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What To Expect in Financial Due Diligence

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Nice Smile – Sharp Teeth!

The day that the buyers send in accountants to review your books is an important milestone in any business sale transaction. Understanding what the investigating accountants will be looking for, and preparing documentation in advance, can make the process less stressful.

You have accepted an offer for your company and now the buyers want to send in their own accountants for financial due diligence. What should you expect? Well certainly the most thorough inspection of your accounts and trading history imaginable. As an established UK business broker that has helped many clients through this process we know that most owners are genuinely shocked by the intensity and detail of a financial due diligence investigation.
 
What Areas Will The Buyer’s Accountants Focus On In Financial Due Diligence?
 
Trading Results Review

This will be a detailed investigation of each element of your profit and loss account for at least the last 3 years, and for the current financial year to date. The accountants will look at year to year changes and trends in every code in your chart of accounts, and ask for explanations of upwards and downwards movements. They will also look at changes in sales to your most important customers, and of your most important products.

It is crucial that every explanation you provide is honest and accurate. If a question catches you off guard it is better to say that you don’t know, but will find out, rather than make a guess. Explanations that change as the investigation proceeds make buyers nervous, and throw doubts on the reliability of answers in other areas.

If you have provided a forecast of sales and profits for the next few years you should expect a detailed review of the assumptions that lie behind changes in sales and costs. The buyers will want to be certain that changes are based on credible scenarios, and not just pulled out of thin air.

Balance Sheet Review

The investigating accountants will look at the history of each account code in the balance sheet in the same way as they examined the profit and loss account. Ratios will be used to analyse trends in cash flow and liabilities to make sure the company is properly financed. Stocks, trade debtors and trade creditors will receive particular attention. Stocks will be examined on a stock code by stock code basis to identify slow moving or obsolete items that the buyer may not want to pay for. Trade debtors will be scrutinised not just to find current overdue accounts, but also to find out if your company has a history of writing off bad debts. The buyer will also want to make sure that payments to creditors are up to date.

Taxation

If the shares of your company are being bought the accountants will want to look at your tax records for the last few years. They will also want to make sure all tax payments are up to date. Prior year’s tax calculations will be examined for any unusual or aggressive tax management practices. If you have been audited or fined by tax authorities in the past the buyer’s accountants will want to understand what happened, and that matters have been put right.

 

If you are interested in finding out more about these and other issues relating to the sale of a private company one of our business sale experts would be delighted to talk to you in complete confidentiality. Click CONTACT ME to book an initial phone conversation or call us on 01604 432964.

 
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One comment on “What To Expect in Financial Due Diligence

  1. Pingback: Preparing To Sell A Company – Sorting Out The Things That Buyers Hate | Select Business Sales

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