CBB Transaction Management & Due Diligence Flashcards

What is a 'data room' in the context of a business sale?

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.

Which of the following is an example of operational due diligence?

Answer: Reviewing customer contracts and key supplier agreements

Operational due diligence examines contracts, supplier relationships, and business processes that drive ongoing revenue.

What risk does a broker help mitigate by structuring an earnout provision?

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.

A buyer discovers during due diligence that a key customer accounts for 60% of revenue. This is an example of what type of risk?

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.

What is the role of a Quality of Earnings (QoE) report in a business transaction?

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.

When should a business broker recommend the seller obtain a legal review of the purchase agreement?

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.