Litigation + Valuation Perspectives

Demystifying Valuation, Economic Damages + Forensic Accounting

I want to buy a small company, should I get a due diligence (quality of earnings) report?

Close up crop of handsMany M&A transactions occur for a purchase price of under $1 million and the question is, should buyers of companies with a purchase price of under $1.0 million get a quality of earnings report?

The answer to this question is ‘it depends’. My yardstick for buyers is: are you sleeping well at night?  If issues related to the transaction are racing through your head while you are trying to sleep, I recommend you speak with a professional concerning a due diligence report.

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Typical issues we address in our reports for small transactions are quality of revenue, quality of earnings, and quality of working capital.  These are three important aspects of a small deal that can assist in smoothing the transaction process, or maybe stopping the process. It is far too easy for a buyer to get caught-up in the excitement of a possible transaction and overlook some red flags. Our process begins with interviewing the buyer to understand the transaction and then developing a scope of work that provides the buyer with some comfort around the transaction.

The typical cost for a small due diligence report is approximately $5,000 and depends on the facts and circumstances of the engagement. Additionally, we have found that a delay in collecting documents from the seller, in most cases, increases the cost of our work.

Most contracts state that the due diligence period is between 30 and 45 days, which is difficult for providers to achieve because of their current backlog of work. Another factor that makes it difficult is the collection of documents. Therefore, we recommend agreeing to a longer due diligence period starting after the receipt of all requested documents.

I hope this information is useful for those going through a small transaction. For more information on how Henry+Horne can help with your Business Valuation, check out our Services page. Feel free to contact us with any questions.

Michael R. Metzler, Director, CPA, ABV, CMA, CGMA, ASA