Before you seek out a qualified buyer, it’s important to make certain representations as to the financial status of your company in order to justify the price you hope a buyer will pay.
This price must be derived from realistic information. But how can the purchaser really be sure? What’s involved in finding out? What can make the purchaser’s own due diligence assuredly diligent – and avoid a nasty dispute when the “real numbers” come to light?
By going through the proper due diligence, you will save time and effort - and ensure you close on a deal based on solid, accurate information.
In some ways the principles of due diligence are similar to an audit even though it’s decidedly a unique and separate engagement. There are tests, reviews of key information and recalculations, but they are, in general, confined to certain areas. The 10 main ones are:
- Tax history – the nature and frequency of reassessments
- Aggressive accounting - especially concerning overstatement of assets, or not recognizing all liabilities
- Obsolete inventory in need of a write down (prevalent in many businesses, and a big balance-sheet item)
- Non arms-length transactions (with relatives or the owner, who might not have taken salary, but rather a dividend)
- High discretionary expenses
- U.S. and other tax filing requirements that need to be fulfilled
- Identities of those on payroll and their clear function - and what would the financial position of the company look like, after adjustments, if family members need to be replaced?
- Cutbacks in R&D in anticipation of sale
- Understated income as a result of private company discretionary spending (or at least the vendor’s representations that this was the case!)
- Overstated income based on spending cuts before a sale which may impact the future profitability of the business
Accounting due diligence is a necessary part of any successful M&A process. When the company value is accurate and all parties are pleased, the purchase is more likely to go through successfully.
Stay tuned for new posts in our succession planning series every Thursday. Missed a post? Read on here:
Post 1: Planning for success[ion]
Post 2: There's selling and then there's everything else...
Post 3: Keeping it all in the family ...or branching out from the family tree
Post 4: When 'What If' Becomes 'What Now?'
Post 5: Should I stay or should I go?
Post 6: Beware of the tax man
Post 7: Freezing value = saving long-term
Post 8: What it's worth now, and how
Post 9: There's value and then there's worth
Post 10: Visualize, then plan
Post 11: The key is transparency
Post 12: Keeping up with the paperwork
Post 13: Consider all options
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About Richter : Founded in Montreal in 1926, Richter is a licensed public accounting firm that provides assurance, tax and wealth management services, as well as financial advisory services in the areas of organizational restructuring and insolvency, business valuation, corporate finance, litigation support, and forensic accounting. Our commitment to excellence, our in-depth understanding of financial issues and our practical problem-solving methods have positioned us as one of the most important independent accounting, organizational advisory and consulting firms in the country. Richter has offices in both Toronto and Montreal. Follow us on LinkedIn, Facebook, and Twitter.