Due Diligence

Due diligence is split into parallel workstreams, each handled by specialists. Financial diligence (often a 'Quality of Earnings' report by an accounting firm) verifies that reported EBITDA is real and sustainable, normalizing for one-time items. Legal diligence reviews contracts, litigation, IP, and change-of-control clauses. Tax diligence checks for unpaid liabilities and structuring implications of a stock vs asset deal. Commercial diligence assesses market size, competition, and customer concentration. Operational, HR, environmental, and IT diligence round out the picture depending on the industry.

The most important output for a buyer is the Quality of Earnings (QoE) analysis. Because price is usually set as a multiple of EBITDA, every dollar of overstated EBITDA inflates the price by the multiple. QoE work normalizes EBITDA by removing one-time gains, add-backs that won't recur, owner-specific expenses, and aggressive revenue recognition. If diligence reveals true adjusted EBITDA is lower than represented, the buyer 're-trades' — renegotiating the price down — or walks. This is why diligence findings directly drive the final purchase price.

Diligence doesn't just confirm or kill a deal — it reshapes the terms. Discovered risks get allocated through representations and warranties, indemnification provisions, and escrow holdbacks (a portion of proceeds withheld to cover post-close problems). A customer-concentration risk might lead to an earn-out tying part of the price to future performance. Pending litigation might be carved out of the deal entirely. The findings flow directly into the definitive purchase agreement, which is negotiated in parallel with the back half of the diligence process.