Financial Due
Diligence
Financial Due Diligence
• Financial Due
Diligence confirms
the accuracy of the
financial information
provided about the
business.
Financial Due Diligence
• The PE firm will hire
accountants to
review all the
financial information.
• We will take a look at
the main areas for
investigation…
Financial Due Diligence
• Quality of Earnings
• Thisconfirms the historic
earnings of the company after
stripping out non recurring costs
and expenses
• Thisfocuses particularly on the
EBITDA because this is a major
driver of the valuation.
• ThePE firm will use the adjusted
EBITDA x EBITDA multiple =
Valuation
Financial Due Diligence
• These adjustments include:
• Management adjustments -
compensation or expenses
• Business
related
adjustments - accounting
related
• ProForma adjustments -
adjusting for the impact of
acquisitions or divestitures
Financial Due Diligence
• Debt
• The PE firm needs to
understand the level of
existing debt and debt-
like items as these have
to be deducted before
the sellers receive their
sale consideration
monies.
Financial Due Diligence
• These can include:
• Unpaidcapital expenditure or
ordered machinery
• Deferred compensation
• Accounts payable
• Tax related liabilities
• Legal settlements
• Tax liabilities - historic and future
• Liabilities
associated with certain
cash transactions
Financial Due Diligence
• Normalised Working Capital
• The PE firm will want to
ensure that the company has
sufficient working capital to
keep operating - any shortfall
in the calculation will be
deducted from the sale
proceeds as it will be
assumed that the sellers have
articificially reduced the
working capital levels.
Financial Due Diligence
• The Due Diligence also
needs to understand the
working capital requirements
of the business through the
economic cycle to ensure
that the company is not
being acquired at a time
when the working capital
requirement is articifically
low.
Financial Due Diligence
• Tax Structure
• Thisfocuses on State, Local
and Federal taxes to ensure
that the tax affairs of the
company are in good order
and as efficient as possible.
• Thecompany does not want
to pay more tax than it is
legally obliged to.
Financial Due Diligence
• IT Resources
• While not directly financial in nature,
the IT in the business is at the core of
the ability of the business to manage
and report its performance properly.
• Ifthe IT in the company does not
work or is out of date it may affect
the accuracy of some or all of the
financial information in the company
• It
may also require considerable
investment to bring it up to speed.
Financial Due Diligence
• Human Resources
• HR has a responsibility
for payroll and all
associated tax
• There are also important
state and federal
regulatory filings that
must be complied with.
Financial Due
Diligence
