Due diligence

Due diligence is where a buyer verifies what it has been told. Financial diligence tests the quality of earnings, whether reported EBITDA is real and repeatable. Commercial diligence tests the market and the company's position in it. Legal, tax, environmental and IT diligence each cover their own risk.

Its practical output is not a report but a negotiating position. Findings become price chips, specific indemnities, conditions to completion, or in the worst case a reason to walk.

Quality of earnings work is where most value moves. Stripping out one off items, correcting cut off errors and identifying costs the target has been running through the wrong line can move an EBITDA figure by several percent, and every turn of the multiple magnifies it.

In European auctions much of this is pre empted by vendor due diligence, where the seller commissions reliance ready reports so every bidder works from the same base and the timetable stays tight.