Answers / Financial Due Diligence
How do you handle a company with significant related-party transactions?
A core Financial Due Diligence interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
Identify all related-party transactions (revenue, costs, financing). Assess whether pricing is at arm's length by comparing to market rates. Adjust for differences: above-market revenue = negative adjustment; below-market rent = negative adjustment (cost will increase post-deal). Quantify the impact on adjusted EBITDA. Flag for the client: will these transactions continue post-deal? If not, what's the pro forma impact?
WHAT INTERVIEWERS LISTEN FOR
- ✓Identify all related-party transactions
- ✓Assess arm's length pricing
- ✓Quantify impact on adjusted EBITDA
- ✓Flag continuation post-deal
COMMON MISTAKES
- ✗Ignore related-party transactions
- ✗Assume all transactions are fair
- ✗Fail to quantify adjustments
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