Due diligence when buying a business
Stephen Clifton – 30-May-2019
Let’s work through a timeline…
So you are considering buying a business.
You have resolved that: you’re right for it … and is it right for you.
Let’s work through a timeline… So you are considering buying a business. You have resolved that: you’re right for it … and is it right for you.
You fully understand what you’re potentially getting into and you will have made your decision based on information from many sources… These sources will have included some offer documentation from the seller of the business.
They would be making certain statements to you in order to justify their sale price. Included in this offer documentation there would be detailed income and expenditure statements with various “add backs” This information has assisted in determining what value to place on the business.
Now you’ve made an offer at a value that you can afford and can provide you with a good ‘rate of return” on your investment. That rate of return extends to annual profits and potential growth in value.
Your offer will include a series of conditions of purchase, one of which is “subject to due diligence”
And the offer is accepted… great!
So now it’s time for the “due diligence review”.
The “due diligence review” is a process that you go through in determining, that the business is really as it seems and therefore that it is truly worth what you have offered to buy it for.
An accountants due diligence considers whether the financial and related information originally provided by the seller supports the valuation and the offer made.
At this stage, we access more information from the seller to determine that the records do not conflict with the data already provided. This information includes, but is not limited to:
- data file eg myob or quickbooks
- a summary of the processes undertaken in the business, from marketing and selling, to receiving sales orders, producing the goods or services,
- invoicing and finally receipt of the income
- bank statements
- summary of major clients or contracts
- who are the major suppliers and assess continued support
- who are the key employees and consider employment contracts
- security of the property lease
Having access to the sellers other information, allows you to consider non-financial information that also may impact on the assets and profitability of the business. This can extend to legal issues, marketing, people, operations and production and management.
Typically we will reconstruct the data to reflect the cash flow of the business and the requirements for working capital. For example, a business making $1m profit per annum which requires working capital of $500,000 is worth less than the same business that has the need for only $250,000 working capital. This is because you will need to somehow fund that additional cash requirement. While this can be done at the valuation stage, it should be confirmed at due diligence stage.
At nca we are committed to assisting you in every one of the steps in this journey. Through the due diligence phase we spend time with you explaining considering all aspects of our due diligence and provide you with a detailed analysis.It provides a secondary benefit in getting a better understanding of the business you are acquiring.