Budget for Due Diligence
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Better to spend on DD than to enter transactions that pose significant risks/have negative returns/complete mismatch in cultures. I would say to spend at least 6 months worth of salaries for full Due Diligence processes at least.
I agree with the above comment from Rong. Approx 1-5% of the transaction value is a reasonable amount.
This is an excellent question. Our company is small and has acquired some other smaller companies in the last few years. We are now strongly and carefully combing through the financials which should have been done long ago, more thoroughly in the due diligence process. The budget aspect is something I am sure was never thought of. Thanks for posting.
Hi Joshua, very interesting question, I think you would have to look at your own M&A strategy. The lower the spend on the DD theoretically could equate to missed opportunities to fully understand the target organisation. Your budgets and resource provisions could depend on questions such as, will the target company be a long term investment, will it be “flipped” soon after purchase, is there a requirement for external companies to carry out your DD or is it carried out in house? Is there a Vender DD being carried out, to what detail will the buyer DD be? The risks have to be evaluated and fully understood.
I agree with the above comment from Rong. However, it can increase depending upon the complexity of Transaction and flow of information.
The Due Diligence fees depending upon the complexity of Transaction and flow of information. Generally, it is around 2-6% of deal amount.
It depends on how wide is the engaged scope of due diligence (financial, tax, legal, commercial) and it normally varies between 1% – 10% of the transaction value.
Due diligence is not a linear process, there may be unexpected issues, delays, or requests that will affect the cost. It’s prudent to factor in flexibility in the budget and monitor and update the cost estimate as the deal progresses.
It’s obvious that the cost of due diligence depends on the scope. In my experience, transaction costs typically range between 1% and 5%, with the size and complexity of the transaction being determining factors. I would budget costs based on and tailored to the risk appetite of the acquiring company.
If I may add on – I believe the type of due diligence matters too. Most transactions that I worked on the entire focus was on the FDD. The clients were willing to pay top dollar for those transactions, but assumed that the others were not worth it. As a % of transaction value, around 5% was the norm that I have noticed.
It also depends on whether the buyer is strategic or financial (i.e. Private Equity). PE firms tend to have pretty standardized % that they will pay for diligence. Depending on the type, size & sophistication of the strategic buyer and the type of investment thesis they are trying to prove out…they may be willing to pay a higher %.
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