Business Acquisition · M&A
The diligence findings that arrive too late
Most deals that disappoint were not missing a finding. The finding existed, arrived in week six, and by then the price was already anchored.
Post-mortems on disappointing acquisitions usually conclude that diligence missed something. In a fair number of cases, diligence didn’t miss it at all. The issue appeared in a workstream report, somewhere after page thirty, in week six of an eight-week process.
By then the price had been anchored for a month, the investment committee had seen a thesis, and the deal had its own momentum. The finding didn’t change the outcome because it arrived after the decisions it should have informed.
That’s a sequencing failure, not an analytical one — and it’s more fixable than it looks.
Deal-breakers first, confirmation later
Most processes run broadly and in parallel: financial, commercial, legal, tax, operational, all starting together and reporting together at the end.
It feels thorough. It means the findings that could stop the deal arrive at the same time as the findings that merely refine the model.
The alternative is to identify, at kick-off, the three or four things that would genuinely change your answer — and test those first, in week one, before anything else gets going. They’re usually specific:
- Is the revenue as concentrated as it looks, and are those contracts actually renewable?
- Does the reported margin survive normalisation for owner compensation and one-offs?
- Is working capital as seasonally stable as the summary suggests?
- Is the key person replaceable, and are they staying?
Answer those first and you either proceed with conviction or you stop having spent one week rather than eight.
Quality of earnings is a question about repeatability
Adjusted EBITDA is a negotiated number. Every adjustment is an argument that something won’t recur, and the seller has an incentive to classify generously.
The productive question for each one isn’t “is this adjustment permitted” but “will this cost genuinely not exist next year, under our ownership?” Several standard adjustments fail that test:
- Owner compensation adjusted to a market rate — but the owner was doing three jobs you’ll now need to hire for.
- One-off legal costs that have appeared in each of the last three years.
- Deferred maintenance presented as a cost saving rather than a liability accruing.
- Discontinued lines whose shared overhead stays with the business.
Customer concentration has a second layer
Everyone checks the top ten customers. Fewer check the structure underneath.
Is the relationship with the company or with a person who is leaving? Are those contracts coming up for renewal, and has anyone asked whether a change of ownership triggers a review clause? Are two of the top five owned by the same parent, making the real concentration higher than the list implies?
And the question that gets skipped most often: has anyone spoken to them? Reference calls with major customers are awkward to arrange and routinely more informative than any amount of revenue analysis.
Forecasts fail in recognisable ways
A seller’s forecast is an argument. It tends to fail in the same places:
The hockey stick with no mechanism. Growth accelerating from a flat base, with no named cause — no new capacity, no new market, no new product.
Margins expanding as revenue grows. Sometimes real. Often it’s the fixed-cost base quietly assumed to stay fixed through a doubling.
Working capital not growing with revenue. Growth consumes cash. A forecast where receivables and inventory don’t scale is a forecast that has not been modelled.
No downside case. If the only scenario is the plan, the plan hasn’t been tested.
The useful exercise is not building a better forecast. It’s identifying the two or three assumptions the valuation is most sensitive to, and asking what evidence exists for each.
Change the order, not the scope
Run the deal-breakers in week one. Report findings as they’re confirmed rather than at the end. And state in advance what a finding would have to look like to change the price or stop the deal.
That last commitment is the one that matters, because it’s made before anyone is attached to the outcome. The quality of a diligence process is decided less by what it examines than by when the answers arrive — and whether anyone said, in advance, what they’d do about them.
Riskova is a financial forecasting and due diligence platform for business acquisitions. More at riskova.com.