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What you see is not Always What it Seems: Due Diligence in the Mergers and Acquisitions Process Part III – Operational Due Diligence
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What you see is not Always What it Seems: Due Diligence in the Mergers and Acquisitions Process Part III – Operational Due Diligence

December 8, 2017 Professional Services Industry Legal Blog

Reading Time: 4 minutes

Previously, I wrote a blog highlighting a business purchaser’s need to do due diligence on its prospective target company.  As stated, the due diligence process can be split into three parts:  (1) legal; (2) financial; and (3) operational.  I began this series with a blog concerning legal due diligence, and recently released a blog on financial due diligence.  This blog will explore what is involved with the operational part of the due diligence process.

Operational Due Diligence

Operational due diligence involves ensuring that the business will be able to operate as the purchaser assumes after it has been acquired.  In the hands of the seller, the business might be generating an enticing profit.  But, upon transfer, that profitability may reduce due to a number of different reasons.  Key employees may leave or important contracts may not be assignable, and may up terminated or even in default.  This may be especially true in the context of leases and existing debts.[1]  Further, if applicable, the purchaser may need to inquire into whether the IP is owned by the company, including the trade names.

Below you will find a non-exhaustive list of the categories of documents that a purchaser should request as part of operational due diligence.  Every deal is different; thus, there are likely additional documents that would be necessary in any particular deal.

  • List of directors, officers, and other key employees and their compensation;
  • Employment agreements of directors, officers, and key employees, including any confidentiality or noncompetition agreements;
  • Confidentiality and noncompetition agreements employees and consultants may be subject to with their prior employees;
  • Any collective bargaining or labor agreements;
  • Employee handbooks and/or personnel manuals;
  • All loan documents for any indebtedness of the company or indebtedness which encumbers company assets;
  • All other financing documents, such as documentation of sale and lease back transactions, installments sales contracts, letters of credit, vendor financing programs, and other lease agreements;
  • License agreements of any intellectual property, including software, patents, copyrights, or trademarks;
  • Lease agreements;
  • Contracts with outside distributors, agents, brokers, and franchisees;
  • Contracts with suppliers and vendors;
  • Contracts with customers;
  • Maintenance agreements and warranties for any essential equipment;
  • Any agreements with that place any material limitation on the method of conducting or scope of the Company’s business;
  • All other material agreements, for example:
    • Joint venture and partnership agreements
    • Agreements that have a value over a certain dollar threshold, and
    • Agreements that have a term of more than one year
  • All documents evidencing title to real estate, including title insurance policies;
  • Any environmental reports on company real estate;
  • Documentation of all patents, trademarks, service marks, copyrights, and other intellectual property owned or used by the company;
  • Evidence of ownership or rights to all proprietary software;
  • Evidence of ownership of all domain names;
  • Correspondence dealing with actual or alleged infringement by the company of others’ intellectual property or by others of the company’s intellectual property;
    • If vital to the company’s business, the buyer should conduct its own independent evaluation of the company’s intellectual property to evaluate its validity and potential infringement.


This completes my blogs series on due diligence in the M&A process.  Due diligence is arguably the most important step in the M&A process for purchasers  It is important to remember that this series was a global overview on due diligence in the M&A process that only scratches the surface on the most important aspects.  It will serve a buyer greatly to consult and retain an attorney before attempting to engage in this process.


[1] May lease and loan documents often prohibit the transfer of the agreement, even indirectly through a purchase or sale of an entity.

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