Due Diligence

When buying a business, the purpose of due diligence is to make sure you fully understand the company in order to inform your analysis of whether or not to purchase it, and at what price. It’s important not only to thoroughly analyze the financial information, but also to understand customers, suppliers, employees, marketing, insurance, contracts, licenses, retirement liabilities, environmental issues, potential litigation, and many other items that will have a major impact on the success or failure of your future company. Sometimes due diligence kills deals (which is a good thing), but more often, it helps the buyer understand both how to succeed going forward and how to negotiate a fair price. When you’re seller – it’s important to know what to expect and be prepared for due diligence. The sooner you can start preparing your company for sale, the better.

In essence, while both reports aim to provide a thorough understanding of a company’s financial health, a sell-side QoE is designed to present a company favorably for sale and maximize its valuation, whereas a buy-side QoE focuses on protecting a buyer’s interests and minimizing (with justification) the price necessary to acquire a company.

Sell-Side (aka “pre-sale”) due diligence can help increase the valuation of a company and eliminate surprises for a seller during a transaction. The preparation of a Sell-Side QoE report will assist in making an efficient and effective due diligence process for interested buyers.

Having a buy-side QoE immediately arms buyers with negotiating power, specifically, in a framework that has been professionally vetted, justified and rehearsed. Additionally, a buy-side QoE will identify and evaluate cost-saving opportunities, revenue enhancement possibilities, and operational improvement strategies that could be implemented and realized post-acquisition.

While the scope of work may vary depending on the intended structure of a transaction (i.e. asset vs. stock deal) and nature of a business, Tax due diligence goes beyond the mere confirmation of federal and state tax returns being filed (and filed appropriately). From an income tax perspective, assessing the reasonableness and realizability of NOLs and deferred tax assets are crucial. There are also numerous non-income-related tax obligations and filings that businesses deal with, including sales (e.g. nexus), gross receipts, use, excise, payroll (e.g. W-2 vs. 1099 compliance), franchise, and property. These items are commonly overlooked by business owners and investors and can lead to severe issues if not recognized and remediated prior to closing a transaction.

It depends on how much risk you’re willing to tolerate, but typically, no. We recommend obtaining the books and having an accountant perform a thorough analysis.

Free Cash Flow takes into consideration capital expenditures, whereas EBITDA does not. While EBITDA is a common focus area during due diligence, EBITDA alone does not provide a complete picture of a company’s true cash generation and return.