By the time due diligence starts, the deal has momentum. Teams have worked for months, the board has seen the strategic case and the seller expects a signature. The risk is that diligence becomes a confirmation exercise: thousands of documents reviewed, few conclusions that change the deal.
Start from the value thesis
Every price rests on a few assumptions: the sustainable level of earnings, the cash the business needs to operate, the liabilities that come with it and the synergies the buyer expects. Good diligence turns each of those assumptions into a question and assigns it to the workstream that can answer it.
In this example, the largest finding is in the quality of earnings: one-off gains and capitalised costs inflate EBITDA, and at the agreed multiple every unit of EBITDA removed is worth eight units of price. Normalised working capital and debt-like items come next. Six findings, each modest on its own, add up to 135 million, about 12% of the offer.
Four ways to act on a finding
- Adjust the price when the issue is certain and measurable, such as an earnings adjustment.
- Protect with the contract when it is uncertain: warranties, indemnities, escrow or insurance.
- Share the risk when the two sides disagree about the future: an earn-out or a deferred payment.
- Walk away when the finding breaks the thesis itself, for example a key customer that will not stay.
The output of diligence is not a report; it is a decision. A short memo to the board that lists the findings that change the price, the protections negotiated and the residual risks accepted is the best evidence that the company bought with its eyes open.
Bartor S.
Founder
