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Avoiding Pitfalls in Financial Due Diligence When Selling a Business

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About the Episode

In an M&A transaction, there are deficiencies in the financials 98% of the time. As the seller, the key to preventing problems that can kill your deal is performing sell-side financial due diligence. What is sell-side due diligence, and what is a quality of earnings report? That’s the subject of my recent conversation with Bill Wiersema, an Audit Principal with Miller Cooper specializing in M&A financial due diligence. Bill is the author of four books and a frequent speaker on M&A topics.

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In this Episode

4:00 What is sell-side due diligence?
8:05 When is sell-side due diligence performed?
12:40 Why should the CPA firm performing due diligence be independent?
14:10 Do most CPA firms perform a Q of E analysis?
17:00 The COVID adjustment
22:00 How important is speed in due diligence?
25:15 What is the purpose of due diligence?
26:40 What’s the difference between preliminary and confirmatory due diligence?
28:40 What’s the difference between an audit and a quality of earnings (Q of E) report?
32:50 Do you recommend both an audit and a Q of E analysis?
35:15 How long is the Q of E report good for?
36:10 Is it possible to sweep problems under the rug?
42:15 As the seller, should you let your CPA know in advance that you plan on selling?
42:25 Is there a standard Q of E report?
44:35 Is it likely your CPA will get offended if you hire a third party to perform a Q of E analysis?
46:25 What’s the difference between a compilation and a review?
48:45 How much does a Q of E report cost?
52:20 Can you perform a two-stage Q of E analysis?
53:40 What are the most common problems you encounter when performing a Q of E analysis?
54:15 What problems do you commonly see in the revenue line?
57:15 How is working capital treated in an M&A transaction?
1:01:00 Is payroll included as a short-term liability in working capital?
1:02:20 How is accounts receivable treated for a seasonal business?
1:03:45 How is inventory treated?
1:05:30 How objective is the calculation of working capital?
1:09:00 How objective is the working capital true-up?
1:10:15 What are the most common issues you see in calculating EBITDA?

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Highlights

  • There are deficiencies in the financial statements 98% of the time, according to Bill.
  • Sell-side due diligence (i.e., sellers perform due diligence on themselves) has become the norm in the last five years. Prior to that, sellers did not perform due diligence on themselves, leading to a lot of broken deals.
  • If you overstate inventory at the end of a period, that reduces cost of goods sold, which artificially increases earnings.
  • Buyers don’t want to waste their time trying to understand the financial statements. If the financials aren’t clear and understandable, they will oftentime pass on the deal and move on.
  • As a seller, it’s usually too late once significant issues have been raised because you’ve now lost credibility.
  • Preparing a quality of earnings (Q of E) report is a specialty that requires significant experience.
  • There is no standard quality of earnings (Q of E) report. The cost varies depending on what’s included.
  • Legal due diligence is usually performed last (after financial and operational due diligence).
  • For a seller, a Q of E report is much more helpful than an audit.

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Resources Mentioned in This Episode

Meet Our Guest

Bill Wiersema

Bill Wiersema

Audit Principal, specializing in M&A financial due diligence | Chicago, Illinois

Bill Wiersema is an Audit Principal with Miller, Cooper & Co., specializing in M&A financial due diligence, and author of several books on finance. His experience has a global reach as he has assisted international entities with their locations in Asia, Europe, and Latin America. His clients include middle-market companies, private equity groups, and financial institutions. Bill has extensive experience in assisting sellers across diverse industries in preparing for sale, conducting due diligence, creating business plans and projections, assisting in negotiations with financial institutions, and advising clients on post-acquisition financial issues.

Bill is a frequent speaker, presenter, and contributor for various organizations and publications, including the Alliance of M&A Advisors (AM&AA) and the Chicago Bar Association. He is a graduate of Economics from Northwestern University, and before joining Miller, Cooper, Co., he was a Graduate Fellow in Accounting at the University of Illinois. Bill serves on the Midwest Chapter Committee of the AM&AA. He is a member and has served on the Board of Directors of the Association for Corporate Growth (ACG) and the Midwest Business Brokers and Intermediaries. He is a member of the AICPA and the ICPAS.

LinkedIn LinkedIn: https://www.linkedin.com/in/billwiersema/

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