7 Ways Your Accountant Can Help in Due Diligence When Buying a Business
7 Ways Your Accountant Can Help in Due Diligence When Buying a Business
So you’ve found the ideal business. You’re excited at the prospect of owning it.
What now?
Before you get too carried away, you must complete the critical due diligence process to make sure you know exactly what you are buying.
Having an accountant in your corner during this time will make all the difference. They offer more than just number-crunching. They bring specialized knowledge that helps uncover potential risks and opportunities.
Here are 7 ways an accountant could assist you.
1. Analyzing Financial Statements
An accountant will comb through key financial documents like profit and loss statements, balance sheets and cash flow reports. While you might know the basics, your accountant will dig deeper to identify trends and spot discrepancies.
2. Assessing the Quality of Earnings
It’s not enough to see profit on paper. Your accountant will look into the quality of those earnings. You need to know the profits are sustainable over the long term. Your accountant can identify and adjust for unusual, one-off items to help you decide if this business is as good as you think.
3. Reviewing Tax Compliance
Your accountant will review tax returns lodged by the business to make sure differences between accounting profit and taxable income make sense. (Have you heard of businesses with two sets of books?) If you are buying an entity instead of just the business, ensuring compliance with all relevant tax obligations is critical. Catching potential tax issues before you take over can save you from future headaches and unexpected costs.
4. Examining Existing Debt
Again, If you are buying an entity instead of just the business, your accountant will assess the nature and terms of any debt obligations. Is the current debt load manageable, given the entity’s income? Understanding the current debt situation helps you decide if the financial risk is acceptable.
5. Evaluating Inventory
While it is unlikely that your accountant will be an expert in valuing the business's inventory, comparing the inventory turnover rates for this business and similar businesses will indicate the possibility of old, damaged or obsolete inventory items.
6. Scrutinizing Cash Flow
Cash flow is the lifeblood of any business. Your accountant will carefully assess the cash flow to quantify the working capital required to fund its operations after the acquisition. You may need to have additional cash reserves available.
7. Highlighting Potential Red Flags
Through training and experience, accountants can spot inconsistencies or unusual trends in financial data that need clarification. Whether it’s unexplained drops in revenue, inconsistent expenses or even discrepancies in reported earnings, your accountant can help you identify potential red flags that may influence your decision to buy.
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Involving an accountant in the due diligence process gives you a more thorough understanding of the business you're about to buy. They bring financial expertise that can save you from costly mistakes, ensure you're making a well-informed investment and ultimately, give you peace of mind about your final decision.
If you want to check out this comprehensive guide to buying a business (Due diligence is #7 on the list!).
Tags: buying finance small business tips
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