Due diligence

Due diligence

Accounts and Legal has a unique business model which allows it to offer accounting services and legal advice under one roof.

This is particularly useful when going through the process of preparing to sell your company, or indeed considering the purchase of a company. There is inevitably some overlap between the queries raised by both sets of professional advisors which risks wasting time and money, but a single coordinated approach avoids both of these issues.

What do accountants look for when conducting due diligence?

When preparing due diligence for small businesses, accountants tend to start with the financial statements.

They will check that the revenue and expenses in the annual accounts matches the amounts on both the VAT returns and the corporation tax calculations. They'll also check this back to cash in the bank, by looking at cash movements on the bank statements and month end balances.

They'll spend quite a bit of time checking the balance sheet - making sure that liabilities have been properly calculated and fully identified, and that any items considered by the company to be assets are properly collectable and present. Errors in VAT reporting and Corporation Tax calculations will need to be quantified and deducted from the company valuation.

A key factor in determining the value of the business is often its level of profitability. Accountants will often undertake a quality of earnings exercise, to make sure that profit hasn't been artificially inflated, by omitting fair costs of the business. Equally, certain costs that are not likely to present post purchase should be stripped out, so that a pro-forma level of profitability can be obtained.

It is also important to consider commercial due diligence when acquiring a company. This tends to include an analysis of the market, competition and regulation for the target company, and can be conducted by the corporate finance specialists accounting team if this is part of the scope of the engagement.

What do solicitors look for when conducting due diligence?

Solicitors tend to review customer and supplier contracts to determine the obligations and liabilities associated with each contract that the company has in place.

They will also try to identify what type of litigation the company has been involved in, and whether there are any outstanding or likely disputes which are likely to cost the business money in the future. A review of the insurance policies and claims history is often also within scope for the legal team.

If the company uses commercial premises: shops, offices or factories etc, the legal team will also review the commercial leases to make sure there are no onerous obligations, and that rent has been paid in full to date.

Ownership and rights to intellectual property also needs to be checked. This is particularly important when buying a business with a valuable brand, or a website with a high volume of traffic.

Where is there overlap in the process?

A key area of overlap tends to be with employees. Solicitors will want to look at employment contracts, whereas the accountants will want to look whether the company PAYE liabilities have been calculated correctly and paid on time.

If redundancies are likely, both solicitors and accountants may be involved in determining likely redundancy pay.

Once the various purchase and supply contracts have been reviewed by the lawyers, the accountants will want to consider what this is likely to mean for the company's cashflow forecast, both in terms of the reliability of the income, and the costs of terminating any contracts which would not be required post acquisition.

Contact us to discuss how we can help

So if you are considering buying or selling a company, then why not drop us a line to talk it through?