Plausibility Check of Seller Information

The Importance of Critical Review in Business Acquisitions

In a business acquisition, buyers face the challenge of accurately assessing the information provided by the seller. Careful plausibility checks of seller disclosures are among the most crucial steps in the acquisition process and can determine the success or failure of the transaction. Studies show that up to 40% of all business acquisitions do not deliver the expected results—often due to insufficient verification of seller information prior to purchase. While sellers naturally tend to present their company in the best possible light, buyers must adopt an objective and critical perspective. Systematic review of the submitted information not only helps identify unrealistic value promises but also uncovers hidden risks and supports the development of well-founded negotiation positions. The plausibility check is not an isolated step but an integral part of Due Diligence, forming the foundation for business valuation and ultimately the purchase decision.

Basic Analysis of Financial Metrics

Review of Historical Financial Data

A critical analysis of historical financial data is the starting point of every plausibility check. As a buyer, you should request at least the financial statements from the past three to five years and examine them systematically. Pay particular attention to unusual fluctuations or patterns in revenue, costs, and margins. For example, a sudden increase in gross margins shortly before the sale could indicate temporary cost reductions or accounting tricks. Compare data from various sources—do the figures from financial statements, controlling reports, and tax returns align? Extraordinary items and one-time effects that may distort regular business results deserve special attention. These should be adjusted for a realistic assessment of sustainable earnings power. Also, check the consistency of accounting and valuation methods over the years, as changes can significantly impact reported financial performance. An experienced auditor’s Financial Due Diligence can provide valuable insights here and uncover overlooked risks.

Analysis of Revenue Quality

Looking at revenue figures alone is insufficient—the quality of these revenues is decisive. Examine the customer structure: How diversified is the customer base? Is there a risky dependency on a few major clients? Experts consider it a warning sign if more than 20% of revenue comes from a single customer. Also analyze the stability and sustainability of customer relationships: How long have these existed? Are there long-term contracts or regular renewals? When reviewing revenue development, industry-specific trends should be considered—does the company grow faster or slower than the market? Exercise particular caution with unusually high growth rates shortly before the sale or significant deviations between actual and planned figures in the past. Analyzing cancellation rates, customer complaints, and losses can provide further clues about actual revenue quality. The geographic distribution of revenues and dependency on certain product lines or services should also be included in the assessment. All these factors significantly influence financial metrics such as EBITDA margin and revenue growth, which often serve as the basis for business valuation.

Review of Cost Structure

A realistic assessment of the cost structure is crucial for evaluating future profitability. Verify whether all relevant costs have been recorded and correctly categorized. Certain costs, such as executive salaries, private withdrawals, or family employees in family businesses, are often not recorded at market rates, artificially improving earnings. Analyze the development of cost blocks over time—sudden cost reductions without identifiable operational changes should be scrutinized critically. Comparing with industry benchmarks can also provide valuable insights: If certain cost ratios are significantly below the industry average, this may indicate hidden problems or artificial optimizations. Deferred investments and maintenance measures deserve special attention, as they may improve short-term results but cause substantial additional costs in the long term. This aspect is particularly relevant for specialized craft businesses or mechanical engineering companies. Hidden liabilities or off-balance-sheet obligations such as pension commitments, lease contracts, or litigation risks should also be identified and quantified. Systematic review of the cost structure helps achieve a more realistic estimate of sustainable EBITDA and thus avoid common valuation errors.

Validation of Seller Information in Practice

Comparison with External Market Data

Matching seller information with external market data and industry benchmarks is an effective tool for plausibility checks. Use industry reports, market analyses, and economic databases to position the company within its competitive environment. Particularly insightful is the comparison of growth rates and profitability metrics with direct competitors or industry averages. If the target company deviates significantly from these benchmarks, the causes should be thoroughly analyzed. Examining market shares and their development over time can also be revealing—exaggerated claims about market share or unrealistic growth forecasts are typical warning signs. Also, ensure consistency with general economic indicators and industry cycles—if the company grows significantly even during periods of economic stagnation, the reasons should be critically questioned. A thorough Commercial Due Diligence can provide valuable insights here. When assessing the market environment, regulatory changes, technological developments, and substitution risks should also be considered, as these may not be adequately reflected in the seller’s information.

Verification of Customer Relationships

The quality and stability of customer relationships are central value drivers that require particularly careful validation. Review top customers not only based on the provided data but try to contact them directly during due diligence to inquire about their satisfaction, loyalty, and future intentions. Pay special attention to personal customer relationships that may be at risk after the previous owner’s departure—especially relevant when acquiring consulting firms or other service providers with close personal client ties. Analyses of customer history and development can provide important clues about customer stability: How many new customers have been gained or lost in recent years? What were the reasons for customer losses? Customer concentration analysis is also important—a high dependency on a few major clients poses a significant risk that should be reflected in the valuation. For long-term customer contracts, review durations, termination notice periods, and possible change-of-control clauses that could become relevant in an acquisition. In some industries, analyzing tender successes or conversion rates can provide important insights into the company’s actual competitiveness.

Review of Operational Performance

Evaluating operational performance goes beyond pure financial figures and focuses on the company’s actual substance. Analyze capacity utilization and productivity—is apparently good performance achieved at the cost of chronic overload or quality declines? For manufacturing companies, the condition and modernity of machinery as well as upcoming replacement investments should be examined. Special care is required when valuing fixed assets, as significant future costs may be lurking here. The IT infrastructure and its modernization needs should not be underestimated—especially for IT companies or technology-intensive business models. Process and workflow analysis can reveal efficiency problems or optimization potential. Equally important is reviewing personnel structure and qualifications: Are sufficiently qualified employees available? Are there critical dependencies on key personnel? What is the age structure, turnover, and length of service? The assessment of operational performance should also include non-financial factors such as innovation capability, brand image, or corporate culture, which can significantly contribute to long-term success.

Thorough Examination of Critical Areas

Evaluation of Revenue and Earnings Forecasts

Future forecasts provided by the seller require particularly critical review, as they often have the greatest impact on business valuation. Compare forecasts with historical development—are the projected growth rates and margin improvements plausible in light of the company’s history? Also analyze the accuracy of previous forecasts—were planned figures regularly met or systematically missed? A particularly important point is analyzing the underlying assumptions: Are they transparent, comprehensible, and supported by concrete measures or market developments? Check for consistency between different forecast areas—do revenue growth, personnel needs, and investment planning align? Be especially skeptical of so-called hockey-stick forecasts, which predict a steep increase after years of moderate growth. The inclusion of market trends and competitive developments in forecasts should also be critically questioned. Developing your own independent scenarios (best case, base case, worst case) can help gain a more realistic assessment of future development and better capture forecast uncertainty. This is especially important when applying the DCF method, where the capitalization rate and WACC should reflect forecast risks.

Identification of Hidden Risks

Uncovering hidden or underestimated risks is one of the most important aspects of plausibility checks. Within the framework of Legal Due Diligence, legal risks such as ongoing or impending litigation, warranty claims, or regulatory issues should be identified. Special attention should also be paid to tax risks—a thorough Tax Due Diligence can prevent unpleasant surprises from tax back payments or risks after the acquisition. Reviewing contracts for change-of-control clauses or extraordinary termination rights is also essential, as these can significantly affect the company’s value post-acquisition. Other important risk areas include protection of IP and trademark rights, compliance risks, environmental risks, and dependencies on key personnel or technologies. The vulnerability of the business model to disruptive changes, technological developments, or new competitors should also be critically assessed. Systematic recording and evaluation of all risks in a structured risk catalog can help quantify their potential impact on company value and incorporate them into purchase negotiations or secure them through appropriate guarantees and warranties.

Review of Assets

A thorough valuation of tangible and intangible assets is a central part of the plausibility check. For tangible assets such as land, buildings, and equipment, valuation approaches and depreciation should be critically examined. Have assets possibly been depreciated for too long, resulting in costly replacement investments? Ideally, fixed asset valuation should be validated by independent appraisers, especially for high-value items. Inventories and receivables also deserve special attention—are these actually valuable, or are write-downs due to obsolescence or payment defaults imminent? For intangible assets such as patents, licenses, and trademarks, reviewing the legal situation (ownership, protection rights, durations) and actual economic usability is crucial. The valuation of intangible assets is often complex and should be supported by experts. Especially when acquiring software companies or e-commerce companies, intangible assets often represent the most important assets. The quality and sustainability of the customer base and customer relationships should also be critically examined, as these often constitute a significant part of the company’s value. The overall asset valuation forms the basis for the asset-based valuation method and can serve as an important complement to earnings-oriented valuation methods.

Professional Approaches to Plausibility Checks

Use of Specialized Consultants and Experts

The complexity of a comprehensive plausibility check often requires specialized expertise beyond the buyer’s capabilities. Involving experienced M&A advisors can professionalize the entire process and help avoid typical pitfalls. Auditors are indispensable for thorough analysis of financial data and can uncover hidden risks in the balance sheet and profit and loss statement. Tax advisors assist in identifying tax risks and recognizing tax optimization potentials post-acquisition. For the valuation of specific assets such as real estate, machinery, or patents, expert appraisers are needed to assess actual value and condition. In the IT sector, a technical due diligence by specialists can provide important insights into IT infrastructure condition, technical debt, or security risks. Industry experts can better assess market position and the future viability of the business model and identify industry trends. The involvement of external consultants should be planned and coordinated early to avoid redundancies and ensure a unified approach. Despite the costs of external expertise, this investment usually pays off through well-founded insights and a stronger negotiation position—or in extreme cases, prevents a costly mispurchase.

Systematic Due Diligence Processes

A structured and systematic due diligence is the most effective tool for plausibility checks of seller information. Instead of isolated reviews of individual aspects, a holistic approach covering all relevant areas should be pursued: finance, taxes, law, operations, IT, personnel, market, and environment. Creating a comprehensive due diligence checklist helps ensure no important aspects are overlooked and structures the process systematically. Clear responsibilities, timelines, and escalation paths should be defined. The due diligence process should also be iterative—new findings may open additional areas for review, which can then be examined in depth. Modern tools such as data room analyses, benchmarking software, or specialized due diligence platforms can make the process more efficient and improve result quality. Systematic documentation of all findings is essential to incorporate them later in negotiations or contract drafting. Coordination between different review areas is particularly important to identify cross-connections and contradictions. The results of due diligence should ultimately be consolidated into a structured summary presenting key findings, identified risks, and their potential impact on company value. This summary forms the basis for further decision-making and negotiation strategy.

Use of Digital Tools and Data Analysis

Digital transformation has also revolutionized plausibility checks in business acquisitions. Modern data analytics tools enable the analysis of large data volumes and can uncover patterns, inconsistencies, or anomalies that might be overlooked in manual reviews. Process mining can help visualize actual business processes and compare them with documented workflows. Intelligent document analysis tools can search large volumes of contracts and other documents to identify critical clauses or risks. Specialized due diligence software supports project management, documentation, and collaboration within the review team. The role of AI in the M&A market is steadily growing, offering new possibilities for more efficient and thorough plausibility checks. Analysis of unstructured data such as emails, social media activity, or customer feedback can also provide valuable insights into actual market position and customer perception. However, when using digital tools, it is important to view them as a complement—not a substitute—for human judgment. Interpreting results and placing them in the overall context still requires the expertise of experienced consultants and decision-makers. The combination of digital analytics tools and human expertise forms the foundation for a modern, efficient, and thorough plausibility check.

From Review to Negotiation Strategy

Insights gained from plausibility checks should directly inform the negotiation strategy. Identified risks or inflated assumptions can be used as arguments for purchase price adjustments. For particularly critical areas, guarantees, warranties, or purchase price withholdings can be employed to mitigate risk. An alternative may be earn-out arrangements, where parts of the purchase price depend on actual future performance. This can be especially useful when there are significant valuation differences between buyer and seller. Plausibility checks also provide important insights for later integration and potential optimization opportunities post-acquisition. Based on the review results, a detailed post-merger integration plan should be developed that considers identified opportunities and risks. When dealing with differing price expectations in business transactions, it is important to transparently and comprehensibly present your own valuation assumptions. A solid understanding of seller information and its plausibility strengthens the negotiation position and helps achieve a fair purchase price that reflects the company’s actual risks and potential.