Reference

The diligence checklist.

Eight workstreams. ~120 items. Print it. Mark it up. Run it on your next deal.

8 workstreams 84 total items 33 critical

How to use this

Print it. Mark it up. Run it on your next deal.

Built from the practice's working diligence framework. Adapted from Appendix C of The Five Closings. The "critical" items in each workstream are the ones whose absence kills deals. The rest are the supporting workstream that protects the LP and the lender's underwriting.

WORKSTREAM 01 · QofE & Financial

Financial

Engage the QofE on day 3 of LOI. The findings drive the price, the working capital peg, and the LP package.

CRITICAL Three years of audited or reviewed financial statements
CRITICAL Trailing 12-month detailed P&L with monthly breakdown
CRITICAL QofE engagement letter signed, scope confirmed
CRITICAL EBITDA bridge: reported to normalized, with each adjustment supported
CRITICAL Working capital normalization: 12-month average, seasonality adjusted
Customer concentration analysis: top 10 customers as % of revenue
Revenue recognition methodology review
Owner add-backs documented and quantified
Related-party transactions identified and priced at arm's length
Deferred revenue and customer deposits reconciled
Inventory valuation methodology confirmed (FIFO/LIFO/weighted)
Accrued expenses (vacation, bonuses, warranty) verified
Capital expenditures: trailing 3 years and forward 12-month plan
Debt schedule: current debt, prepayment penalties, intercreditor terms

WORKSTREAM 02 · Customer & Market

Commercial

The CIM is the seller's story. The data room contracts are the truth.

CRITICAL Top 20 customer contracts: term, renewal mechanics, assignability
CRITICAL Customer retention: top 50 customers, last 3 years, churn analysis
CRITICAL Sales pipeline: open opportunities, probability-weighted forecast
Pricing power: trailing 3 years of price changes and customer reactions
Customer concentration: revenue from top 5/10/20 as % of total
Win/loss analysis: trailing 12 months of significant new business
Competitive landscape: who wins where and why
Customer satisfaction: NPS, surveys, complaints log
Sales team structure, comp plans, attrition
Marketing spend, channel mix, attribution

WORKSTREAM 03 · Legal & Contractual

Legal

The disclosure schedule is where the seller's actual risk allocation lives. Read every line.

CRITICAL Material contracts: customer, vendor, lease, partnership, IP licensing
CRITICAL Change-of-control consent analysis (required / prudent / informational)
CRITICAL Pending or threatened litigation, including settlement reserves
CRITICAL Regulatory licenses: list, transfer mechanics, renewal calendar
CRITICAL Disclosure schedule review against representations
Corporate records: minute books, bylaws, articles
Cap table: equity holders, options, warrants, convertibles
Insurance policies: coverage, limits, claims history
Material vendor contracts: term, pricing, exclusivity
Real estate leases: term, renewal, assignment, recapture rights

WORKSTREAM 04 · Technology & Intellectual Property

Technology & IP

Every piece of IP needs a chain of title. Find the gaps before the buyer's counsel does.

CRITICAL IP chain of title: patents, trademarks, copyrights, trade secrets
CRITICAL Employee IP assignment agreements (and gaps)
CRITICAL Contractor IP assignment agreements
CRITICAL Open-source license compliance audit
Software code review: ownership, modification history
Trademark registrations: jurisdiction, status, renewal calendar
Patent portfolio: status, claims, freedom-to-operate
Domain names: registration, ownership, expirations
Cybersecurity posture: incident history, current controls
Data privacy compliance (GDPR, CCPA, HIPAA as applicable)

WORKSTREAM 05 · Environmental

Environmental

For industrial deals, environmental tail risk can show up as 7-figure surprises post-close. Diligence early.

CRITICAL Phase I environmental site assessment (order in week 2 of LOI)
CRITICAL Phase II if Phase I identifies concerns
CRITICAL Permit inventory: air, water, waste, storage
CRITICAL Compliance history: violations, consent orders, enforcement actions
Storage tank registrations (above and underground)
Hazardous materials handling procedures
Waste manifests: trailing 3 years
Insurance coverage: environmental liability tail
Site-specific historical use (industrial heritage)

WORKSTREAM 06 · HR & Benefits

Human Resources

ERISA is the silent deal-killer. Multi-employer pension exposure can be a 7-figure surprise.

CRITICAL Employee census: titles, comp, tenure, classification (W-2/1099)
CRITICAL Form 5500 filings: last 3 years for each plan
CRITICAL Multi-employer pension withdrawal liability analysis
CRITICAL Senior executive employment agreements: non-competes, change-of-control
Benefits plans: 401(k), health, welfare, summary plan descriptions
Equity incentive plans: outstanding grants, vesting schedules
Pending or threatened employment litigation
Wage and hour compliance audit
Workers comp experience modification rate (EMR) trend
Independent contractor classification review
Union contracts and grievance history (if applicable)

WORKSTREAM 07 · Operations

Operational

The data room shows what the seller wants you to see. Site visits show what's actually running.

CRITICAL Site visits to top 3-5 operating facilities
CRITICAL Management presentation and Q&A with senior team
CRITICAL Key person dependency: identify single points of failure
CRITICAL IT systems audit: ERP, CRM, integration scope, vendor contracts
Operations metrics: throughput, utilization, on-time delivery
Vendor concentration: top 10 vendors as % of cost
Supply chain risk: lead times, sole-source dependencies
Production capacity utilization and expansion options
Quality metrics: defect rate, returns, warranty claims
Inventory aging and obsolescence reserves

WORKSTREAM 08 · Regulatory & Industry-Specific

Regulatory & Compliance

Industry-specific. Healthcare needs Stark/Anti-Kickback; defense needs ITAR/CFIUS; food needs FDA.

CRITICAL Industry-specific regulatory licenses (state-by-state)
CRITICAL Compliance program documentation: written policies, training records
CRITICAL Pending or threatened regulatory actions
CRITICAL Anti-corruption compliance (FCPA if international operations)
Healthcare: Stark, Anti-Kickback, HIPAA, payor contracts
Defense: ITAR/EAR registrations, CFIUS analysis, FOCI
Food: FDA registrations, recall history, co-pack compliance
Financial services: SEC, FINRA, state regulator filings
Insurance: state insurance department filings, market conduct
Construction: bonding capacity, surety relationships, licensing

Working a deal?

Run this checklist with counsel.

The diligence framework is one workstream. The other four closings need their own.

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