What is a reasonable due diligence budget?

April 27, 2021

by a searcher from Anderson University in Canton, OH, USA

Would anyone be willing to share their budgetary numbers for due diligence? I'm curious what people are spending in real out of pocket expenses for legal fees, CPA's, etc. For reference, I'm looking at total deal size from $1 - $7 million Enterprise Value.

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Reply by an intermediary
from Indiana University at Bloomington in Carmel, IN, USA

In my experiences, on deal sizes of $1mm to $5mm, Due Diligence is usually not that difficult, complex or expensive. In my opinion, the buyer should be the one who does most if not all of the heavy lifting in the financial due diligence part, with proper guidance and oversite (some of which depends on your time and capability and if you have someone on your team who has done this several times to know where the skeletons are). It is your money that you are putting into buying the company and you need to understand the financials. If that part is comparing the bank deposit statements to invoices and comparing the internal statements to tax statements (as most QofA work that is done in these size deals), you can hire someone to assist, but it is more just time consuming and detailed. As far as legal, having an LOI where the business issues are negotiated, then the purchase agreement can be very straight forward. In working with my buy-side clients, we negotiate the LOI usually without any legal help and use straight forward purchase agreements and include the already defined business terms, then that can be reviewed by an attorney for under $3000 -$10,000. There are exceptions to this, complexity of the deal, trust of the seller, the quality of the accounting data and the other side's attorneys are the biggest ones. But usually the business owner, who has done many agreements in his lifetime, doesn't usually bring in an attorney until the Purchase Agreement is provided. Been doing this for over 15 years on buy side representation and have only had CPAs involved 3 times for a QofA.

Reply by a searcher
from University of Texas at Austin in Austin, TX, USA

Echo all of the comments above about variability. PreLOI I did sort of miniRFPs to triple bid some of my due diligence resources, to compare rates and services, and then negotiated those engagement letters. Saved myself a few thousand dollars. I'm about 50% of the way through due diligence on a $2MM deal for a trucking company. Here is where I'm at:

Insurance & Benefits Review: $0.00 As ^redacted‌ indicates, I got a ton of great advice and detail from insurance brokers at no cost.
Phase 1 / Environmental: $2,200
IT / Technology: They do not have a lot of tech, and my husband (who is a tech consultant) did the IT infrastructure review, and I paid an outside consultant for data security and a couple of other pieces, reviewed their dispatch software, etc., and it was $500.
OSHA / Safety /Industry Specific analysis: $1100
Attorney: Looking to be approx $10K, but there is some complexity with the leases and a contract for fuel.
CPA: Looking to be approx $4K --- but the company has an extremely meticulous bookkeeper, etc. This was an area that I had budgeted more.

All in - I'm looking at about $18K. Hope this data point is helpful for you.

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