Keeping up with the paperwork

Before you seek out a qualified buyer, it’s important to make certain representations as to the financial status of your company 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?

business people at the table discussing transition planning

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.

“By going through the proper due diligence, you will save time and effort.”

The 10 main ones are:

  1. Tax history – the nature and frequency of reassessments
  2. Aggressive accounting – especially concerning overstatement of assets, or not recognizing all liabilities
  3. Obsolete inventory in need of a write down (prevalent in many businesses, and a big balance-sheet item)
  4. Non arms-length transactions (with relatives or the owner, who might not have taken salary, but rather a dividend)
  5. High discretionary expenses
  6. U.S. and other tax filing requirements that need to be fulfilled
  7. 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?
  8. Cutbacks in R&D in anticipation of sale
  9. Understated income as a result of private company discretionary spending (or at least the vendor’s representations that this was the case!)
  10. 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 merger and acquisition (M&A) process. When the company value is accurate and all parties are pleased, the purchase is more likely to go through successfully.

How we can help you

When we say our approach is holistic, we mean it. It’s centered around you. Not just your company; not only your legacy, you. We advise business owners and their families both personally and professionally. Our professionals, (from wealth management, valuations, taxation and estates, to various other service lines) work collaboratively to provide advice that makes the most sense for you and your objectives – because we know that your work affects your personal life, and vice versa – they are of equal importance. Through early, comprehensive planning, our professionals assess every situation and present options to help you make informed, strategic decisions to make the most out of your unique situation.

Read more articles on business succession planning: