CHAPTER 17 Confirmatory Due Diligence Flashcards
(23 cards)
When does the confirmatory due diligence process begin?
After the Letter of Intent (LOI) is signed.
What is a “proof of cash” analysis?
A method to verify revenues and expenses by comparing them to deposits and payments in the company’s bank account.
Why should you identify major issues early in due diligence?
To avoid spending money on advisors for a deal that may not proceed.
What is the typical cost of accounting due diligence?
$20,000 to $50,000.
What is the typical cost of legal due diligence and related documents?
Around $75,000.
Why can you not fully delegate accounting or legal issues?
Because you must guide the process and ensure findings align with your deal and operations.
What are the six key areas of confirmatory due diligence?
Seller honesty, accounting, legal affairs, customer perspectives, employee perspectives, and specialized due diligence.
What is a major red flag during seller evaluation?
If the seller withholds negative information or is not fully transparent.
What are the two streams of accounting due diligence?
Proof of cash and quality-of-earnings analysis.
What does the quality-of-earnings analysis assess?
Whether historical profits are representative and sustainable in the future.
What can timing errors in revenue and cost reporting lead to?
Inflated EBITDA and overvaluation of the business.
What payroll tax issue can arise from using independent contractors?
They may be reclassified as employees, creating liability for unpaid taxes.
What is a common sales tax risk in multi-state operations?
Failure to collect or remit sales tax in each jurisdiction.
What contracts typically require consent to transfer upon business sale?
Leases and distribution agreements.
What is the purpose of a schedule of contracts in the purchase agreement?
To ensure the buyer reviews all contractual obligations.
What’s the main goal of customer interviews?
To validate customer satisfaction and understand supplier selection behavior.
When do customer interviews usually occur?
Near the end of the due diligence period.
What should employee interviews assess?
Employee capabilities, motivation, and understanding of their roles.
What is one simple yet revealing question to ask employees?
“So, what do you do here?”
What four areas may require specialized due diligence?
Machinery and equipment, software systems, environmental risks, and regulatory compliance.
What are the four possible outcomes after confirmatory due diligence?
Close the deal, adjust the price, change contract terms, or walk away.
Why is maintaining momentum in due diligence important?
Slow progress can reduce business performance, frustrate sellers, and risk losing the deal.
What should be the focus during due diligence?
Findings that would kill, change, or confirm the deal—not curiosity.
