Budget for Due Diligence
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Along with budgeting for due diligence, it’s essential to allocate resources for addressing risks identified during the process. Rather than walking away from a deal due to risks, we should focus on understanding their impact and exploring mitigation strategies, as this ensures informed decision-making and preserves the potential value of the acquisition.
It may range from 1% to 5% of the transaction value. In some cases the complexity the transaction, the continuity of DD task , the business environment where we are ( competitors price), and number of DD task at hand may vary the budget for DD we charge/ the buyer company willing to pay.
With the responses here from 1% to 10%. Are there general brackets to go by to separate in ranges?
Agree that DD cost would typically be about 1-5% of transaction value. But question is, would you normally include the DD spend in your valuation, which would then either affect your returns or the price you can offer to the seller? The amount of DD to be done depends on how prudent the buyer is. Does that mean a more prudent buyer would always be less competitive and end up not securing the transaction? How would you strike a balance?
Define the scope based on the size, industry, and complexity of the target company, then benchmark costs based on deal size. Also, estimate internal vs. external costs and look for opportunities to leverage internal expertise.
It should be factored given the scope of work, urgency of delivery and not the size of the transaction. Of course, bigger quantums would generally reflect bigger complexities but there must be a limit to where a % on the transaction amount is capped. I have also seen where the fees are subject to the quantified benefit actually materialised.
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