Carrying out due diligence is a crucial step when buying a small business and your accountant has an important role to play. Here’s how a good accountant can help you.
According to Amanda Newton, a specialist from cloud-based accounting software company, Xero, if you don’t get a qualified accountant to carry out your due diligence, you run the risk of paying more for a business than it was really worth.
Alternatively, you might underestimate the money you’ll need at the start the business.
“I have many examples of people coming to me after they have purchased the business having discovered that the business wasn’t running the way they thought it would. This could have been avoided if they had consulted an accountant earlier,” she says.
“I liken not employing an accountant to assist you with your due diligence when purchasing a small business to not employing a building inspector when purchasing a property.”
A good accountant uses numbers to tell a story
“They’ll gather all the information you get when you’re enquiring about buying a business (which might include financial records, customer information, performance records and sales history) and then translate this information into a story which they can communicate to you.
“This story is around how the business has been operating in the past and more importantly how the business is expected to operate in the future, based on future expected earnings.”
As part of the due diligence process, the accountant will look at all the financial information that has been provided (such as balance sheets and profit and loss statements) and marry that up with the dialogue that has been occurring between yourself and the seller. The accountant will pay particular attention to “abnormal and extraordinary items”. For example, if the seller had a big sales event you’ll want to find out if the results can be replicated or whether it was just a one-off.
It’s important to remember that the value of the business should be based on its future earnings, not its past earnings. They’ll help you analyse the numbers to determine whether the revenue is growing or in decline and whether costs are increasing.
Making sure the seller’s story is consistent with the numbers
Your accountant will always ask for the seller’s reason for selling the business and also check that the numbers are consistent with the story the seller is telling you. A seller will rarely admit that financial stress is the reason for selling their business.
“For example, quite often people come to me and say that the seller has told them they’re selling for ‘family reasons’. Then when you look more deeply into the financial information you discover that they’ve been running the business at a loss for some time, which may be the real reason for selling.”
Even if your due diligence reveals that the numbers are telling a different story than the story you are being told by the seller, it doesn’t mean you shouldn’t buy the business, it just might put you in a stronger position to negotiate a better price.
“What an accountant wants to see through doing due diligence is that you buy a business with the right information. Nobody wants surprises after the purchase.”
Understanding the running costs
A good accountant will help you understand what the costs associated with the business are beyond the purchase price and how many of those costs become relevant to you if you were to buy that business. They can also help you to work out how much you may have to borrow not only to buy the business, but also to service its future needs.
Making a sound business decision
There are lots of things that an accountant can help you with at the beginning of owning your own business so you can start off on the right foot. Through the due diligence process, your accountant is either going to help you understand that purchasing the business is the right thing to do, in which case you can move forward with confidence, or they’re going to help you understand that it’s not the right thing to do, in which case you’ll avoid inheriting something that could cost you a whole lot more over time.”
Want to know more about due diligence? Read what is due diligence and why is it so important?
Not sure how to find a specialist small business accountant? Check out how guide on when and where to look for a small business accountant.Tags: Due diligence, accounting, Xero
You’re interested in buying a small business and you know that eventually you should consult an accountant to help with...
An accountant is one of the most important advisors you’ll need when purchasing a business. But not all accountants are...