Business acquisition is a highly important decision that needs careful evaluation of the key issues that include the purchase price, the implications of the proposed structure, and the financial, taxation and commercial aspects of the prospective business venture. A business buyer’s due diligence hence takes the form of careful examination and analysis of information available and information gathered from physical inspections of the business.
Before acquiring a business, it is vital to investigate and make sure that the objectives of what you are looking to buy are met and that you are not overpaying. This is also important to avoid making a mistake because if you end up making a bad investment, you will lose money.
This process of investigating a business is called Due Diligence and is the most important step before you commit to buy a business. You could generally insert a clause in your heads of agreement or contract of sale stating. “Sale subject to a satisfactory accountant’s due diligence.”
Due diligence can be carried out in different ways. You can physically inspect a business and note down your observation in a more intrusive approach and/or an experienced accountant can look at the financials and make some informed decisions. We encourage both methods to be used simultaneously however if you are satisfied with one of these, given the kind of business you are investigating, then we are more than happy to take such an approach too.
Due diligence includes financial and legal due diligence. An experienced accountant can carry out the financial due diligence for you, whilst a lawyer can help carry out the legal legwork.
Usually, due diligence is carried out after the buyer and the seller have agreed to the sale under some terms, but prior to the contract being signed. Its purpose is to assess the business’s financial value and growth potential via an in-depth investigation of business records, supporting evidence and detailed information. This can provide the bargaining power to the buyer who would then be armed with the information acquired to determine whether the business is as profitable as the seller claims it to be.
Here at A One Accountants, we have vastly experienced accountants in varied fields like accounting, audit and taxation and we can provide you the much-needed input and professional advice.
Our job is to read the story that the numbers are telling us and then convey this information to you. The due diligence process, makes it possible to verify if the business’ financial status and forecast are aligned with what the seller has indicated in the business sales prospectus and other documentation provided. The report can thus be used to understand the cash flow and to estimate the revenue that will be generated from the business activity.
The information analysed includes financial statements, such as Income Statements, Balance Sheets, Profit & Loss Statements, Stock/Inventory, Assets, Liabilities, Equity, contracts & agreements, Cash Flow and others.
The scope of the process depends greatly on the professional experience of the accountant. We follow a carefully drafted checklist for documentation required and relevant information prior to starting out/carrying out the due diligence.
After analysing the information available, many aspects will be probed with careful detailed analysis with an intention to arrive at the possible causes that could have led to specific circumstances. For example, a decline in profit over the last few years could be originated from poor management, increase in supply costs and resignation of a key manager or due to loss of a specific large client.
It is always buyer’s beware with purchase of a business and hence an expert opinion can go a long way in determining if it is going to suit your needs or not.
Here at A One Accountants, we have a team of professional accountants experienced in performing small business due diligence. If you are in the process of acquiring a business, do not hesitate in hiring professional help, you can not only save thousands on the purchase costs but can also estimate how much you would be able to make from the business in the future. Some banks require a due diligence carried out prior to purchase and an accountant’s sign off, and this important compliance aspect can be ticked off too off your new business buying checklist.