Financial Due Diligence Guidelines

October 08, 2024

by a searcher from University of Virginia-Darden - Darden School of Business in Charlottesville, VA, USA

Here are my takeaways about financial due diligence as a former traditional searcher and current self-funded searcher who conducted several financial due diligence processes:

Financial reviews should vary according to deal size, industry type, and nature of revenue/financials. I see this in three ways:
Level 1: Deals under $500k EBITDA: Agreed Upon Scope of Procedures with CPA or advisor (cost up to $10k), recommended for self-funded searchers looking at small deals
Level 2: Deals from $500k-2M EBITDA: Quality of Earnings "Light" by professionalized accounting firm or individual CPA (cost $10-20k), recommended for self-funded searchers
Level 3: Deals over $2M EBITDA: full Quality of Earnings by professionalized accounting firm (cost starts around $35k), recommended for self-funded searchers looking at larger deals, and recommended for all traditional searchers

For deals that are outside the norm (extremely messy/complex financials, government regulations, or other), level up.

What did I miss?

What type of financial review did you conduct prior to your acquisition? Is there anything you missed, or how would you change your experience for the better? Comment your recommendations for accountants and professionals who conduct financial reviews for self-funded deals. Cheers!

Reply by a searcher
from Massachusetts Institute of Technology in Mountain View, CA, USA

Thank you, Megan! I do have a question, though. Given the costs you've outlined, I wonder how self-funded searchers, especially those working with tight budgets, can manage more than a few thorough due diligence processes. It seems challenging to balance the need for comprehensive financial review with the reality of limited resources. Additionally, how do you personally manage the risk of falling into the sunk cost fallacy? For example, after spending on one or two due diligence processes, do you find it hard to avoid the mindset of, "I've already invested a large portion of my budget, so this deal needs to work out"? I’d love to hear more about strategies for managing these concerns, especially from others who have faced similar situations.

Reply by a searcher
from Brigham Young University in Lehi, UT, USA

Super helpful for self-funded searchers.

I recently read about SMB Diligence, a platform that connects business buyers with vetted diligence providers. They offer Quality of Earnings reviews starting at $6K, along with other tailored financial assessments. Could be a valuable resource for anyone navigating this process!

https://smbdiligence.com

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