CHAPTER 13 Preliminary Due Diligence Flashcards
(19 cards)
What is the primary goal of preliminary due diligence?
To reach a go/no-go decision and shape the price and terms of a potential offer.
How does preliminary due diligence differ from initial filtering?
Filtering uses a static checklist to eliminate bad prospects, while preliminary due diligence uses business-specific questions to explore deeper risks and potential.
When should you begin involving attorneys and accountants?
Only after you are fairly confident the opportunity is worth pursuing.
What should you ask yourself when forming key questions for due diligence?
What are the two or three things that could change my mind about the business?
What types of concerns should questions in due diligence address first?
Concerns most likely to kill the deal.
Why is industry research important in preliminary due diligence?
It provides context, helps understand broader trends, and supports or challenges assumptions about the business model.
Where can you find useful industry research?
Trade publications, analyst reports, industry associations, and public company filings.
What is the preferred method for your first in-depth conversation with the seller?
A phone interview.
Why is a phone interview preferable early on over an in-person visit?
It’s more cost-effective and the seller likely won’t have all quantitative data readily available.
When should an onsite visit be conducted?
After your most critical questions have been answered and you are closer to making an offer.
What are the benefits of an onsite visit?
It allows observation of operations, facilities, employee behavior, and seller involvement.
Why might you not meet the management team during an initial visit?
Sellers often keep sale processes confidential until further along.
What is a financial projection in due diligence?
A numerical model estimating future revenues, expenses, EBITDA, and cash flow based on assumptions.
How should you build the first financial projection?
Use data from CIM or seller-provided financials to create historical summaries and set future assumptions.
What are EBITDA ‘add-backs’?
Adjustments for one-time or non-recurring expenses meant to reflect true ongoing profitability.
Why should you analyze historical results as percentages of revenue?
To identify trends, assess sustainability, and build realistic projections.
What’s the value of financial modeling during due diligence?
It helps identify critical assumptions and see how changes affect profitability and cash flow.
Should projections assume best-year performance is repeatable?
No, be cautious of optimism bias and test against averages or conservative assumptions.
What does financial modeling help you understand about a business?
Whether it is enduringly profitable and what risks or assumptions require further validation.
