Guidelines for Structuring Your First Startup Acquisition: A Comprehensive Checklist

Acquiring a startup is a significant step that requires meticulous planning and preparation. Whether you are the buyer or the seller, the process can be complex and demanding. This article provides a detailed due diligence checklist to help you structure your acquisition effectively and ensure you have all the necessary information.

Understanding Your Role in the Acquisition Process

To offer the most valuable advice, we need to consider your role in the acquisition:

Buyer: Ensuring you have a complete understanding of what you are acquiring by requesting detailed information from the seller regarding the startup's business operations and finances. Seller: Providing all the required information, as the buyer will likely request most or all of the following information throughout the acquisition process.

Ultimately, the thoroughness of your preparation can significantly influence the success of your acquisition.

Key Information Checklists

Organizational and Legal Structure

Understand the legal and organizational structure of the startup. These documents will include:

Articles of Incorporation and amendments Bylaws and amendments Shareholder and director meeting minutes Shareholder and director list Option, trust, warrant, put, call, subscription, and convertible securities agreements Certificate of Good Standing and state incorporation status reports Assumed name registrations and state business authorizations

Financial Information

Review and provide the following financial documents to ensure transparency in the transaction:

Three years of audited financial statements with auditors' reports Recent unaudited statements and comparable past year statements Five years of auditors' letters and replies Credit report (if available) Projections, capital budgets, and strategic plans Indebtedness and contingent liabilities schedule Inventory, accounts receivable, and accounts payable schedules Description of depreciation and amortization methods Analysis of fixed and variable expenses, gross margins General ledger and internal control procedures Stock option and purchase plan descriptions and grant schedules

Physical Assets and Real Estate

Provide comprehensive information on the startup's physical assets, including:

Fixed asset schedule and locations U.C.C. filings and equipment leases Major equipment purchases and sales during the last three years Business location schedule Real estate leases, deeds, mortgages, title policies, and approvals

Intellectual Property

Ensure complete transparency on the startup's intellectual property:

Patent and patent application schedule Trademark and trade name schedules Copyright descriptions Technical know-how description and protection methods Consulting, invention, and intellectual property assignment agreements Patent clearance documents and intellectual property claims

Employees and Benefits

Prepare comprehensive employee-related documents:

Employee list including positions, salaries, and years of service Employment, confidentiality, nonsolicitation, and noncompetition agreements Key employee resumes Personnel handbook, benefit policies, and holiday/vacation/sick leave policies Defined benefit/plan descriptions and collective bargaining agreements Employee complaints, termination claims, labor disputes, and grievance procedures Health and welfare insurance policies, workers' compensation claim history, unemployment claims history Stock option and purchase plan descriptions and grant schedules

Licenses and Permits

List all the licenses and permits the startup requires:

Government licenses, permits, and consents Any correspondence with regulatory agencies

Environmental Issues

Prepare a thorough environmental audit report and document any environmental issues:

Environmental audits for each leased property Hazardous substances used in operations Disposal methods and environmental permits/licenses Correspondences, notices, and files related to EPA, state, or local regulatory agencies Environmental litigation and investigations Superfund exposure and contingent liabilities

Taxes

Provide a comprehensive tax record:

Income tax returns for the last three years Sales tax returns for the last three years Audit reports, revenue agency reports, and tax information Tax liens and employment tax filings for the last three years

Material Contracts

A list of all material contracts, including:

Subsidiary, partnership, and joint venture relationships Contracts with officers/directors/5-percent shareholders Bank and financing agreements Loan, security, and similar agreements Guaranties Installment sale and distribution agreements Letters of intent, closing transcripts, merger, acquisition, and divestiture documents Standard quote, purchase order, invoice, and warranty forms Nondisclosure and noncompetition agreements

Product or Service Lines

Document all existing and developing products and services:

List of products/services Regulatory approvals or disapprovals Product/service complaints and warranty claims Results of any tests, evaluations, studies, surveys, and other data

Customer Information

Prepare comprehensive customer information documents:

Detailed list of top twelve customers Supply and service agreements Purchasing and credit policies Unfilled orders Major customer loss explanation Surveys and market research reports Advertising and marketing materials Competitor descriptions

Litigation

Document current and potential litigation:

Pending litigation schedule Threatened litigation description Insurance policies with potential coverage Consent decrees, injunctions, and other legal agreements Unsatisfied judgments list

Insurance Coverage

Prepare a detailed insurance coverage document:

General liability, personal and real property, product liability, and errors and omissions insurance Defined history of insurance claims over the last three years

Professionals

Compile a list of all professionals involved:

Law firms, accounting firms, consulting firms, and other professionals

Articles and Publicity

Prepare and provide all relevant articles and press releases:

Articles and press releases within the last three years

Final Thoughts

By carefully following this checklist, you can ensure a smooth and successful startup acquisition. Whether you are buying or selling a startup, it's crucial to have all the necessary information and documentation in place to protect your interests and facilitate the transaction.