Are you thinking about buying a business? There are many issues to consider, before taking the plunge. They best way to make an informed decision is the engage experienced professional that can assist you with performing due diligence. Due diligence is a comprehensive appraisal of a business undertaken by a prospective buyer, especially to establish its assets and liabilities and evaluate its commercial potential.
The due diligence team should include an experienced transactional attorney and an experienced CPA that can help with the financial and tax due diligence.
Generally, the due diligence process consists of the following areas:
- Financial due diligence,
- Tax due diligence, and
- Legal due diligence (beyond the scope of this article).
Today, I will focus on financial and tax due diligence.
Financial due diligence attempts to:
- Assess the business’s financial health,
- Determining the exists of underlying assets and liabilities (including contingent liabilities), and
- Evaluate its commercial potential.
Some of the steps involved with financial due diligence include:
- Review prior year financial statements,
- Reviewing bank statements,
- Verify sales and accounts receivable,
- Verify inventory quantities and values,
Tax due diligence attempts to:
- Determine what tax returns have been filed and that there are no material tax issues,
- Determine if there are any tax returns that should have been filed but were not, such as state multi-state income tax returns or multi-state sales and use tax returns, or multi-state payroll tax returns.
The tax issues involved in acquiring a business may vary for many reasons:
- Are you buy the assets of the business or the stock (or membership interest) of the company?
- Has the business filed all applicable federal and state income tax returns?
- Has the business filed all applicable federal and state payroll tax returns?
- Has the business filed all applicable state sales and use tax returns?
- Does the sell have income tax and or sales tax Nexus in any states that they may not be filing applicable tax returns for?
The due diligence process will help the buyer decide to:
- Move forward with the acquisition,
- Move forward but negotiate a purchase price adjustment to factor in any exposure,
- Move forward but provide for an escrow hold back to deal with any exposure, or
- Walk away from the transaction.
Buying a business is both a financial commitment and an emotional roller coaster; let us help you through this process.
Please contact me with any questions or Schedule a Free 15-Minute Phone Evaluation (A $62.50 Value).