SPHM Hospitality

 01  What is Financial Information?

Questions to ask during due diligence begin with financial information.

Specifically, collecting financial statements from the last three to five years, tax-related due diligence questions are especially important.

 

This financial information includes:

• Balance sheets 

• Accounts payable 

• Accounts receivable

• Income statements. 

 

Also, you will want to ask for: 

• Tax returns (usually the last three years) 

• Credit reports

• Reports demonstrating the value of all products

• Dissection of gross profit margins 

• Dissection of expenses (both fixed and variable). 

 

When it comes to financial information, ask for:

• Credit reports

• Tax returns

• Audit and revenue reports

• List of all physical assets

• List of expenses (fixed and variable)

• Gross profit margins

• Owner’s benefit

• Any debt

 

Checklist as follow:

• Audited financial statements of the company for the historical period

• Reconciliation of the management accounts for the historical period

• Investment agreements executed by the company

• Copy of TAN, VAT, and other registration certificates

• Cash flow statement

• Details of any changes made in accounting policies

• Working capital details for each quarter, and reasons for significant variation

• Partnership agreements and technical collaborations

• Overview of any changes in the shareholding pattern in the last two years

• Monthly operational statistics

• A detailed description of the business model of the company/organization

• Revenue streams - current and future streams

• A detailed description of the product and services offered

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 02 What is Company Information?.

A strong understanding of the target company is essential; therefore, corporate structure due diligence questions and business due diligence questions include:

• Current by-laws of the company

• Ownership information

• Overview of the structure of the company (diagrams and charts are valuable here)

• List of security holders

• Communication with stockholders

• List of outsourced work - freelancers, consultants, etc. 

• Major competitors

• Annual reports from the last three to five years

 

 

 03  What is Product Information?

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Focus on the product’s suppliers and competitors, as well as current and future marketing plans. Specific questions related to trends in the product industry have also proven to be useful. With this in mind, product M&A questions to ask include:

• With this in mind, ask about:

• All services and products

• Production costs

• Production margins

• Past and predicted growth rates

 

 

 

 04  What is Customer Information?

Knowing all of the customers, and honing in on the most substantial customers in terms of sales, is key. Additionally, sales lists, contracts, policies, and major correspondence need to be shared with the buy side’s diligence team. Looking at marketing, it is also helpful to learn how these customers were found and, ultimately, acquired. Customer information also becomes highly legal, as all contact and correspondence with the customer’s attorney should be disclosed, as well as any litigation. 

• In a nutshell, ask about:

• Customer database

• Marketing strategies (there are additional, more exhaustive marketing due diligence checklists as well you might consult depending upon your deal)

• Customer communication 

• Purchasing agreements

• Refund policies

• Litigation and/or threats of litigation

 

 

 05  wHAT IS Employee Information?

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Employee information is invaluable for due diligence since employees are what make the company successful. Consequently, the buy-side must have a clear understanding of all employee roles and responsibilities.  In addition, knowing who the key players are is critical because the buy-side will want to work to retain these individuals - remember, it is essential to think about integration early on in the deal’s lifecycle, even during diligence. 

In short, ask for:

• A list of all employees, with key players noted

• A description of each job/team role

• Contracts and benefits - including non-compete, non-disclosure, and severance agreements

• Human Resource employees and policies as well as any filed complaints 

• Personnel turnover rate in the last two to three years