If you’re looking to buy or acquire a business, chances are you know about due diligence. Or at least have heard it is a good idea. But there lies the challenge – how do you know that you have done enough to feel confident that a business you are buying is a good investment or will provide you the earning potential you think it will?
Cash Flow Sanity Check
Recently, I was a guest panelist for Club Entrepreneurship (Club E) in Minneapolis discussing best practices in mergers, acquisitions (M+A) and business valuation. Business valuation is always a topic that we are asked about, and a lot of CPAs, lawyers, bankers and business brokers have access to this kind of expertise. However, relying solely on the valuation as your financial due diligence is risky and often leaves out the most critical part your future business acquisition success: people.
Most business valuations for small to middle market businesses involve multiples of cash flow or EBITDA. Selecting a business broker or advisor who knows your industry well can add greater knowledge and uncover hidden value. But remember, a business valuation is not just the real estate, inventory and financial statement numbers. You need the people who work in the business to make a business work. There are many intangible considerations that an experienced team can help you understand beyond cash flow.
Consider These Questions as a Starting Point:
(Note: This is not a complete list. Consult your M+A advisor to create a custom, complete list for your unique situation)
- Accounts receivable / revenue backlog analysis
- Fixed assets / inspection of facilities to determine if the equipment or location is in good working condition. Is there dust on the inventory or machinery?
- Is there enough working capital?
- Are there personal and operating expenses mixed together?
- Are there liabilities and debt that will transfer to you after the sale?
How Much Due Diligence Is Right?
As with every deal or situation I’ve been involved in for financial due diligence – nothing is typical. Every buyer and seller situation has unique factors to consider. It is important to work with an experienced M+A advisor who can give you guidance on exactly what you need and work efficiently towards your end goal. Working with an inexperienced M+A advisor will save you money upfront in professional fees, but you are paying for their on-the-job training.
Business owners I’ve talked to who learned the hard way say “it will cost you in other ways, such as adding time to close the deal, which adds fees for everyone involved. It also can add cost in what you end up paying for the business through missed tax reduction opportunities.”
Based on my experience, here are rough recommendations for accounting and valuation services (by purchase price) that provide cost-effective financial due diligence:
Reviewed Financial Statements + Valuation
Audited Financial Statements + Valuation
Due Diligence and Business Buying Support
Clients we have worked with (on both sides) agree, our experience brings value and promotes a better understanding of the complex technical information involved in mergers, acquisitions and valuation. Our team of accounting and tax advisors can help buyers determine the most cost-effective financial due diligence support to ensure the numbers are indeed what they appear from an objective and independent point-of-view.
- Agreed upon procedures
- Business transaction tax structuring
- Business valuation and consulting
- Buy / sell agreement review
- Cash flow projections
- Financial statement audit or review
- Individual tax planning for shareholders
- M+A consulting and ongoing support
- Review of working capital
- And more…