Asset Purchase Agreement Checklist: Fill & Download for Free

Of course. That’s exactly what “due diligence” is all about. How thorough an investor will be depends to some extent on the professionalism of the investor, the size of the investment, and the stage of the company, but the checking will almost certainly entail requesting and reviewing all of the startup’s financial accounts and projections, customer contracts, cap table, IP filings, etc. (That’s one reason that a platform like Gust Launch can be so useful, because it ensures that everything is appropriately tracked and recorded.)Here is a typical business diligence checklist for an angel or venture investment:Company OverviewArticulate the “equity story” here (i.e. why the company is on to something and why its stock will appreciate greatly). Is it compelling?Does the company engage in thorough business planning?Does management have a clear understanding of the challenges it faces and a realistic plan to address them?Are there any skeletons in the company’s closet from previous activities (e.g. outstanding liabilities, unassigned IP)?Management TeamAre all resumes and personal references available?What key strengths does the management team have collectively and individually?What holes are there in the team and how/when might they be filled?Have there been any disgruntled employees and, if so, why? Do these employees cause any tangible risk going forward?What strengths does the Board bring to the company? How might it be augmented?Is there a Board of Advisors, and, if so, how active is it?MarketingDoes the company have a well-defined sense of what its true market is?·Is this market sufficiently large and fast-growing to be attractive?Is the company’s market generalized or niche?If generalized, does the company stand out from competitors?If niche, will the company dominate sufficiently to either build attractive cash flow or be bought by a larger firm?Is the company the leading firm in its market? Market share?What barriers to entry does the company enjoy? How long lasting are they?Does management understand the key metrics to measure its business and does it track its progress effectively? How do the metrics compare to similar firms?Does the company have a sensible business model?SalesDo customer reference calls bear out claims management make about demand for their products/services?Is the company pipeline attractive? What is the probability that it will hit its targets?Does the sales strategy make sense? What could be done to improve it?Can the company acquire customers profitably?Is the company’s sales cycle better or worse than its competitors and is it attractive?CompetitionDoes the company know who its competitors are, including indirect competitors?Where does the company stack up vs. competitors? Can it win business from them?Has the company focused its business plan narrowly enough to limit its competition?How well-funded is the competition?Product DevelopmentIs the product a need-to-have, a nice-to-have, or a luxury? Does it solve a critical problem or enable growth (if B2B)/provide entertainment (if B2C)?Describe the customer demand in detail?Has the company proven adept at product development? Does it have an adequate technical team?Did product development flow from perceived (or better yet researched) customer demand or from some other impetus? Explain.Intellectual PropertyDoes the company have an appropriate IP strategy? Explain.Are there any issues relating to patents or intellectual property?Production / Operations (HR, Customer Support, Fulfillment, Returns, Distribution Logistics)Do the management team and other employees enjoy appropriate incentives to run the company for the long term?Are the interests of management aligned with ours?Are total labor costs appropriate?Does the company have a realistic plan for managing its back office and customer support? Will it be able to handle customer growth while maintaining customer satisfaction?Financing StrategyIs the valuation attractive? What is the projected times money returned and IRR (if calculable)? Is the risk-adjusted return attractive?Does the company have a thorough plan as to what it will do with our money? Is it sensible?Is the company raising the right amount of money?What financing risk exists in the business plan? How much additional money must they raise and how flexible (in amount and timing) can they be in raising it?FinancialsDoes the company have a realistic set of projections based on reasonable assumptions?Are the projections bottom-up (good) or top-down (not so good)?Does the company have good operating leverage?Are the margins attractive (absolutely and relative to competitors)?Has the company met, exceeded or fallen short of its previous budgets? Analyze variances.Assets and PropertyAre there any issues here?Customer ReferencesWrite up summary of reference calls.Do customer reference calls bear out claims management make about demand for their products/services?Are there any issues flagged by customers? Does management recognize and admit to (without prompting) these issues?Contracts and AgreementsReview all contracts with legal counsel and flag any issues, risks or omissions.Corporate DocumentsReview all corporate documents with legal counsel and flag any issues, risks or omissions.TaxesReview company tax situation and analyze effects on cash flow over next several years.InsuranceAssess adequacy of insurance coverage and analyze risk to investment thesis of any insurance gaps.And here’s the legal/financial due diligence checklist that would accompany it in the case of a full venture or strategic round:“Please furnish for our review copies of the following documents or indicate in writing on a copy of this list that none exist. In addition, please provide a written summary of each oral agreement or arrangement which is responsive to the requests set forth below. Any documents identified as originals will be returned to you promptly.Unless otherwise indicated, (i) all requests are for any matters which are currently existing and in effect or which occurred at any time since the Company’s incorporation but which are not now existing or in effect, and (ii) each request applies to all past and present direct or indirect subsidiaries (if any), and all predecessors, whether corporations, partnerships or joint ventures. For purposes of this request, all such entities are included in the term “Company.” Where there is no information responsive to the request, please so indicate by writing “N/A” or the equivalent in the margin.I. Corporate Records.Chart showing, or a narrative description of, the corporate, partnership, limited liability company structures (parents, all subsidiaries and other financially or legally related entities) and ownership (including the number of shares and/or percentage of ownership) of the Company.Copies of the certificates of incorporation, by-laws, partnership agreements, operating agreements and other similar organizational documents of the Company.Stock record books and copies of all stock certificates, including reverse sides, of the Company and affiliates.List of all subsidiaries and affiliates of the Company, if any.List of jurisdictions in which the Company is qualified or has applied for qualification to do business and evidence of such qualification or application.List of jurisdictions where the Company has substantial contacts (e.g., real or personal property owned or leased, employees, sales representatives, etc.).List of the Company’s current shareholders, the numbers of shares owned and the consideration paid for such shares.Warrants, stock options, agreements relating to any warrants or options to purchase securities, any convertible security and other rights to subscribe for or purchase securities.Schedule of all outstanding stock options and warrants, including name of individual, grant date, expiration date and exercise price, of the Company.Voting agreements, voting trusts, shareholder agreements or other similar arrangements with or among shareholders or equity owners of the Company.Stock purchase and repurchase agreements.Stock restriction agreements.Registration rights agreements.Minutes or other records of meetings of the Board of Directors, committees of the Board of Directors or shareholders of the Company.All materials distributed to members of the Board of Directors, committees of the Board of Directors or shareholders of the Company since incorporation or organization (or written consents in lieu of meetings).II. Employee Benefit Plans and Other Employment Matters.Employment, consulting, compensation or other agreements or arrangements to which any director, officer or employee of the Company is a party.Copies of any provisions of any contract or arrangement, pursuant to which any director or officer (or other applicable principals, partners or members) of the Company is insured or indemnified in any manner against liability.All documents relating to pension, deferred compensation, stock option (including SARs), profit sharing and any other similar plans of the Company, all IRS determination letters relating to the foregoing and the most recent actuarial report for any defined benefit pension plan for the Company.All other employee compensation, bonus, incentive, benefit (e.g., life or health insurance) or similar plans of the Company, including plan evaluation and actuarial evaluation reports.Any standard form employment agreements used by the Company as well as any agreements that deviate in any material respect from such standard forms, and all severance or special termination agreements with senior management of the Company.Information with respect to any pension benefit plan subject to Title IV of ERISA maintained by an entity other than the Company which is, or was within the past five years, in a single controlled group with the Company.All collective bargaining agreements to which the Company is a party or by which it is bound, including any side letters.Any policy manuals or materials with respect to trade or employment practices of the Company.Confidentiality, proprietary rights, and non-competition agreements (i) between the Company and any officer, director, employee, consultant, representative, supplier or customer or (ii) which the Company’s employees or consultants have entered into with a prior employer.Information as to employment arrangements and/or compensation plans where any benefits or rights are triggered by a change in control of the Company, including any so called “golden parachute” or similar arrangements.Information as to employment arrangements and/or severance plans where any benefits or rights are granted upon severance or termination of an employee, whether or not in connection with a change in control of the Company.Any contracts for consulting or management services.III. Regulatory MattersAll applications, filings, findings, reports, registration statements, correspondence, complaints, consent decrees, determinations, orders, etc., relating to federal regulatory agencies and all foreign, state and local agencies performing similar functions. Include all exhibits for all filings, unless duplicative of material requested elsewhere.IV. Properties, Assets, and Leases.List of all real property owned, leased (as lessee or lessor) or used by the Company including all documentation of ownership, leasehold interest, any encumbrances or restrictions against transfer on such property, and any title insurance policies or title searches.List of all intangible or intellectual property e.g., patents, trademarks, copyrights, trade names, trade secrets and customer lists owned, leased, licensed or used by the Company and any patent or trademark registrations or similar documents in any domestic or foreign jurisdiction. Please include any required permits, licenses, approvals, related regulatory reports, or agreements and any actual or threatened claims of infringement or misappropriation.List of all fixed assets, personal property and equipment owned, leased or used by the Company including all documentation of ownership, leasehold interest or any encumbrances or restrictions against transfer of such property.With respect to all of the properties and leases described in this Item IV, please identify any officers, Directors, shareholders or employees of the Company holding an interest in such properties or leases.V. Material Agreements and Financing Documents.Loan agreements, lines of credit, indentures, revolving credit agreements, note purchase agreements, notes, other evidence of indebtedness and all related documents concerning any debt financing.Venture capital financing documentsAny agreements in principle or otherwise with respect to mergers, acquisitions, divestitures or sales of material assets of the Company, whether or not consummated.Mortgages, security agreements, pledges and other evidence of liens or letters of credit securing any obligations of the Company.Corporate and personal guarantees of any obligations and powers of attorney executed in the Company’s name.Schedule and copies of all contracts, agreements, arrangements or understandings under which the Company (i) has any surviving representations or warranties or any ongoing obligation to indemnify, defend or hold harmless any party, (ii) is subject to any other material commitment, contingency or liability or (iii) which restrict in any manner the right of the Company to conduct its business or to compete with any partyList of bank accounts belonging to the Company and its affiliates.Correspondence and internal memoranda relating to any documents requested in this Item V.VI. Marketing, Sales and Operations.Licensing agreements (including inter-company).Patents, patent applications, trademarks, trademark applications and copyrights (domestic and foreign), service marks (domestic and foreign) and documents relating to know-how, trade secrets, and other proprietary information used by the Company.Promotional material, sales literature and other advertising documents distributed to potential customers.Agreements with any educational institutions or relating to the Company’s provision of private student loans.Joint venture, partnership and limited partnership agreements.Agency, commission, distribution, franchise or sales representative agreements.Governmental contracts, agreements or purchase orders.Agreements under the which the company is obligated to provide or purchase a material amount of goods or servicesAll other contracts (including executory contracts) material to the Company.VII. Accounting, Financial and Insurance Matters.2004 annual and 2005 year to date monthly financial statements (including balance sheet and income statement).All documentation relating to any transaction between the Company and any director and officer including any loans or similar arrangement.Budgets, fiscal projections and strategic plans, together with a review of or comparison with actual results, if available.Summary of federal, state, local and foreign income tax status, including consents and agreements with any tax authority or any pending or threatened disputes concerning tax matters and all audit papers and communications between the Company and the Internal Revenue Service.Any documents relating to liabilities and obligations, including material contingent liabilities, write-downs or write-offs of notes or accounts receivable, incurred otherwise than in the ordinary course of business since formation.Copies of all insurance policies and a history of insurance claims, with details of any pending claims or incidents which may arise in claims.VIII. Legal Proceedings.List and description of all material litigation, administrative proceedings, arbitration proceedings, investigations, claims or disputes (including pending or threatened litigation or claims) involving the Company or any principal shareholder, officer, director, principal, partner or member of the Company as a plaintiff or defendant.All consent decrees, judgments, other decrees or orders, settlement agreements, injunctions or similar matters (continuing or contingent) to which the Company is a party or involving any person in his capacity as a shareholder, officer, director principal, partner, member or employee of the Company.Documentation with respect to any pending or threatened disputes with any governmental agency to which the Company is or may become a party.All correspondence dealing with actual or alleged infringement of patents, trademarks and copyrights.Any waivers or agreements canceling claims or rights of substantial value other than in ordinary course of business.IX. All other materials and documents involving the Company, not otherwise covered by the foregoing items, which, in your judgment, may be material to the business of the Company or which should be reviewed in making disclosures regarding the business and financial condition of the Company.”

So it sounds like your company has decided to purchase an existing business. Regardless of whether the deal is structured as an asset transaction, a stock transaction, or a merger, make sure you know what you are getting into by requiring detailed information from the seller regarding its business operations and finances. The following is a checklist of information and documents you should review.A. Organization and Good Standing.The Company's Articles of Incorporation, and all amendments thereto.The Company's Bylaws, and all amendments thereto.The Company's minute book, including all minutes and resolutions of shareholders and directors, executive committees, and other governing groups.The Company's organizational chart.The Company's list of shareholders and number of shares held by each.Copies of agreements relating to options, voting trusts, warrants, puts, calls, subscriptions, and convertible securities.A Certificate of Good Standing from the Secretary of State of the state where the Company is incorporated.Copies of active status reports in the state of incorporation for the last three years.A list of all states where the Company is authorized to do business and annual reports for the last three years.A list of all states, provinces, or countries where the Company owns or leases property, maintains employees, or conducts business.A list of all of the Company's assumed names and copies of registrations thereof.B. Financial Information.Audited financial statements for three years, together with Auditor's Reports.The most recent unaudited statements, with comparable statements to the prior year.Auditor's letters and replies for the past five years.The Company's credit report, if available.Any projections, capital budgets and strategic plans.Analyst reports, if available.A schedule of all indebtedness and contingent liabilities.A schedule of inventory.A schedule of accounts receivable.A schedule of accounts payable.A description of depreciation and amortization methods and changes in accounting methods over the past five years.Any analysis of fixed and variable expenses.Any analysis of gross margins.The Company's general ledger.A description of the Company's internal control procedures.C. Physical Assets.A schedule of fixed assets and the locations thereof.All U.C.C. filings.All leases of equipment.A schedule of sales and purchases of major capital equipment during last three years.D. Real Estate.A schedule of the Company's business locations.Copies of all real estate leases, deeds, mortgages, title policies, surveys, zoning approvals, variances or use permits.E. Intellectual Property.A schedule of domestic and foreign patents and patent applications.A schedule of trademark and trade names.A schedule of copyrights.A description of important technical know-how.A description of methods used to protect trade secrets and know-how.Any "work for hire" agreements.A schedule and copies of all consulting agreements, agreements regarding inventions, and licenses or assignments of intellectual property to or from the Company.Any patent clearance documents.A schedule and summary of any claims or threatened claims by or against the Company regarding intellectual property.F. Employees and Employee Benefits.A list of employees including positions, current salaries, salaries and bonuses paid during last three years, and years of service.All employment, consulting, nondisclosure, nonsolicitation or noncompetition agreements between the Company and any of its employees.Resumés of key employees.The Company's personnel handbook and a schedule of all employee benefits and holiday, vacation, and sick leave policies.Summary plan descriptions of qualified and non-qualified retirement plans.Copies of collective bargaining agreements, if any.A description of all employee problems within the last three years, including alleged wrongful termination, harassment, and discrimination.A description of any labor disputes, requests for arbitration, or grievance procedures currently pending or settled within the last three years.A list and description of benefits of all employee health and welfare insurance policies or self-funded arrangements.A description of worker's compensation claim history.A description of unemployment insurance claims history.Copies of all stock option and stock purchase plans and a schedule of grants thereunder.G. Licenses and Permits.Copies of any governmental licenses, permits or consents.Any correspondence or documents relating to any proceedings of any regulatory agency.H. Environmental Issues.Environmental audits, if any, for each property leased by the Company.A listing of hazardous substances used in the Company's operations.A description of the Company's disposal methods.A list of environmental permits and licenses.Copies of all correspondence, notices and files related to EPA, state, or local regulatory agencies.A list identifying and describing any environmental litigation or investigations.A list identifying and describing any known superfund exposure.A list identifying and describing any contingent environmental liabilities or continuing indemnification obligations.I. Taxes.Federal, state, local, and foreign income tax returns for the last three years.States sales tax returns for the last three years.Any audit and revenue agency reports.Any tax settlement documents for the last three years.Employment tax filings for three years.Excise tax filings for three years.Any tax liens.J. Material Contracts.A schedule of all subsidiary, partnership, or joint venture relationships and obligations, with copies of all related agreements.Copies of all contracts between the Company and any officers, directors, 5-percent shareholders or affiliates.All loan agreements, bank financing arrangements, line of credit, or promissory notes to which the Company is a party.All security agreements, mortgages, indentures, collateral pledges, and similar agreements.All guaranties to which the Company is a party.Any installment sale agreements.Any distribution agreements, sales representative agreements, marketing agreements, and supply agreements.Any letters of intent, contracts, and closing transcripts from any mergers, acquisitions, or divestitures within last five years.Any options and stock purchase agreements involving interests in other companies.The Company's standard quote, purchase order, invoice and warranty forms.All nondisclosure or noncompetition agreements to which the Company is a party.All other material contracts.K. Product or Service Lines.A list of all existing products or services and products or services under development.Copies of all correspondence and reports related to any regulatory approvals or disapprovals of any Company's products or services.A summary of all complaints or warranty claims.A summary of results of all tests, evaluations, studies, surveys, and other data regarding existing products or services and products or services under development.L. Customer Information.A schedule of the Company's twelve largest customers in terms of sales thereto and a description of sales thereto over a period of two years.Any supply or service agreements.A description or copy of the Company's purchasing policies.A description or copy of the Company's credit policy.A schedule of unfilled orders.A list and explanation for any major customers lost over the last two years.All surveys and market research reports relevant to the Company or its products or services.The Company's current advertising programs, marketing plans and budgets, and printed marketing materials.A description of the Company's major competitors.M. Litigation.A schedule of all pending litigation.A description of any threatened litigation.Copies of insurance policies possibly providing coverage as to pending or threatened litigation.Documents relating to any injunctions, consent decrees, or settlements to which the Company is a party.A list of unsatisfied judgments.N. Insurance Coverage.A schedule and copies of the Company's general liability, personal and real property, product liability, errors and omissions, key-man, directors and officers, worker's compensation, and other insurance.A schedule of the Company's insurance claims history for past three years.O. Professionals.A schedule of all law firms, accounting firms, consulting firms, and similar professionals engaged by the Company during past five years.P. Articles and Publicity.Copies of all articles and press releases relating to the Company within the past three years.

Firstly, you should never buy a cafe or restaurant without professional help in the form of legal and accounting advice. The price you pay for these services will often be offset by savings in the negotiations or they will save you a fortune from making the wrong decision made on wrong assumptions. You might even look to engage a knowledgeable business broker in this field to help you or an experienced cafe/restaurant owner who can spot the problems that your rose-tinted glasses will never see.So that’s step 1 in the due diligence process - get professional and experienced help.I have both purchased and sold cafes and restaurants and here are the areas that the professional and experienced help looked at in those transactions:Verify the turnover/takings: The price you are paying for the business is pretty much determined by the volume of turnover that the vendor is saying they are achieving. Your accountant will normally ask for prior year’s tax returns to verify this turnover (although everyone knows that this will be understated). You might also ask for a two week due diligence period, working in the business prior to settlement to verify the turnover. Your experienced and knowledgeable help will be looking at things like coffee bean purchases, staffing costs and seating/covers because these are all good indicators of total turnover.[1] For security, your solicitor may include a performance clause in the contract that specifies the minimum takings of the business over an appropriate period leading up to settlementBe clear about what you are buying: This is a 101 issue for solicitors who will advise you of the pitfalls in buying the business vs buying the assets of the business. Buying the assets of the business is less riskier than buying the business because you will not be taking on the obligations and liabilities of the business. However, sometimes you need to buy the business because certain value may be tied to it like licenses and agreements. Either way, make sure that your solicitor is fully engaged in this process.Ensure that the assets are unencumbered: Make sure that the assets that you are buying are free of encumbrances. i.e. that others like financiers do not actually have claims over them. Again your solicitor will be across this issue and will be asking for verification of ownership or secure some form of guarantees from the sellers.Ensure that the assets are in good working order and are fit for purpose: This is where your experienced restaurateur or cafe owner comes in handy. They will know about the capacity of the equipment, its maintenance status, the tell-tale signs of impending expensive repair and it’s brand/quality to help you understand what you are buying and whether you are paying fair market value. See User-12828854714828252077’s comment [2] .Determine if you are taking over the staffing obligation: The goodwill that you are invariably paying for, includes the relationship that the existing customer base has with the business. This relationship is typically built on the existing staff but with the change of ownership, will you be re-employing the existing staff under new contracts, at least in the short term? If so, then you will need to check the terms and conditions of their current employment as part of the due diligence process. Make sure the outgoing owner pays out all the outstanding wages and benefits (i.e. holiday pay, superannuation obligations, long service leave)Set the makeup of the purchase price: Typical cafe/restaurant sales will involve two key components: (1) the value of the assets/business being purchased and (2) the value of the goodwill (the difference between the purchase price and the value of the assets). Your accountant will advise you of the tax implications of this makeup which usually tries to maximize the value of the assets/business for the buyer because these values can be expensed (depreciated) against future earnings whereas goodwill can not.[3] Unfortunately the seller’s accountant will be advising their client to do the opposite. So this is both a due diligence and a negotiation issue.Ensure the business has current food and liquor licencing certificates and they have been transferred to you: In most jurisdictions a cafe/restaurants needs food safety certificate to operate. You may be able transfer the existing licence or you may have to obtain one for your new operations. Either way it is a critical action on the list of due diligence. If there is a liquor licence attached to the premises, make sure it is transferable and available to you on your first trading day. This can take time so make sure it is addressed well before the proposed settlement date. Your solicitor will usually make the transfer of important existing contracts and licences, a key condition of the sale.Conduct a stocktake and determine values: You will typically be buying the stock on your first day of trading. So you will need to determine the process, the goods that you don’t want to buy (you don’t have to buy everything) and how the goods will be valued. An estimate of the value should be provided during the negotiation period.Check the key items in the contract of sale: Your solicitor will want to ensure that any representations made by the seller are guaranteed by the seller and incorporated as a condition in the contract. Some monies from the sale may be set aside in a trust account as a guarantee of the seller’s performance post-sale. You may also look to insert a restraint of trade clause in the sale contract to restrict the previous owner from operating a similar business within a certain distance for a number of years. Also make sure that business names and social media profiles for the business are appropriately transferred or agreed to be transferred. These issues are well covered by a Victorian Government’s business sale contract checklist.[4]Check out the lease terms: The vast majority of cafe/restaurant sales will not be freehold sales (buying the business + the premises) but will in fact be just buying the business within a leased premises. The lease is the right of tenure for your business and there are critical parts to the lease agreement that can have significant impact on the sale negotiations and your future profitability. You will need an experienced solicitor to help you identify these critical parts and advise you accordingly. Based on my experience, here are the critical parts that I would be looking at to either make sure my tenure was secure or to use in the negotiation process.Lease term: How much more time has this lease got to run in the current term and what is available under future option periods? The longer the term the better.Bond: How much is the bond (a lease guarantee which is usually 3–6 months rent value) on the lease agreement and how is it to be dealt with in the sale? This can have a significant impact on your cashflow.Assignment right: Does the lease agreement give the existing owner the right to assign the lease to you? Without it, the sale can’t proceed without renegotiating a new lease with the landlord.Current rent and rent increases: Is the current rent the amount that the seller disclosed to you and when is the next rent review date and what is the structure and % for increasing the rent? Look for the big increase in rent that may have been negotiated at the start of the current business.Trading times: What are the allowable trading times under the lease? Make sure you can trade the hours you want.Permitted Use: What does the lease say about the permitted use of the premises? Does it allow sub-leasing? Make sure you can do the things you want with the business.Outgoings: What is the amount of the outgoings? (your business’s contribution to the owners building insurance, rates and building maintenance). This amount is above what you pay for the rent.Breaches: Are there any current or past breaches under the lease agreement?Other issues: The suitability and soundness of the premises, any council plans for road changes or new shopping developments in the area, the premises have meet hygiene inspections and safety regulations as evidence by certifications and notices.These areas give you a general view of the due diligence that was undertaken in the cafe/restaurant businesses that I traded but I emphasis the point again that it is best to outsource the due diligence process to professional and experienced people because every sale transaction is different and the smallest issue overlooked or unaddressed may have major ramifications in the future.Footnotes[1] Peter Baskerville's answer to What valuation multiples/techniques should I used to determine the valuation of an existing coffee shop for sale?[2] https://www.quora.com/What-due-diligence-is-required-when-buying-a-cafe-or-restaurant/answer/Peter-Baskerville/comment/50521884[3] Guidelines for allocating the purchase price of a business - Hall & Wilcox[4] Checklist: Buying a business, existing or estalished