In sell-side due diligence, a seller's financial statements can be accurate while its sales presentation remains misleading. Applying the disclosure standard means explaining how a major customer's departure changes what last year's revenue tells a prospective buyer.
Preparing buyer materials begins with assembling the business's records and investigating the claims made about it. Due diligence is that investigation. In sell-side diligence, you advise the business or owners seeking a sale and help prepare reliable information for potential buyers.
In a securities offering, the issuer is the entity issuing the securities. Its management supplies business information, attorneys address legal requirements, and accountants examine financial reporting within their assignments. You coordinate inquiries, investigate inconsistencies, and connect findings to the financials and transaction materials. Another professional's participation does not automatically complete your work.
An offering document describes the issuer, securities, terms, and risks so investors can evaluate a purchase. Reviewing the issuer's business supports those disclosures. In a business sale, similar investigative work supports buyer materials, although a sale presentation is not automatically a registered offering prospectus.
Common mistakes
- Treating a 4% revenue item as automatically immaterial. Reviewing its business significance may reveal dependence on a critical customer or license.
- Accepting management's $2 million earnings adjustment without support. Financial due diligence must establish the expense's nature and whether it is likely to recur.
- Treating 100 uploaded documents as completed diligence. Reviewing the index may still reveal missing amendments or financial periods.
Bottom line
- Offering documents must avoid material falsehoods and omissions needed to prevent misleading statements.
- Materiality depends on significance to a reasonable investor, without a universal percentage threshold.
- Business diligence includes financial review, management interviews, outside contacts, site visits, and review of business plans.
- Seller financial diligence supports buyer materials and does not itself constitute an audit.
Exam shortcut
Start with the claim the reader would believe. Locate the fact that changes its meaning, then select the response that investigates and corrects it. Match the problem to the next action: conflicting financials need reconciliation; unsupported forecasts need assumption checks; missing documents need follow-up; late developments need a bring-down. Circle timing words mentally. “Before effectiveness,” “before contracting,” and “before closing” can point to different information records.
The full lesson (about 3,829 words, 26 min read) adds 2 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- A11
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