[author: Mark Ferris]
What is Due Diligence?
Due diligence is a thorough investigation service of a business by a potential buyer, to establish value, assets, liabilities, potential and the associated risks.
What are important focus areas in DD of an Accounting Business?
The Clients:
- Perhaps the most important asset being purchased… so requires detailed assessment
- Focus on Client size, age, key Client relationships, industry concentrations, retention rates, satisfaction levels, and any pending or potential client dispute
The Team:
- Also important… because the team probably interfaces with Clients and produces the work
- Review qualifications, experience, recent performance, status of employee contracts, compensation structures, retention strategies, and outstanding HR issues or liabilities.
- Identify competitive threats and future hiring needs
Financial Performance
- Past financial performance helps predict future performance
- Review income statements, revenue streams, client contracts, billing practices, accounts receivable aging reports, balance sheets, and cash flow statements
- Ensure reported revenue ties up with tax returns and bank statements
- Assess profitability, liquidity, and overall financial healt
Business Processes
- Assess the company’s services, complexity of the work, Client engagement processes, workflow systems, and quality control processes for improvement opportunities, synergies and risks
- This is achieved by examining a sample of Client files and working papers
- Assess fee levels relative to the work. Low fee levels may be an opportunity… WITHOUT losing Clients
- Review Accounts Receivable even if not included in the purchase, to assess payment behaviour
Technology and Systems
- Assess IT infrastructure, software, data security, and technology capabilities for compatibility, scalability, and efficiency, especially as relates to potential integrations or upgrades
Compliance and Legal
- Ensure compliance with accounting standards, regulatory requirements, and licensing obligations
- Identify legal issues, litigation, or investigations that could impact reputation or operations
What Makes the DD Process More Efficient?
Focus on Material Issues
- Start with material issues (examples above). Do high- level analysis BEFORE drilling down. That prevents a failure to grasp the ‘big picture’
- Areas of potential risk (or ‘icebergs’) should be assessed in great detail and prioritised
Preliminary Assessments
- Initial assessments or interviews with leaders and other stakeholders help to form preliminary insights and identify red flags which require special focus
Checklists
- Use comprehensive tools, models and checklists developed by experts
Responsibilities and Deadlines
- Use astute project management practices including delegating due diligence tasks to internal and external participants along with clear deadlines
Utilise Technology
- Accounting software, data analytics tools, and document management systems streamline the gathering, analysis, and storage of due diligence
Use Advisors
- Experienced legal, financial, tax and accounting advisors assist with interpreting findings.
Confidentiality
- Deals are at significant risk if sensitive information is leaked to competitors, employees etc.
Communication
- Open communication with the seller’s management team, advisors, and owners can quickly address questions
- This also helps develop trust, a critical aspect for what may follow if a transaction goes ahead.
