Whilst there are many aspects to consider when buying a business, one of the most important in any acquisition is accounting due diligence, also known as financial due diligence.
When considering a business takeover, it is essential to be fully aware of all the components that make up the company before making a final agreement with the seller on things like cost and terms and conditions. Failure to thoroughly investigate and a lack of attention to detail could leave you significantly out of pocket.
A comprehensive study of a company’s finances will enable you to make an informed decision about how to proceed with the purchase based on a full overview of its past, present and forecasted financial state.
What Is Accounting Due Diligence?
The definition of due diligence is;
‘A comprehensive appraisal of a business undertaken by a prospective buyer, especially to establish its assets and liabilities and evaluate its commercial potential.’
When you relate that to accounting…
Due diligence requires a professional review of the historical, present and forecasted financial information and the actual physical assets of the business you are looking to gain.
This will give you a detailed picture of its performance so you can assess if the acquisition is in your best interest.
What Does It Include?
Accounting due diligence during the process of an acquisition looks at every aspect of a business’s finances and will highlight any monetary or commercial risks involved for you, the buyer.
Your appointed accountant or acquisitions expert will examine all the business’s financial information, including (but not limited to);
- Revenues – income from sales, services, rent, etc.
- Expenses – outgoings for payroll, rent, bank fees/interest, utilities, insurances, etc.
- Cash Flow – a measurement of income and outgoings during a set time.
- Taxes – UK business taxes include corporation tax, income tax, capital gains tax, etc.
- Forecasting – predicting how the business may perform based on past/current data.
- They will also look at changes to policies, providers, how the statements are audited and what bookkeeping software is being used to give you complete peace of mind that things are being done as they should be. If not, the audit will highlight any gaps/changes that might need to be made – the impact and costs of which can be considered in the negotiation.
What Is It For?
Detailed analysis of all the points mentioned above will determine whether the company complies with tax rules and accounting principles and whether what the seller is presenting is the truth when it comes to turnover, profit and cashflow.
Did you know that around 45% of mergers and acquisitions fail because of issues uncovered during financial, legal and commercial due diligence checks?
It just goes to show how important it is to ensure you’ve taken the time and appointed the right people to perform an in-depth review of the business you are planning to buy.
Accounting due diligence gives you, the buyer, a thorough understanding of the business’s financial health. And it will show if the acquisition is a great investment or highlight a bad deal.
What If Something Is Uncovered?
After thoroughly examining the company’s finances, you’ll have a clear overview of what’s working well and what isn’t.
Certain things may be easy to fix, and if your appointed specialist identifies any risks, you might be able to use the issues raised to negotiate a more appropriate ‘deal’. Potentially saving you money on the purchase price and/or more agreeable terms of sale.
If the financial risks uncovered are too great, the due diligence performed gives you the heads-up required to pull out of the purchase completely, avoiding the possibility of financial loss, personal stress and business failure.
Are You In The Process Of An Acquisition?
Clive Margetts has over 20 years of successful acquisition management experience. He knows exactly what to look out for to get you the best possible deal or identify if you should walk away.
Clive believes in providing his clients with guidance they can trust, and will always give you unbiased, honest and transparent advice. To speak with Clive at a time that suits you, click here to arrange a callback.