Understanding the numbers · Topic guide
Due diligence
Investigation that tests the purchase assumptions and identifies risks before a binding commitment.
Due diligence connects the investment story with evidence. Financial work examines the quality and sustainability of earnings and the balance sheet. Commercial work investigates customers, contracts and how the business earns money. Legal work examines ownership, obligations and the terms required to complete the transfer. These streams inform one another: a contract issue may change both expected revenue and financing capacity.
The collection describes checking monthly management accounts, bank statements and reconciliations rather than relying only on annual headline figures. It also records a target losing a major customer shortly before completion. That example is a trading event during the process, not proof that diligence itself discovered a hidden historic problem. The distinction matters because new information can arrive after earlier checks were satisfactory. Watch source Watch source
Maintain a list of assumptions, supporting documents, open questions and decision consequences. Update the evidence close to completion, especially where trading is changing. A material new fact may justify repricing or withdrawal; deliberately making an unrealistic opening offer with the intention of reducing it later is different. Some source comments minimize specialist review, but they do not demonstrate that environmental, legal or financial risks are immaterial. Scope the investigation around the actual business and unresolved exposure, rather than treating a simplified checklist as complete protection. Watch source
Follow the connections
Adjusted EBITDA · Customer concentration · Letter of intent.
Continue in the course: Diligencing the business.
See it in an example
- Hypothetical
When an addback doubles claimed earnings
Test the operating assumption behind a marketing adjustment before using it to value a business.
Numbers in context
- HVAC ownership/revenue · About 50% speaker; 25% Magnus; 5 other shareholders; combined £19m revenueMixed
HVAC sales and ownership are described across both a prospective acquisition and a later reported completion.
The two companies had no common holding company; some revenue statements omit currency and cannot establish a single dated cap table. Includes audio recovered with Whisper; amounts and wording have not been independently verified.
- West Africa loss · $5m hit; working capital described as negative $5mPersonal experience
Sey describes a major loss and working-capital problem in the West African businesses.
No identified transaction or detailed financing terms support the account.
- External financial DD fees · £10k, £15k, £20k, £25kMixed
External financial diligence is treated as a cash expense that can arise before completion.
Quoted fee examples are historical; one later case followed unreliable management accounts and a bank requirement. Includes audio recovered with Whisper; amounts and wording have not been independently verified.
- Financial review horizon · 12 months bank statements; monthly management accountsRule of thumb
The buyer is encouraged to compare bank movements with a history of monthly accounts.
Suggested review periods vary; document volume alone does not establish reliable earnings. Includes audio recovered with Whisper; amounts and wording have not been independently verified.
- Legal DD questionnaire completion · 50%–80% concretely answered out of hundreds of questionsRule of thumb
The speaker expects many legal diligence questions to receive incomplete responses.
A response percentage is not a legal test for whether diligence is adequate.
Sources & further viewing 2 videos
The explanations on this site are independent synthesis. Follow each original for full context. A reported experience is not independent proof of a transaction.
- Educational Three workstreams and actual checks
- Personal experience Customer concentration can erase all earnings
- Opinion Material DD changes versus intentional retrading