Unless you’re well-versed in performing a comprehensive financial analysis of a business, it doesn’t make sense to buy one without using a due diligence and valuation specialist.
A due diligence report:
- Verifies the accuracy of the seller’s information.
- Outlines a detailed understanding of the business.
- Contains vital information that can be used for negotiating the transaction, obtaining financing, establishing the tax and accounting basis of the assets, and integrating the acquired entity into the buyer’s business.
- Most of all, due diligence identifies possible deal-breakers. A seller may “prepare” a business for sale, making it look better than it really is, in order to obtain a higher price. A professional due diligence review guards against the overstatement of assets and understatement of liabilities. It also provides an analysis of historic earnings and the likelihood that forecasted operations can be met.
One crucial, but often overlooked, part of due diligence involves the tax consequences of the proposed transaction. Depending on the operating structure of the acquiring company and the target (for example, a C corporation, S corporation or partnership), it may be better to receive assets versus stock. Keep in mind that a badly structured sale can result in a tax disaster.