Insight
News: The Growing Importance of Sell Side Due Diligence
Insight: The Growing Importance of Sell Side Due Diligence
July 17, 2023

There is growing importance for sell side due diligence, and a Quality of Earnings (QofE) analysis is a vital component of financial due diligence in M&A transactions. It evaluates a company's profitability, measured by its Earnings Before Interest, Taxes, Depreciation, and Amortization expense (EBITDA), while taking into account any non-recurring revenues or expense items. M&A deals are usually valued as a multiple of adjusted EBITDA, making it a crucial metric.Besides profitability, a QofE analysis also examines the amount of net working capital required to operate the business without additional capital after the deal's closing. Transactions are often executed on a "cash-free/debt-free" basis, where the seller retains all unrestricted cash on the balance sheet and repays all outstanding debts at the close. The purchase price is adjusted based on the difference between the net working capital target and the actual net working capital delivered at close.Given the importance of adjusted EBITDA and net working capital target in M&A deals, the QofE is a critical element of the diligence process. While it has been customary for buyers to engage QofE teams for decades, sellers have recently embraced the practice of hiring their own team before taking the transaction to market. This whitepaper highlights nine reasons why sellers should engage their own QofE team, and the growing importance of sell side due diligence.

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