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LUTZ BUSINESS INSIGHTS
issues during the due diligence process in m&a transactions
bill kenedy, LUTZ consulting and m&A shareholder
Completing a due diligence analysis is a critical step in the M&A process. Due diligence is conducted to validate value proposition assumptions, evaluate strategic and financial risks, and support deal decision making. Many times, there are issues that arise in these findings that may negatively impact a deal going through.
Here are a few common issues found during the due diligence process:
- High customer concentration
- Overstated EBITDA add-backs
- Working capital peg
- Unsustainable growth projections
- Low EBITDA margins
- Unusual revenue swings
- Inaccurate financial statements
- Top management lack of control
“I’ve seen many of these issues arise during the due diligence phase of different M&A transactions. The most common issue revolves around working capital. Typically the definition and calculation of the ‘working capital peg or target’ is addressed late in the sale process during purchase agreement negotiations. Many times this leads to disagreements which is why we strive to address working capital expectations with buyers as early in the process as possible,” said Lutz Consulting and M&A Shareholder, Bill Kenedy.
Although these are common issues, not all transactions are subject to negative findings. Here are a few things to keep in mind to help you prepare your business for a clear due diligence analysis:
1. Know that a buyer will want to make themselves comfortable that your company is sustainable. Meaning your business doesn’t have any significant risk to future sales, profitability and growth.
2. A buyer will want to confirm that your company’s financial performance is as good as you have portrayed it to be. With this in mind, know that they will check every aspect of your performance, including confirming revenues, costs and EBITDA adjustments.
3. Companies with audited or reviewed financials tend to have a better due diligence experience than those without CPA prepared quality financials.
4. If you have a large customer that will be hard to replace, this will typically reduce the amount buyers are willing to pay.
5. If there are gaps in your management team, your company’s EBITDA will be negatively adjusted for the cost of hiring and compensation of new executives.
Issues uncovered during due diligence may result in change of deal terms and could prevent a deal from closing. So, it’s important to consider these factors when deciding to sell your business. The goal when selling your company is to receive more than what you paid for it. So, you don’t want to receive anything less than what it’s worth just because of a few insufficiencies.
With proper preparation, negative surprises during the due diligence process can be eliminated. If you have questions concerning the due diligence process of an M&A transaction, please contact Lutz M&A.
ABOUT THE AUTHOR
BILL KENEDY + LUTZ CONSULTING AND M&A SHAREHOLDER
Bill Kenedy is a Lutz Consulting and M&A Shareholder at Lutz. He specializes in business valuation, litigation support, and merger and acquisition advisory services.
AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
- American Institute of Certified Public Accountants, Member
- Nebraska Society of Certified Public Accountants, Member
- Certified Public Accountant
- Accredited in Business Valuation
- Certified in Financial Forensic
- Certified Exit Planning Advisor
- BSBA in Accounting, St. John’s University, Collegeville, MN
- Construction Financial Management Association, Past Treasurer, Board Member
- A Time to Heal (non-profit focused on cancer patients), Board Member
- Primary Benefits of Selling Your Company to an ESOP
- Is An Employee Stock Option Plan Right for Your Business?
- Lutz M&A Advises C&W Transportation on its Sale to Platform Capital
- Our Services, Our People, and Our Results
- Lutz M&A Advises Hands of Heartland on its Recent Investment by Evolve Capital
- Overcoming Obstacles in Business Transition Planning
- Understanding Net Working Capital in Business Transactions
- How to Increase the Value of Your Business
- When is the Right Time to Exit My Business?
- Lutz M&A Advises Triage Staffing on Recapitalization
- Is Your Small Business at Risk of Fraud?
- Why is Forensic Accounting Needed?
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