Condition

Provide property condition assessments for owned facilities. Document age and condition of building systems (HVAC, roof, electrical). Plan for necessary capital improvements.

Lease Review

For leased facilities, provide all lease agreements, amendments, and correspondence. Note renewal options, rent escalations, and any landlord obligations.

Zoning and Permits

Ensure all facilities have appropriate zoning and permits for current use. Document any variance or special use permits. Address any non-conforming uses before going to market.