Deal Diligence Interview Prep
This conversation was generated using Cook'd AI's career assistant and reviewed by Fallon Han from our editorial team for accuracy.
I want an interview that starts with a transaction scenario and then drills into diligence priorities. Please keep it realistic for a third-year finance student recruiting for transaction advisory at a Big 4 firm in Amsterdam, and make the case focus on a sell-side process.
Great. Here is the scenario: a Dutch mid-market software company is being sold by a private equity owner. Revenue is growing, but management says margins improved after a recent pricing change and a restructuring of sales commissions. The buyer wants a fast process and a clean vendor pack.
I would start by asking: what are the first diligence priorities you would focus on in a sell-side process, and why? Think in terms of quality of earnings, working capital, and any red flags that could affect deal certainty.
I would begin with quality of earnings to see if the EBITDA is normalized and sustainable. Then I would check working capital trends to make sure the business can run at a normal level after closing. I would also look for red flags like revenue recognition issues, one-off margin boosts, or aggressive adjustments in the vendor pack.
Good structure. Now go deeper on QoE. If management says margins improved because of a pricing increase and lower commissions, what specific tests or questions would you run to verify that this is real and repeatable rather than temporary?
Also, what would you want to see in the bridge from reported EBITDA to adjusted EBITDA?
I would test whether the pricing increase has actually flowed through across customer cohorts and whether volumes held up after the change. For commissions, I would ask if the lower cost is due to a one-time reset or a lasting policy change, and whether sales productivity has fallen.
In the EBITDA bridge, I would check that add-backs are limited, clearly documented, and non-recurring. I would be cautious about owner expenses, restructuring costs, and run-rate savings that are not yet fully realized.
Strong answer. Let's move to working capital. In a sell-side process, buyers often focus on a normalized working capital peg. How would you assess whether the current level of working capital is representative, and what patterns would make you suspicious?
Please answer as if you are speaking to a Big 4 manager in Amsterdam.
I would review monthly working capital by component over at least 12 months and compare it with revenue growth and seasonality. I would normalize for exceptional items like tax payments or delayed supplier invoices. I would also examine DSO, DPO, and inventory days to see whether the business is stretching payables or collecting more slowly.
I would be suspicious if receivables spike near closing, if payables are unusually high, or if there is a sudden buildup in accrued liabilities that may reverse after the deal.
Good. Last question: the buyer's diligence team flags a few issues in the data room. One is a high concentration of revenue from three customers. Another is a pending tax audit. A third is that management has changed accounting policies twice in two years.
Which of these is the most serious red flag in a sell-side process, and how would you explain the implications for deal execution and valuation?