When Vancouver BC business is about to exchange hands, the seller of the business has a huge advantage over the buyer during the negotiation process. The seller, being the current operator of the business, has intimate knowledge of competition moving into the neighbourhood, revenue momentum, labour cost variability, profitability, and so on. In addition, the buyer can never be absolutely certain of the accuracy and completeness of financial records such as bank statements, tax returns and financial statements being provided by the current owner.
A potential buyer can mitigate the risks of his purchase by hiring a Vancouver Chartered Accountant to perform due diligence work on the information, particularly financial information being provided by the seller. A professional accountant can assess the profitability of a business by performing a series of due diligence tasks. Of course, the seller must be willing to provide the basic financial information such as cash register tapes, bank statements, financial statements, and business income tax returns to accommodate the process.
The number of possible due diligence procedures is long and the importance of some procedures over others depends on the business being exchanged and whether the transaction is an asset sale or a share sale.
A key starting point in any business purchase is the financial statements because they contain vital information on the profitability of the business. It is important for the buyer to get some comfort with the figures reported on the financial statements.
Examples of due diligence procedures:
For financial statements:
- Obtain thee years of financial statements (audited is preferable but not always available).
- Read over the auditors’ letters for those past three years.
- Perform comparison of sales and expenses, particularly looking for sales and gross margin trends.
- Find reasonable explanations for unexpected changes uncovered during the comparison.
- Examine sales reports, cash register tapes, bank deposit books, etc.
- Compare reported sales on the financial statements to corporate tax returns and HST returns filed.
- Follow up on unusually large deposits.
- Follow up on discrepancies between financial statements and sales reported to the tax authorities.
- Examine payroll reports.
- Read the lease agreement and other contractual agreements.
- Examine monthly statements of major suppliers.
- Examine invoices from the accountants and lawyers.
- Determine ongoing repair and maintenance issues.
- Determine the soft costs versus hard costs in the financial statements.
For assets and liabilities:
- Obtain a listing of all physical assets and inventory.
- Obtain a listing of all debts including outstanding lawsuits and possible future claims against the business.
Other due diligence procedures would be:
- Examining the general ledger of the business to ensure the books appear correct and have been prepared by qualified accountants.
- Question items that are charged to shareholder(s) rather than recorded as business expenses.
- Determine capital investments such as new equipment and computers in recent years.
- Examine the company’s corporate records.
Above are just a handful of examples what a Vancouver chartered accountant can do to determine the potential profitability of the business in the future based on the most recent financial information available. The seller should be willing to provide this information if selling the business is at the core of their intentions.
Buying a business solely based on financial statements without any of the detailed work listed above would be a dicey investment. Based on discoveries during the due diligence process, the price of the business could be negotiated downward with valid support if weaknesses or inconsistencies were uncovered.
If you have any questions or would like to know more about how we can help you, contact us.
Disclaimer: All Rights Reserved for Mew & Company. This blog post is designed to provide information for personal use only. Please consult your professional tax advisor for further information. Mew & Company is not responsible for any legal disputes resulting form the content of this blog post.