For those doing their own financial due diligence

This is a reminder to spend time in the Target’s general ledger. A company can have a proof of cash (PoC) that works and “clean” financial statements, however, you won’t truly know what’s flowing through their accounts until you dig through their GL. This is commonly where issues and EBITDA adjustments are found. Real life example from a recent deal: While working on the vendor analysis, I saw vendor name that matched an employee listed on the Target’s website. He had weekly payments flowing through the Company’s COGS materials account. After asking the Target about this, we found out he’s been paid under the table as he’s not legally able to work in the US. This raises a few issues: potential legal, payroll tax EBITDA adjustment, a possible market rate wage adjustment as they were found to be paid less than the W2 employees, and possible back pay payroll tax liability/penalties for the new owner (depending on deal structure). This is the kind of thing a PoC won’t catch. Happy to talk through a GL review approach with anyone going the self-DD route.