Buy-side Due Diligence

Overview

Buy-side due diligence is an independent financial review commissioned by an acquirer or investor before it commits to a transaction. Its purpose is to test whether the numbers that underpin the price and the investment case are reliable, and to surface anything that should change the price, the structure or the protections in the purchase agreement.

A seller's headline EBITDA, balance sheet and forecast are only a starting point. We examine how profit and cash are actually generated, which items are one-off or unsustainable, and which obligations sit outside reported borrowings, so that you negotiate with a clear and evidenced view of the target.

What the service covers

We scope each engagement around your investment thesis and the risks that matter most for the target. A typical review covers:

• Historical trading: revenue, gross margin, cost base and EBITDA by period, product, customer and entity.
• Quality of earnings: the adjustments needed to move from reported to sustainable earnings.
• Net working capital: seasonality, the normal level needed to run the business and the quality of receivables, inventory and payables.
• Net debt and debt-like items: borrowings, leases, deferred consideration, accrued liabilities and other claims on value.
• Cash flow: conversion of earnings to cash, capital expenditure and funding requirements.
• Forecasts and the business plan: the financial logic, the assumptions and how they compare with trading to date.
• Accounting policies, reporting quality and the finance function, including consistency with the policies your group applies.
• Transaction-specific matters such as change-of-control effects, related-party arrangements and management cost allocations.

Key activities and deliverables

Key activities

• Agree scope, materiality and timetable with your deal team, and issue a tailored information request.
• Review financial statements, management accounts, general ledger extracts and supporting contracts, and reconcile them to each other.
• Hold management sessions to understand trading, one-off items, accounting judgements and the forecast.
• Build the earnings, working capital, net debt and cash flow analysis, and test each adjustment against evidence.
• Report significant findings to your team as they emerge, so they can be used in negotiation while the process is live.
• Provide input on the purchase agreement, including price adjustment mechanisms and definitions.

Deliverables

• A red-flag summary of the key issues, where a rapid read-out is needed.
• A full due diligence report with an executive summary, an EBITDA bridge, working capital and net debt analysis and a view on the forecast.
• A supporting databook of reconciled financial data.
• Recommendations on price, structure and purchase agreement protections arising from the findings.

Our approach and methodology

We work from the question the buyer needs answered rather than from a fixed checklist. Scope follows the deal thesis, the value drivers and the areas where the information is weakest, so effort is concentrated where it can affect the decision.

Every number in our analysis is traced back to the accounting records and reconciled to the financial statements. We challenge management adjustments rather than adopting them, we separate what is evidenced from what is asserted, and we communicate material findings early. Where an issue falls outside financial diligence, such as tax, legal or commercial matters, we flag it so your other advisers can pick it up.

Benefits for clients

• A price based on sustainable earnings and cash generation, not on the seller's presentation.
• Early sight of risks that can be used to adjust price, structure or conditions.
• Clear definitions of debt, debt-like items and working capital to carry into the purchase agreement.
• A reliable financial baseline for the integration plan and the first budget under your ownership.
• Support for investment committee papers and for lender discussions.

Who needs this service

Buy-side due diligence is relevant whenever you are about to commit capital to a business, including:

• Private equity and venture investors considering an acquisition or a significant minority stake.
• Corporate acquirers and their finance teams.
• Family offices and investment holding companies.
• Management teams undertaking a buy-out.
• Lenders and financing partners who need to understand the target's earnings and cash flow.

Scope and limitations

Our work is advisory. It is not an audit or a review under auditing standards and does not provide assurance on the financial information. We rely on the information and explanations management provides, and we state the basis of preparation and any limitations in our report.