It is critical to perform due diligence when buying a business. Commercial due diligence is no easy task; it requires a team of experts:
You may fill one of these roles, but buying a business requires due diligence consultants to fill out the team. When shopping for due diligence services, be prepared by knowing the process and look for experienced professionals.
As financial professionals and small business specialists, CFOshare performs financial due diligence for acquisitions under $50M. Transactions at this size require special focus on critical elements to measure key risks while avoiding high costs. Our due diligence consultants will explain each step of the process, appraise you of key findings, and advise you on opportunities to renegotiate a purchase.
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The due diligence process begins with a standard checklist of data to be requested from the company for sale. This includes things you may think of like historical financials and legal documents, but should also include less common concerns such as IRS form 5500’s, excise tax filings, workman’s compensation claims, etc. There are dozens of these items to cover, and your due diligence service provider should track and verify each one in an encrypted data room. These documents should also be verified against each other for consistency – for example, a balance sheet that doesn’t match the tax filings may indicate financials were retroactively adjusted.
Due diligence consultants will meet with management and the financial team of the business you want to buy to ask tough questions and dig into key issues. The goal of off-site diligence is to uncover as many skeletons as may exist to form an opinion about Quality of Earnings and future projections (see below.)
Hiring a due diligence consultant avoids making you the “bad guy.” Financial professionals are expected to ask the hard questions and make people uncomfortable. You, the buyer, maintain a friendly and amicable relationship with the seller, allowing for better negotiations.
This step can be laborious and requires attention to detail. It may include reviewing QA logs or hand-counting physical inventory. A good due diligence consultant will focus on key items while not letting details go unnoticed or unquestioned.
Half of the focus of financial due diligence is on historical financials. This review is called a Quality of Earnings study, designed to calculate how robust the historical earnings of the company were. In a Quality of Earnings study your due diligence consultants will look for issues like:
Historical data is not necessarily a predictor of future earnings. The most important part of financial due diligence is projection of future earnings to help the buyer estimate their return on investment. Good due diligence services will provide 2-3 years of projected earnings along with a sensitivity analysis highlighting major risks. This should be explained to you in person and provided as a written report.
More than finding “a good deal,” you should understand if you are in a strategically advantageous position to grow your acquisition target. Are there strong synergies you can bring to the organization? Can you modify the tax structure to improve earnings? Are you capitalizing the deal correctly? Financial professionals can consult on these points and give you a deeper understanding of the opportunity.