The due diligence process is arguably the most important, but often under utilized step of the business deal. There are several types of due diligence – legal (your lawyer will do this part), operational (understanding the business processes, employees, etc.), financial and tax (these two are our specialty!).

Financial due diligence is completed using our robust and customized investigative methods – often, it goes much deeper than an audit and in some cases, may even uncover details that a financial statement audit did not. This process involves our team performing a comprehensive “deep dig” of the proposed business acquisition – identifying hidden risks and possible items that the seller neglected to disclose (intentionally or unknowingly). Often, these risks and concerns may cause the buyer to refine their offer, or in some cases the findings may be a dealbreaker, causing the deal to cease.

Tax due diligence involves similar approaches to those described above, but instead of focusing on the financial details, it encompasses all areas of tax (corporate, sales tax, source deductions). In addition, our tax specialists can perform various value added calculations, such as the quantification of the lost tax deductions (tax shield) when purchasing shares instead of assets.

As part of the due diligence process, we can also provide assistance with the calculation of Target Working Capital (the PEG), and closing working capital calculations.

While we often target our due diligence process to the “buy side” – meaning assisting the buyer of the business – our team can also assist you if you are planning to sell your business. Using the same techniques, we can provide you with some confidence that when you do sell, the purchaser will be less likely to uncover such items during its due diligence engagement.

A Quality of Earnings (“QOE”) Report is an independent, third-party analysis of the sustainability of earnings of the business, specifically focused on EBITDA. The goal of this additional due diligence piece is to provide confidence that the earnings as presented by the seller are of “high quality”. While subject to some judgement, this typically means earnings that are likely to continue in future years (after you become the owner of the business), and specifically exclude items such as one-time events, related party transactions, and non-business expenditures.

The QOE will provide valuable insight into historical operations and highlight areas of concern with respect to trends, unusual sales patterns, concentration risk, and economic dependence on one or more customers. Of course, while there is never a guarantee that current earnings will continue into the future, the QOE process provides comfort to a purchaser and may result in an additional leverage item to be able to renegotiate or refine the deal if potential concerns are identified that may decrease overall normalized EBITDA.

Potential lenders and equity partners are regularly seeking a QOE on potential business transactions in addition to standard financial and tax due diligence. Our professional report has been recognized by both major banks and private equity firms as being robust, comprehensive, and extremely valuable to the overall consideration of partnering with a purchaser.

Our Transaction Advisory team is experienced in providing step-by-step support for both vendors and purchasers as they navigate the business deal. We can provide tax advisory, including reorganization plans and business optimization strategies prior to the sale of your business. We can also assist with interpreting and advising on the Purchase and Sale Agreement. We will work with your team of external legal and other advisors to complete deals in a timely and cost effective manner.

If you are a current client of KMSS and are thinking of selling your business, your trusted advisor will work with you to develop a step-by-step plan to enable the process to run smoothly and most importantly, be able to maximize the value to you.

If you are looking to purchase a business, and require support from our Transaction Advisory team, please contact us. We understand small business and look forward to helping you as you complete your deal!