Looking at buying a company? Due diligence can be very time consuming and involve expensive consultants. Doing some high level vetting of the target on the front end can save you both time and money. Here are some good tips that will save you valuable resources before you get too deep into the buying process.
1) RECALCULATE EBITDA
Obtain a copy of the company’s financials. Review and ensure you understand the components of EBITDA (outside the standard definition) and how it is being calculated. For example, the seller may be excluding an “other one time” expense, but you believe it should be included in the calculation. This could be a deal breaker and a major topic of discussion before proceeding.
2) ASSESS REASONABLENESS OF MANAGEMENT ADDBACKS
If the company is using adjusted EBITDA make sure you understand the nature and validity of it. For instance, adding back 100% of the owner’s salary would be inappropriate if your intention is to replace that position.
3) REVIEW THE BALANCE SHEET
Look for unusual items that may impact the income statement that are “hung up” on the balance sheet. Perhaps the company is capitalizing internal costs, which impacts the true cash flow position. This greatly influences EBITDA.
It’s worth engaging the help of an accounting firm to help you vet the target. Many times issues can be rectified or deals can be killed, saving valuable time and money, before you get too entrenched in the buying process.