By Charles Ladas, EisnerAmper
Whether on the buy-side or sell-side, due diligence can uncover issues that affect valuation, deal structure, and the decision to move forward. While every transaction is different, three hidden risks often deserve closer attention before a deal reaches the finish line.
What Due Diligence Should Reveal:
Low Quality of Earnings
Strong revenue and net income do not always mean reliable cash flow. A company may record significant revenue and accounts receivable but struggle to collect those receivables on time. A quality of earnings analysis helps determine whether earnings are sustainable, cash-backed, and representative of ongoing performance, rather than inflated by timing or one-time activity.
Key Person Risk
Another common issue is overreliance on one owner, executive, or employee. A transferable business should continue operating with limited disruption after a sale. Due diligence should assess whether customer relationships, operational knowledge, decision-making authority, processes, and responsibilities are documented and transferable.
Tax Risk
Aggressive or unsupported tax positions can create problems after closing. Income tax, sales tax, payroll tax, and other compliance issues may expose buyers to unexpected liabilities. Reviewing filings, supporting documentation, nexus considerations, and open audits can help identify exposure before it becomes a post-close issue.
Why a Disciplined Review Matters
These are not the only risks due diligence should uncover, but they highlight why a disciplined review matters. Buyers need a clear view of earnings quality, operational continuity, and tax exposure before committing capital. Sellers benefit by addressing these issues early and presenting a stronger, more defensible business to the market.
Need due diligence support? EisnerAmper helps buyers and sellers identify key deal risks, strengthen transaction readiness, and move forward with confidence.
