Due Diligence Priorities/Timeline
June 28, 2022
by a searcher from The University of North Carolina at Chapel Hill - Kenan-Flagler Business School in Indianapolis, IN, USA
Does anyone have feedback on best practices for a self-funded searcher trying to be cost effective with their due diligence process? I have more than enough checklists of due diligence items, but what I'm trying to refine is the method in which I implement outside (and costly) partners like lawyers and CPAs.
General flow in my mind:
1. Do initial financial and legal due diligence myself through modeling on financial statements and internet research of public records. Identify any major red flags myself. (probably within 1 week of DD beginning)
2. Calls with seller regarding operational questions and review key items I've requested (customer list, sales records, etc) (probably within 1 week of DD beginning). Do an on-site visit with seller.
Sticking point - do you pay a lawyer to begin legal DD on your behalf before you pay a CPA to do a QoE/PoC? If no major red flags are raised through your own DD efforts, is it better to pay a CPA and lawyer congruently, or would doing one and then other be better? I know timeliness is a consideration here--I'm planning against a###-###-#### day DD period. I'm trying to avoid paying a CPA and lawyer at the same time to only have one identify a huge issue and be out of pocket for both.
I know being overly cheap with your DD process is not a good idea, but there has to be a good methodology out there.
Appreciate any feedback.
from Bentley College in Miami, FL, USA
Let me share with you a client review that we received this morning that I think may resonate with you...
"Hey Roman - Bob's part concluded last week. He's on standby in case anything comes up with the underwriting process with the lenders. Bob was great to work with and delivered exactly what I needed. Thanks to his work, I was able to shave nearly 20% off the asking price, and it might even go lower. More importantly, he focused on what mattered versus any other superfluous bells and whistles - I cannot emphasize how important this is for an acquisition newb like me. At the end of the day, I have historical P&Ls that are accurate, and a key understanding of the areas that I need to dig deeper into during this acquisition process. All without a 45+ page report. :) 10/10 I'd work with Bob again. Thanks to you for recommending him - I really appreciate it."
from University of California, Berkeley in Seattle Metropolitan Area, WA, USA
Targets with cleaner financials and operations are likely the ones that command a higher multiple for which you may end with 'less' early engagements with outside advisors but more deep analysis to uncover anything that wasn't as evident. You need to set your threshold/criteria (with discussion with what those advisors would typically look for) for you to get to the point of bringing them in.
What are the things you need to see in order in diligence to get to those next steps? You mentioned an on-site, which, if local, may not be a big deal except matching schedules. But if you're going regional/national, maybe those trips end up as more costly than initial diligence. Prioritize and niche down your targets, that may clear up some likely hurdles. Remember that the thing that doesn't end up as a line item in dollars is time, and that'll likely end up as the largest expense through the course of your search in general.
Good luck with the search!