Gruber Co

Please refer to Chapter 29 of our notes for a sense of what due diligence assignments are about. Exactly what the service will be will depend on what the client has asked for. A client might be asking “what should we be paying for this acquisition” (i.e. requesting a valuation) but it is more likely that they will want assurance about the information on which they are basing their negotiations of a price (at the end of the day – as each transaction is unique – the price is what is negotiated between the parties and has nothing to do with any one specific valuation, since there are so many possible bases). So, for example, what contingencies there might be that are not obviously apparent.

As it says in the answer “If McClane were to value the shares …” (and speculating further that that valuation should be the consideration of the transaction) … the price paid (which would be cost of investment in the parent’s FS and part of the goodwill calculation in the consolidated FS) would be “self-reviewed” during the audit. If not the purchase price itself, the firm might be coming up with some of the fair values of the net assets acquired – or indeed the recognition of intangible assets acquired. Because the firm has already done work as due diligence, it may overlook then the need to objectively audit goodwill, fair values etc.