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Due Diligence - Part 1 of 4 U.S. Treasury Circular 230 Disclosure: If any tax advice is contained in this communication or attachments, it is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding tax related penalties under federal, state or local law, or (2) promoting, marketing, or recommending to another party any matters addressed herein.
This information is designed to be accurate and authoritative.However, this information is distributed with the understanding that it does not render legal, accounting, or other professional advice, and no liability is assumed in connection with its use.
February 8, 2011
Many business owners operate their business with the goal, either express or implied, of selling it someday.Every owner should always consider what information a potential buyer would request during due diligence.If the information is easily accessible and in the appropriate format, it will expedite the entire process and bolster the business’ value.
While every buyer has a unique way of conducting due diligence, over the next few weeks I will discuss the 20 most likely items that a buyer will request when analyzing a business.This week I will be highlighting the first five items that may be requested. 1. Financial Statements - Most buyers will request the business’ financial statements for the past three to five fiscal years along with the year-to-date financial statements for the current fiscal year. If your business’ financial statements are more comprehensive, with footnote disclosures, it will expedite the sale process.
A business owner who is contemplating a future sale should always consider improving the level of the business’ financial statements. If the financial statements are compilations consider upgrading to a review or audit and if the financial statements are a review, consider an audit.In many cases the additional cost of the more comprehensive financial statements will be more than offset at the time that the business is sold.
Moreover, the business should also prepare, typically in-house, year-to-date comparative financial statements that report the results for all periods ending within 45 days or less from the date that the information is being provided.
Analyze all trends, patterns, metrics, and benchmarks in the business. Consider how these items affect the business- either positively or negatively.Consider how a potential buyer may react and what your response will be. 2. Tax Returns -In addition to financial statements, the business’ tax returns for the past five years will also provide valuable insight into the business’ operations, performance, and results. If the business uses different accounting methods for their tax returns and financial statements, the reconciliation on schedules M-1 and M-2 of the tax returns will be helpful to the buyer. Determine if there are any explanations that should be submitted that supplement these schedules. Consider if there are any additional state or local tax returns that should be filed.
3. Organizational chart - Continually update the business’ organizational chart and prepare a spreadsheet listing the names, job title and functions, compensation, and tenure of the business’ key employees. This schedule should also list the equity ownership of the individual executives and managers.
4. Business plans and projections -All business plans and projections, outlining the goals for the current and upcoming year as well as the methods to achieve these goals should be continually updated. The plans should be achievable, realistic, and easily understood. If the business has its historical plans and projections available they should be provided to the potential acquirer and can be helpful especially if a pattern of achieving the goals can be demonstrated. If the past goals have not been achieved, it is important to discuss the reasons for this.
5. Marketing materials -updated marketing materials can clearly explain what the business offers and can provide insight into its current and potential market. Frequently, different individuals with diverse backgrounds will be participating in the due diligence process. The marketing materials may provide a non-technical person with a succinct explanation of the business.
Parts 2 through 4 of this article will discuss fifteen additional items that are usually on a potential buyer’s due diligence checklist.
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U.S. Treasury Circular 230 Disclosure: If any tax advice is contained in this communication or attachments, it is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding tax related penalties under federal, state or local law, or (2) promoting, marketing, or recommending to another party any matters addressed herein.
This information is designed to be accurate and authoritative.However, this information is distributed with the understanding that it does not render legal, accounting, or other professional advice, and no liability is assumed in connection with its use.
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