Financial diligence (commonly referred to as a “Quality of Earnings” or “QoE”) is a comprehensive assessment of an investment target’s financial position and historical cash flows aimed at distilling the core value drivers of the business (i.e., customer diversity, opportunity for margin expansion, etc.) as well as identifying key deal issues and/or “deal breakers.” Analysis within this area will focus on the run-rate earnings of the business by normalizing one-time, non-recurring, out-of-period, and non-operational items. Further, the analysis will shed light on the company’s historical and go-forward working capital considerations as well as identify any known and potentially unknown contingent liabilities and commitments.
Operational diligence is an assessment of a company’s operational infrastructure including identification of purported cost structures, value-creation opportunities and improvements, and the viability of forecasted synergies. Operational diligence provides insight into the how and why a Company does things, what the core operational value drivers are, and how they can differentiate themselves post-close.
Legal diligence comprises an assessment of a company’s legal structure including review of entity formation documents, material contracts and lease agreements, bank financing arrangements, etc. Legal diligence will help a prospective buyer understand if there are any glaring risks / key considerations that would curtail current business operations post-close.