Answers / Financial Due Diligence
What is the concept of 'leakage' in a locked-box transaction, and how would you identify and quantify potential leakage in the context of financial due diligence?
An advanced Financial Due Diligence question — expect it in final rounds and case-heavy interviews (IB, PE, Big-4 Transaction Services).
THE SHORT ANSWER
Leakage refers to the transfer of value from the target company to its shareholders or other parties prior to the transaction closing. I would identify potential leakage by reviewing the company's financial statements, including its balance sheet, income statement, and cash flow statement, as well as its accounting policies and estimates. I would also analyze the company's related-party transactions, its dividend payments, and its share repurchases to quantify potential leakage.
WHAT INTERVIEWERS LISTEN FOR
- ✓Leakage: transfer of value
- ✓Review financial statements
- ✓Analyze related-party transactions
COMMON MISTAKES
- ✗Unidentified leakage
- ✗Inadequate disclosure of related-party transactions
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