The importance of doing your own due diligence

  • Companies trying to sell are incentivized to show better numbers
  • According to Drs. Douglas Cumming and Simona Zambelli, funds doing internal due diligence perform better

Seller’s unrealistic projection – a real example

The seller projected a triple in EBITDA for a good company with solid cash flows, whereas

  • The company has a stable EBITDA for the last 10 years
  • No big CapEx expense
  • No big acquisitions

The seller justified this triple in EBITDA to triple the price by saying

  • The company’s existing customers would buy more
  • The company would get a lot of new customers using existing strategies

As expected, the next-year EBITDA turned out to be very similar to the previous year

You need to understand everything about the company when buying it, e.g.

  • The industry
  • The sales, such customer concentration
  • The income statement
  • The accuracy of the historical numbers

Interview as many people as possible

  • Consultants
  • Industry professionals
  • Customers

Free Resource

Private Equity Due Diligence Checklist: 10 Questions Family Offices Should Ask

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