My CPA reviewed the books. What else is there?
A quality of earnings report starts from the seller’s records. Bank and merchant statements start from the money.
Reconciling the two is where surprises live, and it is rarely anyone’s assigned job in a deal.
Your CPA is looking at the financial statements and tax returns. Your attorney is looking at the contracts and legal obligations. Both are essential. But there is another layer to the business: how money actually comes in, how it goes out, which financial relationships the company depends on, and what has to change when ownership changes.
I call it the money plumbing.
Reconcile reported revenue to the money coming in
Start with deposit composition.
Match twelve months of merchant funding and deposit activity to reported revenue by month. You’re not trying to recreate the entire accounting system from bank statements. You’re looking for whether the movement of money makes sense in relation to the business you’ve been presented.
Seasonality that does not appear in the deposits needs an explanation. So do deposits that materially exceed reported revenue.
Understand where revenue actually lands. Credit card sales may arrive through merchant-processing deposits. ACH payments may appear separately. Checks and cash may flow through another account. Some businesses have multiple operating accounts that accumulated over years for reasons nobody remembers.
None of those things automatically means there is a problem.
The point is to identify the things that don’t reconcile and get an explanation before you own them.
Look at chargebacks, returns and payment history
Revenue isn’t the only thing merchant activity can tell you.
Look at chargeback and return history, processing volumes and unusual changes in activity. Elevated chargebacks can create problems with the existing processor and make replacement processing more difficult.
For a business that depends heavily on card payments, processing isn’t just another vendor relationship. The ability to accept payments is part of the operating infrastructure.
The same applies to ACH.
Frequent ACH returns, unauthorized transactions or unusual payment activity can tell you something about the operation that won’t necessarily be obvious from the income statement.
That’s an operating risk, not an accounting one.
Understand the banking relationships the business depends on
A business can have far more tied to its bank than a checking account.
There may be a line of credit supporting working capital, equipment financing, corporate cards, remote deposit, ACH origination, wire services, lockbox arrangements, positive pay, and other treasury services supporting everyday operations.
You need to understand what those relationships are and which ones will still exist after the transaction.
Don’t assume the seller’s banking setup simply becomes yours at closing.
Determine what requires a new account, new underwriting, new agreements, new user access or an entirely new relationship. If the business depends on a particular credit facility or payment capability, the replacement needs to be addressed before it becomes a Day One problem.
Know what happens to the debt
Understand the financing arrangements associated with the business and make sure they agree with your understanding of the transaction.
Identify loans, lines of credit and equipment financing connected to the company. Understand which obligations are expected to be paid off, retained, or replaced as part of the transaction.
If the seller expects to be released from a personal guarantee, determine how that fits into the payoff or refinancing process.
Also understand whether a change in ownership affects an existing financing relationship.
These are areas where your attorney and lender should address the actual contractual and legal implications. My job in a banking diligence review is to identify the financial relationships and issues that need to be put in front of them.
Check ACH exposure and payment controls
Then look at how money leaves the company.
Who can initiate an ACH file? Who approves it? Can the same person create and release a payment? Are there transaction limits? Is positive pay being used for checks? Are ACH debit blocks or filters in place?
A company can be profitable and still have terrible payment controls.
If the target sends payroll and vendor ACH files from an inadequately protected account with one person controlling the process, that risk becomes yours after closing.
Buying the company means inheriting its operating practices along with its customers and equipment.
You want to know about those weaknesses while you still have time to fix them.
Build the Day One banking plan before closing
Diligence should not end with a list of problems.
Before closing, you should know where the operating accounts will be, how customer payments will be received, where merchant proceeds will settle, how payroll and vendors will be paid, what treasury services need to be established, and who will have authority over the accounts.
If financing is changing, that needs to be coordinated as well.
The goal is simple: the money should continue moving on Day One.
A buyer who waits until after closing to figure this out can own a perfectly good business and still spend the first few weeks fighting avoidable banking and payment problems.
Banking diligence fills a gap in the deal team
The CPA reads the books. The attorney reads the contracts.
Someone should also read the money plumbing.
A Banking Due Diligence review looks at the banking and payment activity behind the business: deposit and merchant activity, financing relationships, payment systems, ACH exposure, controls, and the financial infrastructure that has to work after closing.
It doesn’t replace legal, accounting or tax diligence. It looks at a different part of the business and identifies questions or risks that should be resolved before the transaction closes.