Due Diligence costs

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May 11, 2023

by a searcher from Rice University - Jesse H. Jones Graduate School of Business in Katy, TX, USA

Can someone share the costs associated with a typical due diligence? How can they be structured in different ways? I'm looking for more from self funded perspective. I read that the costs could range from $20 - $30K.

Thanks

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Reply by a searcher
from Harvard University in San Francisco, CA, USA
Here are the buckets of fees we typically budget for, and the things you should consider:
-Travel - do you need to fly/stay somewhere to do BUSINESS due diligence? Meet in person to build relationships? How often/how many times?
-Accounting - do you have the skills to due financial/accounting due diligence? What kind of shape are the numbers in? If not, budget at least $25k. (we DO have the ability to do it and still usually outsource)
-Legal - how much complexity is there? Even simple businesses can have legal complexity (due to shareholder base, entity structure, etc.)
-Tax diligence/structuring - do NOT skimp here. You don't want to inherit a problem. Sales tax compliance, nexus issues, blown S-corp elections, etc...big potential issues for an unwitting buyer.

Here's an article on the topic:
https://www.axial.net/forum/dont-break-the-bank-5-budgeting-tips-for-independent-sponsors/
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Reply by a searcher
from BI Norwegian Business School in Laguna Niguel, CA, USA
I agree with the comments, but would add that the amount is very dependent on the type of deal, size, complexity, how well you know the industry, funding, etc. One example, if you plan on bank financing, some lenders require a quality of earnings report, which can be expensive. Another example, if you don’t know the industry at all, you might have to hire a consultant to avoid pitfalls. I will also add that a tiered approach is a good way to be cost efficient. Spend time early on crossing key hurdles and identifying deal breakers with the seller before you spend money on legal, accounting etc. Once you know that a deal is likely to happen you can increase your spending, If you think it will fall apart, then pull the plug early. Repeated failed deals is the key driver of due diligence costs.
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