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The due diligence review is one of the most important and risk-fraught elements of any transaction. A successful due diligence review fully engages the client in the process. The following questionnaire and checklist can be a helpful tool in bringing the client squarely into the diligence process. A. “Big Picture” Questions and Answers 1. What is my principal motivation for effecting this acquisition (e.g., to generate excess cash flow, to produce above-market returns, to achieve a strategic goal, to achieve a personal goal or ambition not related to economic consequences etc.)? 2. How have I calculated the price I am willing to pay? 3. What level of confidence do I have that I am paying a fair and appropriate price, and upon what facts is that level of confidence based? 4. If one year from now it is determined that I overpaid for this company by 20 percent, what will the consequences be? 5. If I have overpaid by 50 percent, what will the consequences be? 6. What sources of funding am I using and what additional sources can I draw upon if required to operate the business or service its debt? 7. What is my personal tolerance for risk? 8. To what extent am I competent to manage this business, and to what extent am I relying on current management to do that job? 9. Is this my first experience in this industry? What experience or knowledge do I have that is relevant to success in this industry? 10. Is this my first acquisition? If not, how many acquisitions have I done, and did they involve similar degrees of financial risk and exposure? 11. If my projections concerning the future financial performance of this business prove overly optimistic, from what sources will I generate sufficient capital to continue the enterprise? 12. Whom do I consider to be the primary due diligence team responsible for a successful investigation? 13. What do I consider to be my role in the due diligence exercise? 14. What internal personnel resources will I commit to the due diligence investigation (e.g., CEO, COO, CFO etc.)? 15. Who will be the head of my internal due diligence team (i.e., the person primarily responsible for being the liaison between the client and the retained diligence team)? B. Preliminary Topics for Review 1. Investigate the reputation of owners, directors, management and professional advisers. 2. Research and understand the target’s market share, competitive position etc. 3. Assess whether this is a growth opportunity or a turn-around/restructuring situation. 4. Analyze and understand the extent of government regulation under which the target operates. 5. Research and understand all material external factors (e.g., labor, raw materials, macro-economic trends, interest rates, consumer confidence etc.) that affect the target. 6. Prepare a written list of all material recent developments that should be taken into consideration in connection with the proposed transaction: � Industrywide trends � New products � Capital expenditures � Labor costs � Other 7. List the competitive advantages, if any, enjoyed by the target: � Technical � Cost � Market � Geography � Product � Service � Reputation � Intellectual Property � Barriers to entry � Management � Other 8. List all pending litigation and determine whether any such litigation is major or threatening in other ways. 9. Review and understand any cyclical factors that affect the industry or the target. 10. Order a credit report on the target, and assess the implications of its credit rating and the reasons therefore. 11. Determine whether any operations have been discontinued in recent years or are expected to be (or should be) discontinued in the near future. 12. Determine whether any material contracts or leases are approaching expiration. Understand the economic and other implications thereof. 13. Determine whether any labor negotiations are pending or are scheduled to occur in the near term. 14. Conduct a background check on the target’s officers or directors. Confirm whether they have been involved in criminal proceedings, regulatory disputes or civil litigation. 15. Confirm that you understand the real reason the target is being offered for sale. 16. Determine how long the target has been for sale and whether there have been any prior “busted deals.” If so, be sure you understand why the prior deals collapsed. 17. Determine what “slap and dash” work has been done to make the target look more attractive for sale (if the answer is “none,” then look again). � Reducing discretionary expenditures for advertising, maintenance, research and development, new product introductions, capital improvements � Deferring compensation increases � Avoiding regulatory compliance � “Enhancing” sales figures � Accounting changes 18. Understand the key factors for success in the industry and how the target measures up in these areas. 19. Determine what factors make the target more attractive than other companies in the industry. Identify the target’s principal competitive advantage. Determine what could cause the target to lose that advantage. 20. Ensure that you understand each of the following: � History of the business, any predecessor companies and changes in capital structure, or capitalizations � Description of products, markets, principal customers, any subsidiaries and their lines of business � List of officers and directors, with their affiliations, ages and number of years in office. � Number of people employed and their major areas of activity � Capitalization and stock distribution, including the number of shareholders and names of principal shareholders, rights of each class of stock and stockholders’ agreements � Terms of outstanding warrants, options and convertible securities. Find out if these would have to be dealt with by issuing additional shares � If the stock is publicly traded, the exchanges on which it is traded or, if over the counter, the dealer-making markets, the extent of public float, institutional holdings, trading volume and total market capitalization. Obtain any SEC filings and a shareholder list, if available � Organization chart � Names, addresses and contacts of company’s professional advisers, including attorneys, auditors, principal bankers and investment bankers � Locations of the target’s financial and legal records � State of incorporation and date incorporated 21. List all changes required in the target’s management or business to meet your expectations. 22. Understand why you are making this acquisition. 23. Understand your tolerance for risk and how much risk is involved in the proposed transaction. This checklist is intended as a general guideline and may need to be modified to conform to the legal requirements of your jurisdiction. It in no way constitutes legal advice. Gary M. Lawrence is Chairman and Managing Director of Akin Gump Technology Ventures, a venture capital, legal services, and strategic advisory firm with offices around the world. Lawrence is a member of the boards of directors of numerous public and private companies and is a founding director of STARTech Technology Accelerator. In addition, Lawrence serves as a member of the Management Committee of the international law firm Akin, Gump, Strauss, Hauer, & Feld, (www.akingump.com) and is a director of its investment fund committee. To purchase the book “Due Diligence in Business Transactions,” click here

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