As you might imagine, we’re probably going to ask this question in a variety of ways to get to nuance, details, and (you got it) risk. But the baseline request is to just tell us what’s out there.

List:

• All outstanding indebtedness including:

  • All short-term debt

  • Long-term debt

  • Intercompany debt

  • Guaranties

With:

• All amounts, maturities, prepayment, and payment terms

Perhaps you have access to additional debt that you haven’t drawn on yet. Knowing the types and terms helps us understand opportunities and obligations.

List:

• Outstanding standby letters of credit

• Performance bonds

• Performance guarantees

• Similar credit support obligations

From equipment to machinery to real estate, there are a lot of possibilities for owing somebody something at some point. Knowing them now allows for accurate assessment and ensures things don’t lapse post-close.

Detail:

• Any other material financing arrangements:

  • Capital leases

  • Synthetic leases

  • Sale and leaseback arrangements

  • Installment purchases

  • Similar arrangements

Provide:

• All loan and credit agreements

• Mortgages

• Deeds of trust

• Letters of credit

• Indentures

• Promissory notes

• Other evidence of indebtedness

• Any amendments, renewals, notices, or waivers

When we buy something, we want it to be free and clear – so we ask you to provide a record of anything that might be out there. We’ll then cross-check that list against public databases.

Provide:

• All documents that create:

  • Liens

  • Mortgages

  • Security agreements

  • Pledges

  • Charges

  • Other encumbrances on the company’s assets or equity or in the company’s favor

  • Copies of all Uniform Commercial Code financing statements

When we’re underwriting downside, we want to make sure we can cover fixed costs.

Provide:

• A list of all third-party guarantees and copies of those guarantees

Whatever we’re buying must be able to stand on its own. So here we’re looking for any assets that have been used as cross-collateral, etc.

Provide:

• A list of all inter-company guarantees and/or guarantees given the company has given and copies of any such guarantees (or evidence of the release of any such guarantees)

Think of this as the catch-all question. We really actually want to know if any other money is owed or promised anywhere.

List:

• Any agreement to provide funds to or otherwise invest in any other person or entity

Has the company given employees loans or vice versa? Has someone not been paying themselves for a period of time? Are the financials independent and able to stand on their own feet?

Identify:

• Any financing arrangements or loans between the company and any employee, director, officer, agent or equity holder that were outstanding during the last year

Provide:

• Copies of any related documents

If there’s one thing we’ve learned, it’s that weird stuff consistently hides in inconsistent places. And, if we don’t ask about it, we may never learn about it.

List:

• All outstanding and/or contingent liabilities incurred by the company outside the ordinary course of business

What you’ve told the government about yourself is another lens into who you are, how much business you do, and what kinds of tax liabilities and exposures you might face.

Provide:

• Copies of all:

  • Federal, state, local, and foreign income tax returns for the past five years

  • Franchise, employment, use, and sales tax returns for the past five (5) years

  • Any other tax returns regarding business, assets, or income of the company for the past five years

Is the company organized the way the government thinks it is for tax purposes? The answer can affect how a transaction might take place.

Provide:

• All past and present tax elections, including:

  • 2553 (S Election) elections, consents, agreements, or waivers

  • 8869 (QSub) elections consents, agreements, or waivers

Essentially, has the IRS or any other governmental entity ever looked hard at your business, and what did they find?

Provide:

• Documentation of any past or present:

  • Federal, state, or local tax examination or audit of the Company and the results of each such audit

  • Tax litigation or appeals process

Yes, it’s important to know whether a tax authority found anything weird with your business. But more useful is how you responded.

Provide:

• Correspondence between the company and the IRS or any foreign, state, or local tax authority

What else could be out there – particularly things that wouldn’t necessarily be on our own tax return?

Provide:

• Copies of any tax indemnification, sharing, or allocation agreements, including any joint venture agreements that have the effect of tax allocation agreements

If you’re receiving any subsidies that might not apply after a transaction, it might affect the economics of the business and the terms of the deal.

Describe:

• Any preferred tax status or tax benefit that could be adversely affected by an acquisition

• Any available tax attribute carry-forwards

• Any undertakings given by the Company to tax authorities

• Any special tax rulings or agreements arranged with tax or other governmental authorities

Fundamentally, we want to know if you’re paid up on your taxes. There are some tricky rules in place about where you may need to pay sales tax. If there’s an issue, we want to be able to make a plan to address it.

Identify:

• All jurisdictions in which you file sales and use tax returns

Summarize:

• Total sales and use taxes paid (by jurisdiction) during the last five years

If you’re selling in non-U.S. markets, there are additional tax liabilities and complications to consider.

Identify:

• Any excise tax returns filed for the production, sale and distribution of product

• All jurisdictions where the company is subject to VAT (value-added tax) or a similar tax

These are some of the messier areas when it comes to teasing out the reality of a business. Conflicts of interest can have unexpected forms and unpredictable outcomes – we’re trying to get a bead on what a business is capable of doing on its own.

Are there links between people in the business that would dissolve in the case of a transaction?

• List: Any indebtedness or other obligations of or to the company to or from any officer, manager, equity holder, or employee

• Include: Amounts or any other relevant terms of those obligations

Who ends up getting “company” properties (i.e., company cars) post-close?

• Describe: Assets or properties used by the company in which any officer, manager, equity holder, or employee has any interest

What else is out there?

• List: Any material transactions between the company and any of its officers, managers, equity holders, or employees not already listed

What are you actually insured for now?

Provide:

• Policies or binders of insurance or self-insurance arrangement, including:

  • Workers compensation

  • Disability

  • Automobile

  • General liability

  • Fire and casualty

  • Products liability

  • Professional liability

  • Business interruption

  • Officers' and directors' liability

  • Key-man life insurance

• Information on:

  • Deductibles

  • Coverage limits

  • Other significant terms

• Names and addresses of all insurance agents and brokers

Knowing what you’re paying, claims you’ve filed, pending claims, and what you’re not paying for and why tells us a lot about the nature of your business and if there are any outstanding liabilities.

What claims have you made?

• Provide: Schedule and summary of insurance premiums paid, claims filed, and loss history during the last five years

Have there been any denials or cancellations?

• Document: Any cancellations, denials of claims, or denials of insurance during the last five years

Any upcoming claims?

• Provide: Schedule of any currently pending or likely claims

If you have any type of in-house insurance programs, we’ll likely have follow-up questions.

Provide:

• Schedule of any self-insurance programs or other similar risk retention

For general contractors or subcontractors, we want to understand what bonding obligations you have.

Describe:

• Existing bonding requirements and relationships

Provide:

• Any underlying documentation or support

We want to know about all recent, current pending, or possible litigation. It helps us get a better understanding of the risk inherent in your business, anything that might create outstanding restrictions or obligations on the company, and whether there’s an individual involved in legal proceedings that occurred in connection with their performance on the job. This is a big list – buckle up.

Have you been involved in any recent legal proceedings?

• List: All litigation and other legal proceedings involving the company during the last five years

• Provide: Related documentation (pleadings, settlements, judgments, etc.)

• Describe: How these matters were resolved.

What have your lawyers said about it?

• Provide: Copies of all letters sent during the last five years from counsel relating to litigation or contingent liabilities

Is there any pending litigation?

• List: All pending litigation, administrative, or regulatory proceedings, investigations or governmental actions

• Describe: The claim and the principal parties

• Provide: Copies of all pleadings or other material filings made or correspondence received

Is there any threatened litigation?

• Describe: Threatened litigation, legal claims, regulatory actions, or other actions or proceedings

• Include: Any correspondence relating to any threatened governmental investigation or alleged violation of law or regulation

Any legal judgments, decrees, or agreements in effect?

• Provide: Any currently effective consent decrees, judgments, other decrees or orders, settlement agreements and other similar agreements involving the company or its assets, employees, or equity holders

Any litigation regarding bankruptcy, securities law, etc.?

• Provide: A copy of any litigation involving an executive, stockholder, officer or director of the company concerning bankruptcy, crimes, securities law, or business practice during the last five years

Here, we want to mine for any additional information on the types of government approvals you’ve received to operate your business. And, the scope of the answer helps us understand how regulated your business is and what needs to happen post-close to ensure the proper licenses are in place.

Provide:

• From all foreign and domestic governmental and regulatory authorities:

  • Permits

  • Licenses

  • Certificates

  • Authorizations

  • Registrations

  • Approvals

  • Exemptions

  • Applications

  • Dates of issuance and renewal

Describe and document:

• Currently pending or threatened investigations, inquiries, or proceedings initiated against the company by any governmental Authority

• Any investigations, inquiries or proceedings that were previously initiated or threatened against the company by any governmental authority. How were these matters resolved?

• Any other circumstance where the company has been or may be accused of violating any law or failing to possess any material license, permit or other authorization

• Any other material correspondence, filings, reports, and notices received from or provided to any governmental authority

This certainly depends on your business, but if you’re importing or exporting, we want to ensure you have the proper approvals and authorizations in place – and that we know what’s allowed and regulated in terms of purchase and sale of goods in international jurisdictions.

List:

• Approvals required for the company to do business, including export, import, or customs:

  • Permits

  • Authorizations

  • Certificates

  • Registrations

  • Concessions

  • Exemptions, etc.

  • All approvals, etc. granted that are currently in effect or pending renewal

List:

• Countries to which the company exports or has exported any items

Provide:

• Copies of correspondence with, submissions to, or documents received from Bureau of Industry and Security, Office of Defense Trade Controls or Office of Foreign Assets Control, including:

  • Requests for advisory opinions

  • Commodity jurisdiction requests

  • Commodity classification requests

  • Applications for export licenses and responses thereto

  • Export licenses

  • “Is informed” letters

  • Reports filed pursuant to the Export Administration Regulations or an export license

  • Requests for documents or other information

  • Voluntary disclosures

  • Pre-charging letters

  • Charging letters

  • Warning letters

  • Documents reflecting settlement of alleged export control violations

There are always unique elements to acquiring a government contract. If you’re a government contractor or subcontractor that will lead to some further questions.

Provide:

• Copies of all contracts between the company and any governmental authority

We’ve asked about properties you own or lease before, but when we talk about environmental risks, we need to know anything you’ve ever owned or leased. Just because you don’t own a property anymore doesn’t mean you're out of the liability woods for environmental risks.

List:

• Facilities or other properties currently or formerly owned, leased, or operated by the company and its predecessors

We ask for any studies you’ve had done to help us figure out if we need to commission additional studies.

Provide:

• Environmental studies, reports, site assessments, or data prepared with respect to your properties

Some industries and businesses use toxic chemicals and/or produce toxic waste. If you’ve filed reports on this, it tells us what types of reports you have to file, indicates whether you’re handling it properly, and helps us assess potential risk.

Provide:

• Copies of all legally required reports of hazardous waste activities including the generation, transport, treatment, storage, or disposal of hazardous waste

Describe:

• Toxic chemical used and/or hazardous waste created in connection with the operation of the business

• Any release of hazardous substances or petroleum known by the company to have occurred at properties

Identify:

• How chemicals and waste are stored and disposed of

• Any contracts for storage or disposal services

Is this a rabbit hole we need to go down?

Verify:

• Whether asbestos or asbestos-containing material ("ACM") is used, generated, stored, treated, disposed, removed, or otherwise located at the properties

• Whether it is friable and/or the cost of abatement

Have you ever done anything or been accused of doing anything contrary to environmental or workplace health and safety law or regulations?

Describe:

• Any past or current investigations, notices, complaints, etc. related to any actual or alleged violations of:

  • Federal, state, or local environmental law or regulation

  • Workplace safety and health law or regulation

Provide:

• Copies of any related correspondence, notices, complaints, orders, judgments, rulings, or settlements. How were these matters resolved?

Communications with and from the government indicate reporting requirements. Violations or actions from private parties clue us in to additional risk. Potentially responsible party letters indicate that there may be outstanding liability. We simply want to know any information about hazardous material at any of your current or historical properties.

Provide:

• Copies of any applications, statements, or reports to:

  • The EPA

  • Any state department of environmental regulations

  • Any similar state or local regulatory body, authority, or agency

• Documents relating to potential environmental liability to private parties:

  • Complaints

  • Claims

  • Lawsuits

  • Other documents

• Any "potentially responsible party" letters or other similar notices or requests for information from any governmental or regulatory authority