Once you’ve identified your targets, secured financing and hired advisors, you need to complete due diligence before discussing offers and finalizing paperwork. It’s important to take a holistic approach to due diligence—you want to know as much as you can about the company you may buy, and that is more than just the financial reports. For instance, is the owner emotionally ready to let go of the company? Are there any proposed regulatory changes that could change a hot industry to a dying one? Does the company have any legal disputes relating to HR issues?

It’s just as important to look forward at budgets and forecasts as it is to look back at past financial performance. At the same time, accounting irregularities can cause surprises down the road. You don’t want to be in a position of needing to restate earnings because of mistakes made in the way the target is accounting for transactions. Revenue due diligence will help decrease the risk that revenue was characterized incorrectly.

As you begin the process, you’ll want to be sure your acquisition process due diligence includes the following items:

  • Quality of earnings
  • Review of accounting policies
  • Search for unrecorded liabilities
  • Working capital trends
  • Financial reporting review
  • Tax diligence
  • IT controls review
  • ERISA compliance review
  • HR regulatory review
  • Develop preliminary valuation model
    • Pro-forma earnings and cash flow model
    • Valuation and pricing
    • Preliminary purchase price allocation

A due diligence report should cover:

  • Quality of earnings
  • Cash
  • Accounts receivable
  • Inventory
  • Fixed assets
  • Accounts payable
  • Billings in excess of cost
  • Tax Matters

To continue reading about how to get the most acquiring a business, click here and download our free e-book, The Anatomy of an Acquisition.

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