CBB CBB Transaction Management & Due Diligence 2 — Questions and Answers
Question 1: What is a 'data room' in the context of a business sale?
- A physical storage space for inventory
- A secure repository where confidential business documents are shared with vetted buyers (Correct answer)
- The broker's office where negotiations occur
- A server room for the business's IT equipment
Correct answer: A secure repository where confidential business documents are shared with vetted buyers
A data room—often virtual—provides qualified buyers controlled access to sensitive business documents during due diligence.
Question 2: Which of the following is an example of operational due diligence?
- Reviewing customer contracts and key supplier agreements (Correct answer)
- Checking the seller's personal credit score
- Verifying the broker's license status
- Reviewing the buyer's bank statements
Correct answer: Reviewing customer contracts and key supplier agreements
Operational due diligence examines contracts, supplier relationships, and business processes that drive ongoing revenue.
Question 3: What risk does a broker help mitigate by structuring an earnout provision?
- The risk that the seller will compete against the buyer
- The risk that future performance will not match historical results (Correct answer)
- The risk of the buyer defaulting on a bank loan
- The risk of regulatory non-compliance post-closing
Correct answer: The risk that future performance will not match historical results
An earnout ties a portion of the purchase price to future business performance, bridging valuation gaps based on projected results.
Question 4: A buyer discovers during due diligence that a key customer accounts for 60% of revenue. This is an example of what type of risk?
- Regulatory risk
- Customer concentration risk (Correct answer)
- Currency exchange risk
- Environmental risk
Correct answer: Customer concentration risk
Customer concentration risk arises when a disproportionate share of revenue depends on a single client, threatening stability if that client leaves.
Question 5: What is the role of a Quality of Earnings (QoE) report in a business transaction?
- To certify the business's products meet quality standards
- To independently verify and analyze the accuracy and sustainability of the seller's reported earnings (Correct answer)
- To benchmark the business's revenue against competitors
- To assess employee productivity and morale
Correct answer: To independently verify and analyze the accuracy and sustainability of the seller's reported earnings
A QoE report, prepared by a third-party accountant, validates that reported earnings are accurate and recurring rather than inflated.
Question 6: When should a business broker recommend the seller obtain a legal review of the purchase agreement?
- Only if the deal value exceeds $10 million
- Before the seller signs any binding agreement (Correct answer)
- After the closing has already occurred
- Only when a bank loan is involved
Correct answer: Before the seller signs any binding agreement
Sellers should always have an attorney review binding agreements before signing to protect their legal and financial interests.
CBB CBB Transaction Management & Due Diligence 2
What is a 'data room' in the context of a business sale?