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Home Podcast Everything Sellers Need to Know About Financial Due Diligence

Everything Sellers Need to Know About Financial Due Diligence

Everything Sellers Need to Know About Financial Due Diligence

Helana Robbins Huddleston

CPA | Financial Due Diligence

In this episode of M&A Talk, we discuss the intricacies of financial due diligence with award-winning CPA Helana Robbins Huddleston, a partner with CohnReznick Advisory with over 20 years of experience. We talk about ways sellers can prepare for a sale, the key areas investors look into when considering a business for investment or acquisition, how you can hasten the sales process, and much more. If you are thinking of selling or buying a business, join us to learn more about this critical area of preparation. 

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Guest Profile

Helana Robbins Huddleston is a partner with CohnReznick Advisory with over 20 years of expertise in financial due diligence, restructuring, auditing, and business process improvement. Helana leads buy-side and sell-side financial due diligence engagements with strategic and financial buyers for private and public companies with enterprise values ranging from $10 million to $500 million. Helana was recently honored by the business newspaper Crain’s Chicago Business as Notable Gen X Leader for the service she provides to her clients and community. Helana has also received the Emerging Leaders Award from M&A Advisor in 2018 and the Turnaround of the Year Award from the Turnaround Management Association in 2011.

Highlights

  • Financial due diligence can often be conducted in one week once the information is gathered together.
  • Not preparing for due diligence increases the time it takes to close the transaction and dramatically increases your legal fees – problems uncovered in due diligence will need to be addressed in the purchase agreement.
  • 95% of investment bankers require that the seller conduct pre-sale (sell-side) due diligence before they go to market.
  • Your CPA MUST have experience conducting M&A due diligence to help you prepare for the sale.
  • Buyers prefer to see financial statements on an accrual basis (aka GAAP compliant).
  • Many CPAs don’t want to conduct sell-side due diligence because they aren’t familiar with the process.
  • Conducting pre-sale financial due diligence often pays for itself.
  • Pre-sale financial due diligence is different from an audit.
  • An audit carries much more weight if it’s conducted by a reputable firm.
  • Ask for a redacted or sample quality of earnings report (Q of E report) before you pay for one.
  • A Q of E report can be used when marketing a company.
  • The key features of a data room are user-friendliness and updates when a new document has been added.
  • Most transactions are cash free, debt free, and include net working capital.
  • Even an audit will not uncover every problem – audits have a materiality threshold.
  • Financial due diligence is separate from tax due diligence.

Topics Covered

  • What does financial due diligence consist of? [3:15]
  • How long does financial due diligence take? [5:15]
  • What other information is needed beyond what is in the accounting file? [7:00]
  • What are the most common problems you discover in financial due diligence? [8:15]
  • How common is it to discover material issues during due diligence? [10:20]
  • How much can an overstatement of EBITDA affect the purchase price by? [12:45]
  • To what extent is it necessary to prepare for due diligence? [14:30]
  • How long does sell-side due diligence take? [17:05]
  • Who does the clean up work, if any is required? [18:15]
  • Can/should the seller’s CPA perform pre-sale (sell-side) due diligence? [20:10]
  • What does pre-sale (sell-side) due diligence cost? [24:55]
  • Do you recommend an audit? [29:30]
  • What’s the difference between an audit and financial due diligence? [28:25]
  • How much does an audit cost? [30:15]
  • What is a quality of earnings analysis/report? [32:15]
  • Does the buyer require a Q of E report? [33:00]
  • Is the Q of E report in a narrative format with explanatory information? [34:30]
  • How long is a Q of E report? [35:40]
  • Are you a fan of virtual data rooms (VDRs)? [36:45]
  • Who needs the Q of E report? [38:00]
  • How is net working capital calculated? [38:45]
  • Why is working capital included in the price? [40:30]
  • How do you calculate working capital? [42:20]
  • What are the other major issues related to financial due diligence? [44:50]
  • How commonly are issues discovered after the closing? [46:40]
  • Who quarterbacks the due diligence process? [49:40]
  • What experts are on the due diligence teams? [50:15]
  • What clauses in the purchase agreement relate to financial due diligence? [51:30]
  • How can the seller speed up due diligence? [55:35]

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