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Financial Due Diligence: Starting the Journey to Close

You have thought long and hard about it, worked with members of the ownership team or had a heart to heart with a loved one and have decided to sell your business.  There is a level of excitement that comes with that decision but sometimes some fear around the process and what it will take to get the deal closed.  You have received a letter of intent from a potential buyer and it is time to prepare for due diligence.

Under the due diligence umbrella, there are a number of areas that are focused on – legal, financial, tax, operational, IT, technology, human resources, and commercial – just to name a few.  One of the more crucial aspects is financial due diligence, as it provides the buyer detailed insight into your business from a historical and future projections standpoint.

The Start

The due diligence process typically begins with a list of requests which are expected to be provided.  Providing timely data can ensure that the timelines outlined in the letter of intent can be met.  Preparation of the detailed financial information files once a decision has been made to sell the business will greatly assist in a smooth diligence process.  What can be prepared ahead of time?

The time period of financial information typically requested tends to be the previous three fiscal years and the year to date information. Once the monthly or quarterly Income statements and balance sheets are provided, requests for schedules—especially relating to customer revenues and costs—are submitted which are expected to agree to the published balances.

Each balance sheet account typically includes a number of requests of schedules and supporting documentation to prove the accuracy of the balance throughout the period. Trying to prepare these schedules just prior to the due diligence process can be very time consuming and will distract management from the day-to-day operations of the business.

Once all of the requests have been prepared, they are then stored on an electronic drive known as a virtual data room (VDR), which can be setup by the buyer or seller, but most sellers like to manage their own VDR for more control.

On-Site Visit and Meetings with Management

Once the data has been provided, the buyers due diligence team will schedule a in person visit, which may be at your office or offsite. These meetings with management are often full-day meetings and may span a number of days to cover all of the questions and clarifications needed.

Typically, meeting agendas could include:

  • Overview of the business operations
  • Introduction to certain key members of management
  • Discussion regarding customer base, types of agreements, fluctuations of revenue by customer, revenue recognition, attrition of customers, concentration of customers
  • Discussions around the competitive landscape and recent wins/losses
  • A walkthrough of the entire trial balance, which includes questions on fluctuations of the balances on certain accounts, breakdown of items within accounts, and justification for the accounting method used. Through this process, the due diligence team is attempting to identify any unusual or non-recurring items, as well as any transactions that may not have been recorded or occurred but are expected to be incurred in future periods.
  • Understanding any trends in pricing or future expectations for pricing
  • Determining whether all liabilities have been properly recorded
  • Understanding headcount and related payroll expenses and other benefits that employees may currently receive which they would expect to continue to receive, as well as employee contracts that may include acquisition related bonuses

The on-site process can be difficult for a company as the due diligence team usually requires the attention of the more senior or experienced employees – the ones that are often also integral to keeping the company’s operations running. Preparing these individuals is critical to ensuring the process is as efficient as possible. Furthermore, if the management team is able to answer all the due diligence team’s questions thoroughly and clearly, they will avoid multiple follow-up questions.

Almost Closed

When the due diligence team leaves your facility, the expectation is that they will review all of the information provided in detail and communicate any additional inquiries. This will help in finalizing the purchase price and other key terms in the purchase agreement.

Being properly prepared for the financial due diligence process is critical to the completion of a successful acquisition.


Ateet Patel
Portfolio CFO
Volaris Group