GUEST POST: Getting Ready for a Sale or Capital Raise? 6 Crucial Financial Due Diligence Focus Areas
Sell-side financial due diligence can be paramount in facilitating a smoother sale or capital raise, while maximizing value and achieving the highest purchase price possible. It improves a Buyer’s confidence in the financial and operational information provided by a Capital Seeker, which can also increase the pool of interested Buyers. As well, it helps the Capital Seeker proactively identify and resolve potential deal issues prior to going to market. Which can reduce the risk associated with a Buyer re-trading on valuation late in the sale or capital raise process.
FINANCIAL DUE DILIGENCE ANALYSIS
A financial due diligence analysis, also known as a quality of earning analysis (“QofE”), is prepared primarily to normalize earnings before interest, taxes, depreciation, and amortization (“EBITDA”). EBITDA is normalized to exclude non-recurring items and to incorporate pro-forma adjustments that bridge the gap between historical and forecasted financial information.
At a high-level, a financial due diligence analysis is prepared using the following procedures:
| Diligence Focus Areas | Description |
| Management Adjustments | Validate adjustments to EBITDA (such as non-recurring expenses and pro forma) proposed by management and help management develop supporting documentation for such adjustments. |
| Unusual, Non-Recurring and Pro-Forma Items | Identify additional unusual or non‐recurring, non-operational, out-of-period and pro-forma items to adjust to EBITDA that should be considered in determining historical/baseline EBITDA for modeling/valuation purposes. |
| Adjusted Income Statements | Prepare a diligence adjusted income statement, incorporating the impact of management and diligence EBITDA adjustments in the appropriate income statement line items to present it on a comparable basis to the forecasted income statements. |
| Adjusted Net Working Capital | Prepare a net working capital analysis that would exclude non-recurring / non-operational balance sheet items and assist in setting a net working capital peg at transaction-close. |
| Debt and Debt-Like Items | Identify debt and debt-like items that will potentially impact the purchase price. |
| Sale and Purchase Agreement (“SPA”) | Review of financial information related items referenced in the SPA. |
The finance and accounting experts at CFGI (https://www.cfgi.com) have extensive experience performing sell-side due diligence and helping organizations make financial decisions that put them on a track to lasting success. Our diligence team works on more than two hundred transactions each year. We prepare and assist the Sellers team to respond to Buyer’s questions and requests throughout the sale process.
If you’d like additional information on sell-side due diligence or have questions & thoughts to share, please email tmenscher@cfgi.com, pwilliams@cfgi.com and nparikh@cfgi.com.
