A Checklist For an Asset Purchase
Acquiring only some of the assets from a seller requires many of the same due diligence activities as the acquisition of the company. Additionally, a similar level of detailed due diligence is required in areas of the company which may not seem to be directly related to the asset purchase.
While the balance sheet is the usual starting place, there are many other historical documents that must be examined to assure the seller has a clear title in the assets. The due diligence in the asset purchase is focused on assuring that any issues associated with the assets are uncovered and properly accounted for, or cleared as potential defects in the title.
The scope of the due diligence will span a checklist of topics to include:
- A full detailed review of the Balance Sheet for the prior three to five years. The reviewer will be searching for any documents concerning the assets to be purchased, including Accounts Receivable, Prepaid Assets, Fixed Assets, Deferred Assets, Accounts Payable, Notes Payable, Deferred Revenue, Other Deferred Liabilities, Long Term Liabilities, and Equity.
- The Income Statement, Statement of Cash Flows, and the Statements of Stockholder’s Equity for the same periods would also be reviewed.
- A detailed review should be performed of all contracts, agreements, equity investments, as well as all related directors’ minutes and communications.
- Employment Agreements with founders, executives, and staff must be examined.
- All lawsuits and challenges to the asset’s title must be reviewed by competent legal counsel. The review of the supporting documentation for these statements is to assure that all of the activities of the company have been addressed.
The review will include the rights and covenants in the Client Contracts, Vendor Agreements, Bank Loans and Lines of Credit as well as other Lender’s secured and unsecured positions. Client contracts may also identify any escrow agreements regarding the assets or any triggers therein that may occur upon the sale of the assets to a third party. Any issues discovered during due diligence will have to be cleared and releases obtained prior to the Closing of the transaction.
The Prepaid Assets may identify information on existing agreements for maintenance, support, or other prepaid services associated with the assets. These agreements may concern testing, distribution or third-party development contracts. These agreements would also be part of the acquisition.
Current Accounts Payable may need to be confirmed to assure that all liabilities have been properly recorded. Tax returns and tax audits should be free from any liens on the company and its assets.
The Employment Agreement review will assure that all work by employees is “Work for Hire”, and that the agreement specifically assures that any “moral rights”, or the like, have been assigned to the company.
The documentation for all investments in the company, from the founders through any subsequent investment rounds, as well as any convertible debt documents, should be reviewed for covenants related to the sale of the assets of the company.
In addition to the above historical review, the buyer will want to assure that the key employees, critical to the asset’s upkeep, maintenance, development, and support, are under the buyer’s employment agreement prior to the Closing, which will become effective upon the Closing of the transaction.
Obviously, in order to cost-effectively manage all aspects of the due diligence process, the acquirer should utilize a state of the art Merger and Acquisition software application to move expeditiously to complete the transaction.