Due diligence

Factual definition

Due diligence is the deep verification work before buying.

Organize Hanil’s five diligence workstreams

Fictional teaching case. Hanil Widget Works is an invented company used for this example.

A buyer running full diligence on Hanil Widget Works works five streams at once: financial, legal, commercial, operational and tax. Each one addresses questions the confidential information memorandum (CIM) did not answer.

The work often intensifies after the letter of intent (LOI), with its scope and timing shaped by access, the investment thesis and the transaction.

• financial
• legal
• commercial
• operational
• tax

How Shayne Fitz-Coy uses Due diligence

Charlie Munger called earnings before interest, taxes, depreciation and amortization (EBITDA) bullshit earnings, and his alarm went off whenever he saw it. I want yours to go off too.

When a seller calls a deal proprietary and you did not originate it, check. When you are handed reported earnings, calculate them again yourself.

Questions that test the thesis

In the teaching clip “Most deals are like JAGs,” Shayne tells students to use their investment thesis to decide which questions need answers. The questions should test whether the thesis holds up; running through every possible question on every deal wastes limited time.

Source: edited teaching clip “Most deals are like JAGs,” 00:35–00:44. The timestamp refers to the edited clip.

A quality-of-earnings review examines the sustainability of earnings; due diligence also investigates commercial, operational and legal questions that an earnings analysis cannot settle.

A hypothetical renewal test

Hypothetical: a buyer’s thesis says repeat orders will support dependable revenue. The seller’s forecast carries a large customer’s current orders into next year, although its contract expires three months after the expected closing.

The question is specific: what evidence supports purchases after that expiry date?

The buyer reviews the signed contract and 24 months of order history, then interviews the customer’s purchasing lead with the seller’s permission. In this example, earlier orders were steady, but recent orders are falling.

The contract has no minimum purchase commitment after expiry, no renewal is signed, and the customer says it will seek competing bids. The recent evidence weakens the assumption that orders will continue at their previous level.

The buyer now models lower orders and no renewal, then revises the revenue forecast and the price it can justify. If the bid works only with a renewal the evidence cannot support, the buyer pauses until that uncertainty is resolved.

Past repeat purchases alone do not settle the question.

This is an invented teaching case. The method is consistent with PwC’s descriptions of using customer research to challenge revenue forecasts and reviewing commercial commitments to inform deal economics.