Successful entrepreneurs are often on the hunt to acquire other businesses for strategic reasons. Acquiring a competitor to increase market share or buying out a supplier to add synergy to an existing business are just a few of the reason entrepreneurs seek acquisitions.
When a business is up for sale negotiation, the seller of the business has a huge advantage over the buyer. The seller, being the current operator of the business, has intimate knowledge of the environment he operates within. Factors such as competitors, demographics, labor availability and cost, etc. are factors that the seller has contemplated and taken into consideration day in and day out.
What you need to know as the Buyer
The potential buyer can mitigate the risk of his purchase by hiring an independent professional accountant to perform due diligence work on the financial information provided by the seller. The number of possible due diligence procedures is long and the importance of some procedures over others depends on the business being acquired. Due to modern technology, financial information can be obtained and verified with less time, making it less costly for the buyer to obtain independent professional advice.
Collect All the Financial Information
Sales report, bank statements, financial statements, and income tax returns, can available from accountants, banks and the CRA at a snap of a finger.
On the CRA website, a business can print its filing history upon request. Corporate tax and GST returns can be used to verify sales and expense figures being asserted by the seller. Payroll filings can be used to verify the number of employees and family members who are on payroll. Shareholders and family members may be contributing to a business without being compensated at a full rate. The ability to retrieve these reports directly from the CRA online should give the buyer added comfort. A seller may be biased towards inflating sales and deflating expenses. To embed theses biases into the tax filings is unlikely.
The Sales Figure One Of The Most Important Figures To Verify
Similarly, using cloud-based platforms for sales collection and accounting reporting facilitate the assembling and analyzing of data. The sales figure is one of the most important figures to verify. With majority of consumers using credit and debit cards to pay for purchases, many payment processing platforms provide detailed sales reports and history. These platforms can provide information on sale trajectories, average transaction size, store location of sales, names of payees, biggest selling item, etc. The information is on a third party’s platform; hence it would be difficult to falsify.
Likewise, major suppliers can be contacted to verify cost of sales and large expenses. These suppliers can provide independent detailed history reports readily given the automated nature of today’s accounting systems.
The bottom line is this: information that used to take weeks to assemble and months of wait time from the CRA and other third parties can be gathered in minutes now.
For buyers, there is no excuse for not to do your homework before acquiring your next business!!!
Mew & Company Professional Chartered Accountants
If you are looking for personal or corporate tax planning services, or if you have questions, please don’t hesitate to contact us to learn more about how we can help you!
Call us at 604-688-9198 to learn more about how we can help.