We are all aware our economy is being buffeted by Covid 19. But it does not mean that business sales have dried up – far from it. What it does mean is that it is now more important than ever for good homework (ie, “due diligence”) to be done on a potential business purchase.
Due diligence is the process involving all the tyre kicking and horse teeth checking necessary to ensure you are not sold a lemon. A weaker economic environment can mean there are more lemons out there – so care is needed.
Typically, a prospective business buyer will approach an accountant as someone has told them that they need to do “due diligence”.
It makes me think of Oliver Twist, you know “please sir, may I have some more” scene, in that clients are coming to the accountant in fear and supplication.
It is not like if you order a McChicken burger, but you get a Big Mac – then you know that something has gone awry and you can fix it.
For many people this is their first (likely to be their only) experience with “due diligence” so they often do not know what is involved and the questions they should be asking.
Not just a checklist
Now many accountants will have a checklist that tells them what to do when approached to complete due diligence on a business. A checklist can help avoid risks and of course this is important.
But consider two scenarios regarding a recent building inspection:
- The report confirms a potential purchase is not a leaky home at the date of the report, or,
- The report confirms that the house is not a leaker – but also advises that the house is designed in a fashion that is likely to leak, and that you should watch out for certain tell tales in specific parts of the building.
Of course, scenario two is the more valuable advice. It is the same with buying a business.
A typical due diligence process helps the clients avoid “gotcha” scenarios. i.e. seemingly obvious things that clients would be grumpy about if the issue were not highlighted. i.e. the business has no contracts with customers, the stock is all dated, all the key knowledge is in the heads of the exiting owners etc.
“Buyers need help understanding the true opportunities and risks of the business and the wider industry.”
Of course, these kinds of things should always be checked.
But for many prospective buyers there are few things that are in a typical accountant’s due diligence checklist that will really help the client decide whether they should proceed with the purchase.
Look at all the information available
I believe the main role of an accountant is to help a client analyse all the information available so they can decide if they should go ahead with the purchase.
Buyers need help understanding the true opportunities and risks of the business and the wider industry, help to be aware of their own biases (rose tinted glasses etc) and help understanding the impact on the business if things do not go 100 percent to plan (spoiler – nothing ever does).
I think if we accountants spent a little less time filling out checklists, and a little bit more time helping clients thoroughly understand what they are taking on, then clients are likely to be less stressed and succeed more often.
If you know someone who is considering buying a business in the coming weeks and months, make sure they get proper advice. It is always easier to avoid a hole in the ground then it is to climb out of it.