JOHANES LIM CONSULTING

Due Diligence Checklist

GENERAL SECTION

• Obtain information or make judgment about the image of the company and products and services compared to other agencies in the area
• The reputation of present owners, management and professional advisors
• The trend of market share.
• Any external factors affecting the company.
• New developments planned or in progress
• Capital equipment commitments
• New branch or department
• Supplier contracts and block allocation
• Special skills and advantages such as:
• Automation compatibility
• Established market
• New product success
• Experienced staff
• Litigation pending or potential
• Credit rating.
• Contracts and leases nearing expiration.
• Trade association memberships
• Cyclical factors affecting the industry.
• Recent major developments among competitor.
• What Is the reputation of the owners?
• Do you know the real reason the company is for sale?
• Do you know how long the company has been for sale and if other transactions have fallen through?

Consider whether management has done anything to make the company appear more attractive to a buyer, such as:

• Reducing discretionary expenditures for advertising, capital improvements support staff.
• Deferring raises or bonuses.
• Do you know what factors make the company more attractive than it's competitors? Determine if the company can maintain its advantage, identify developments that could cause the company to lose that advantage and assess the likelihood of their occurring?
• Obtain the basic information you need about the company, including:
• History of business, any predecessor companies and changes in
• capital structure.
• List the officers and directors, with their affiliations, ages and number of years owned.

Number of people employed Including:

• Job description
• Current salary/commission income schedule
• Previous two years actual Income and the present year to date
• Capitalization and stock distribution, including the number of shareholders and names of principal shareholders, rights of each class of stock and stockholders' agreements.
• Organizational chart.
• Terms of any outstanding warrants, options and convertible securities. find out if these would have to be dealt with by issuing additional shares.
• Current and past names, addresses, phone numbers and contacts of company's professional advisers including:
• attorneys
• auditors
• principal bankers
• business broker or investment banker
• bonding agent
• insurance brokers
• Location of company's financial and legal records.
• State of incorporation end date incorporated.
• Description of products, markets and principal customers.
• Will a change In the company's management or business approaches be necessary to meet expectations?

Obtain this general data on the transaction:

• Terms of the acquisition.
• Accounting treatment.
• Arrangements that have been made with any brokers or finders representing either side of the transaction,
• If subsidiaries are not wholly owned, the details of outside ownership. Details of any recent acquisition(s).

FINANCIAL CONSIDERATIONS

Obtain:

• Monthly and annual financial statements for prior three years,
• Comparative financial results by major division.
• Tax return for the prior three years, IRS reports, schedule of unused loss carryovers.
• Projected operating and financial statements,
• The chart of accounts and a description of accounting practices.

Examine operating results, analyzing:

• Trends in sales, net income, wage expense end override commission structure.
• Determine compound growth rate.
• The commissions, selling expenses and general and administrative expenses.
• Review these for significant trends, especially in controllable costs such as advertising, travel end entertainment, and management and support labor.
• Review all extraordinary and non recurring expenses far the periods.
• Schedule significant items in other Income and expenses account.
• Annual interest expense and other fixed charges.
• Compensation paid to officers and key employees.
• Legal retainers, consultants fees and similar arrangements.

The terms of the following agreements, where applicable, and of any other pertinent contracts or agreements affecting income:

• Bonus or profit-sharing plans
• Employment contracts
• Long-term building leases
• Equipment financing leases
• Supplier contracts
• Medical insurance carrier
• Charges and revenues from parent company or subsidiaries.

For Financial Ratios, Compare:

• Current assets to current debt.
• Net income to commission income.
• Net working capital.
• Fixed vs. variable costs.

Prepare common size income statements and compare.
Selected operating expenses:

• Compensation to owners and officers
• Rent paid on business property
• Wages by category
• Bad debts
• Advertising and promotion
• Equipment leasing
• Employee benefit plans
• Compare financial results to industry standards.
• Analyze monthly financial statements for the prior three years to determine any significant trends.

Balance Sheet Review.
Review cash position, present and projected, Including:

• List of banks where the company maintains accounts and related balances at balance sheet date.
• Analyze total cash by function of account.
• Determine whether idle cash balances are promptly invested.
• Determine whether seasonal bank borrowing are required.
• Evaluate the company's cash management techniques.

For accounts receivable:

• Obtain an analysis of the total receivable balance for amounts due from customers, officers, employees and others.
• Obtain "aged" trial balances of the receivables above. Compare them to aging percentages far previous years and note any trends.

Inquire about customer receivables, including:

• The number of customers
• The business mix
• The names of large customers and annual volume to each
• Turnover
• Credit policies

Ascertain the purpose and repayment terms of loans to officers and employees:

• Determine how the company establishes credit terms
• Evaluate the collection efforts.

For prepaid expenses, deferred charges and other assets:

• Determine amortization policy for any prepaid expenses or deferred charges.
• Determine how goodwill or other intangibles arose and how they are being amortized
• Investigate other assets,

For accounts payable and prepaid expenses:

• Obtain an analysis of the type (vendors, taxes, payroll, deposits, etc.) and described payment practices for each.
• Compete the balances in the accounts with those at the end of the previous month, quarter and year
• Ask about the amounts of any outstanding purchase commitments.
• Describe the company's policy or vacation and sick pay accruals.
• Obtain a list of the companies principal suppliers, together with the approximate annual amounts purchased. Note all delinquencies in settlement of vendors and suppliers accounts.

For contingent liabilities inquire about:

• Contracts and agreements to which the company is a party.
• Any possible EEOC problems.
• Price re-negotiation or re-determination.

FINANCING AND CAPITAL STRUCTURE

For borrowings (short end Iong-term):

• List the amounts of all financial liabilities and determined the general terms of notes, mortgages payable, credit lines and other debt (e.g., lender payment schedules, interest rates, seniority, personal guarantees and other pertinent information).
• Note the nature and exact amount of assets pledged as collateral
• Note aggregate payments due.
• If any amounts are due to officers or stockholders, discover the nature of advances and repayment terms.
• Have all loan covenants been complied with? Are there any restrictions which would interfere with the acquisition?
• Obtain a business credit rating report.
• Obtain the terms capitalized leases and long-term non capitalized leases.
• Determine the nature of property subject to the leases and what renewal or purchase rights exist,
• Obtain information on any established lines of credit, terms and unused amounts available.

For common stockholder's equity:

• Obtain a shareholders list.
• If there is more than one class of common stock, determine the rights of each class.
• Obtain details of any preferred stock outstanding and determined if the terms of the stock specify treatment in an acquisition or merger.
• Determine if the company has any obligation to issue or repurchase stock. inquire about any unusual capital accounts (donated capital, appraisal surplus, etc.).
• Determine the company's debt to equity ratios.
• Determine the interest and fixed charge coverage's for the last 3 years,
• Obtain cash flow statement for prior 3 years.
• Does the company have capital expenditure budgets?
• Evaluate the company's relationship with banks and other Ienders. Review capital budget and planned sources of funds.
• Determine whether the debt repayment schedule can be met from operating cash flow. Determine the effect of interest rate fluctuation on cash flow.

Forecasts:

• Obtain available projections of earnings and cash now? Obtain worst, best and most probable results.
• Apply same ratio analysis as performed on historical figures and determine that the relationships are consistent.
• Determine the reasonableness of the assumptions used in the budget.
• Are the projections consistent with Industry standards'?
• Adjust the projections for any items resulting from the acquisition.
• Review or prepare cash flow projections to determine that investment in working capital, new plant and equipment and scheduled debt maturities is provided.
• Relate the cash flows developed to the proposed purchase price, using net present value or similar techniques.

Financial Management

• Form an opinion as to the reliability of the company's accounting and reporting. How accurate are the company's interim financial statements?

Determine the following:

• How often are internal reports issued?
• How soon after the end of the period are financial reports available?
• What changes will be needed and how soon?
• Determine how management information reporting is integrated with financial accounting Are these reports compared to budget and prior years?

EDP

• List all significant accounting and operational functions currently on computer.
• Are any EDP functions performed by service bureaus?
• Determine the sophistication of the EDP installation and the extent to which various segments are integrated.
• Obtain a list of hardware used by the company, Determine the lease terms. Is the equipment up-to-date?
• Determine what the companies short and long-term hardware and software needs are.

Insurance and Bonding

• Is the insurance coverage adequate? insurance broker regarding insurance needs and updates Is the company self insured in any way?

Taxes

• Determine all taxes to which the company is subject, Obtain the prior 3 years tax returns, Reconcile the tax returns to the financial statements.

Legal Matters

• Are any charges pending against the company by State agencies?
• Obtain legal counsel that the stock is validly issued, fully paid and non assessable and that the corporation is in good standing in the state of its incorporation.
• Are there any outstanding legal matters which should be dealt with in the purchase agreement?
• Obtain copies of all pertinent contracts, bases, etc. for legal review,

HUMAN RESOURCES

• Determine the number of employees grouped into managers, reservation agents, outside sales, etc. Determine wage and commission cost for each category.
• Determine extent of employee benefits offered. Determine the cost of any benefit plans and compare to prior years
• Look into any existing incentive plans. Determine the date they were established and the last updating. Obtain copies of the incentive plan,

Review the following areas:

• Working conditions, statistics on turnover and the reason for it.
• Medical problems and sick leave frequency
• Any unfilled positions

Obtain the following information an management personnel:

• Document management functions and responsibilities.
• Do any employment agreements or unwritten understandings exist?
• Recent key personnel losses to competitors.

Evaluate employee benefit programs for the following:

• The details and costs of pension, profit-sharing, life insurance, disability insurance, medical benefits, travel, accident, bonus, deferred compensation and severance plans.
• Compare benefits and salary levels to those in industry. Determine if either company would need to upgrade its benefit programs or salaries as a result of the acquisition. If so, what is the estimated cost?
• Vacation and sick leave policies.
• The number of company cars
• Stock option or stock bonus plans.

SALES AND MARKETING

Review the following sales and marketing areas with appropriate personnel.

• Analyze present and probable pricing policies for the product lines, considering:
• The sensitivity of both the industry and company to price changes.
• Whether there is a price leader.
• Any excess capacity in the industry which might tend to depress prices.
• Whether the company has been able to pass along recent cost increases to customers.
• Does the company have any major accounts? If so, list along with percentage of overall business,

Determine the method this and other companies in the industry use to distribute and sell, including:

• The channels of distribution and their relative importance.
• The nature and importance of the field tales effort.
• The manner of compensating sales personnel.
• Advertising and sales promotion practices in the industry.
• Any trend among major customers toward integrating, purchasing substitute products or otherwise deviating from purchasing from the company.
• Review sales promotion programs for cost and effectiveness,

Review trends in the major elements of marketing, including:

• Market forecasts compared to actuals.
• Sales cancellations and the reasons for them.
• Departmental costs compared to budget.
• Sales and expenses per salesman.
• Customer booking costs.
• Customer complaints and lost customers.
• Discount patterns.

Facilities and Equipment

• Obtain detailed fixed asset schedules for the company and determine the following:
• Location and departmental use.
• Assets excluded from sale.
• Observe significant fixed assets and determine same.
• Determine capitalization vs. expense policies for repairs and maintenance.

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