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Transaction Due Diligence Services

No two businesses are alike, and no single due diligence strategy will satisfy every buyer. Often there will be special areas of concern depending on the deal. A buyer must decide early in the process what areas are likely to be the most important. Each due diligence engagement should be customized to meet the needs of the buyer.

Some typical due diligence procedures would be related to:

  • Assessing financial trends
  • Judging accounting policies and procedures
  • Evaluating working capital trends
  • Probing revenue recognition policies and procedures
  • Gauging reserves and allowances
  • Determining capital expenditure needs
  • Weighing net realizable value for assets
  • Understanding unusual or nonrecurring transactions
  • Recalculating EBITDA amounts
  • Identifying unrecorded liabilities

One of the benefits of a properly executed due diligence program is that it can help highlight areas of uncertainty where some provisions need to be incorporated into the purchase agreement, such as warranties, indemnities or other forms of protection. The buyer should not regard financial due diligence and legal protection as substitutes.

Additionally, a well-executed due diligence plan gives the buyer an opportunity to identify issues big enough to break the deal or spotlight smaller issues which could possibly reduce the purchase price. Due diligence may identify assets that have been over or under valued, expose unrecorded liabilities which end up being left with the seller, or the exercise may identify tax efficiencies that are best achieved by leaving debt in the business or by acquiring stock instead of assets.

A due diligence plan seeks to explain results. It begins with information provided by the target company and is supported by interviewing key members of the management team. It takes reported results and arrives at underlying profitability after isolating unusual or nonrecurring revenues or expenses. Underlying profitability is the profit which the target company is capable of earning.

Some typical unusual or nonrecurring revenues or expenses are:

  • Owner expenses
  • Affiliated company or other management charges or expenses
  • One time expenditures
  • Sale of assets
  • Change in or inappropriate accounting policies, practices or procedures
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