Due Diligence & Deal Structuring Flashcards

What is the primary purpose of due diligence in an investment banking transaction?

Answer: To verify and validate material facts about the target company before closing

Due diligence is conducted to verify material facts, identify risks, and validate information about the target so that the buyer or underwriter can make an informed decision.

Which type of due diligence focuses on examining a company's financial statements, accounting policies, and historical earnings quality?

Answer: Financial due diligence

Financial due diligence examines the target's historical financial statements, accounting practices, and earnings quality to confirm reported results are accurate and sustainable.

A 'quality of earnings' (QoE) analysis performed during due diligence primarily assesses:

Answer: Whether reported earnings reflect sustainable, recurring cash flows

A QoE analysis adjusts reported earnings to remove one-time items, non-recurring revenues, and accounting distortions, revealing the true recurring earnings power of the business.

In an M&A transaction, a 'virtual data room' (VDR) is primarily used to:

Answer: Provide a secure, controlled environment for sharing confidential due diligence documents

A VDR is a secure online repository where sellers share confidential company information with prospective buyers during the due diligence process, controlling access permissions.

Which document typically governs the due diligence process and outlines the terms under which confidential information will be shared with a potential acquirer?

Answer: Non-disclosure agreement (NDA)

An NDA (also called a confidentiality agreement) must be executed before sharing proprietary information, legally binding the recipient to protect the seller's confidential data.

Legal due diligence in an M&A transaction typically includes review of which of the following?

Answer: Pending litigation, regulatory compliance, and material contracts

Legal due diligence focuses on identifying legal exposures including pending lawsuits, regulatory issues, material contract terms, and intellectual property matters.

During due diligence, 'normalized EBITDA' adjustments are made primarily to:

Answer: Remove non-recurring items and owner-specific expenses to show sustainable operating earnings

Normalizing EBITDA removes one-time charges, non-recurring income, and above-market owner compensation to present a cleaner view of the business's ongoing earnings capacity.