Due Diligence: Financial Management–Profits!

Performing a thorough due diligence on a potential acquisition is one of the most important tasks that a buyer needs to do when making a purchase decision. We’ve put together a list of items that buyers will want to investigate when talking to a seller.

This is part of a large series. Be sure to scan our Buyers Blog for the category Due Diligence.

Now we’re moving on into evaluating the Financial Management of your potential acquisition portion of your Due Diligence tasks. The purpose of this section is to discover historical and potential profits of the company.

Profitability

– Obtain annual financial statements for the last three years.

– Obtain monthly financial statements for the current year.

– Obtain copies of federal tax returns for the last three years.

– Determine profitability by service line, customer, and segment.

– What is direct materials expense as a percentage of revenue?

– How have revenues, costs, and profits been trending for the past three years?

– How many staff is directly traceable to the servicing of specific customer accounts?

– Are there any delayed expenses? Has the company avoided necessary maintenance expenditures or wage increases in order to boost profitability?

– Has the company capitalized a disproportionate amount of expenses?

– Obtain the budgets for the past three years. Does the company routinely achieve its budgets, or does it fall short?

– Obtain budget projections or business plans for the Business and the Company and review with Company officials to determine any material changes in the financial position of the Business and the Company and compare past budgets and projections with actual experience in order to assess the accuracy of management estimates.

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