What is Due Diligence? Why Use a CPA?

In representing a buyer in a business acquisition, Mr. Loomar regularly works together with a Certified Public accountant to assist in the financial due diligence investigation. The fundamental purpose of a buyer's due diligence investigation is to gather information that will help assess the value of the target business, in light of all the facts and circumstances, including special skills and attributes of the seller that the buyer may possess (or lack). This information allows the buyer to make an informed decision on whether the proposed purchase should be confirmed and finalized.

Many accountants or business advisers are available to perform due diligence but do not possess the skills of a Certified Public Accountant. A CPA is a professional who is educated, tested, and licensed to serve. The role of the buyer's CPA usually includes reviewing the targeted company's financial books and records including tax and related business information to determine if the purchase price is reasonable.

During due diligence, the CPA may analyze and test key financial ratios to assess operating results and trends while conducting specific analysis to quantify net owner benefits and the related multiple of earning. The CPA may also assess the impact of the transaction on future and present taxes as well as suggest ways to structure the transaction to minimize such taxes and offer advise on entity setup for the newly acquired business assets (i.e. S Corp, C Corp, or LLC)

Not all CPA's are experienced in due diligence so its important to engage an expert CPA with due diligence experience. Jay Shapiro & Associates CPA's is often regarded as the small firm of choice in South Florida offering expert due diligence services.

Mr. Shapiro and his firm can be contacted at (954) 385-6616 or e-mailed at JayShapcpa@aol.com and his web site is www.jayshapirocpa.com.

Cash Verses Accrual Accounting

As most of you already know, all business financial statements include at least a balance sheet and an income/expense statement. A balance sheet is the summary of the financial status of a business on a certain date in time (i.e.: as of September 30, 2005). In other words, it gives the financial condition of all of the assets, liabilities, and equity of the company as of a specific date. An income/expense statement (sometimes called a profit/loss statement) presents a summary of the financial operations of a business during an interval of time. It gives the history of the business operations during that time.

Business financial statements, including income tax returns, can be represented in two ways, cash basis or accrual basis. The essential difference between cash and accrual methods is a difference of timing of certain transactions. In accrual, income and expenses are recognized and are recorded in the financial books of the business, as of the date on which the business first acquires the right to the income or the obligation to pay the expense. When using a cash method, on the other hand, income and expenses are recorded on the books only when the money is actually received or paid out. Although cash accounting is somewhat simpler from a purely bookkeeping standpoint, accrual accounting provides a more realistic picture of the financial activities and the status of the business. For this reason, accrual accounting is more accurate for valuation purposes than the cash basis. Also, be aware that the business may operate on an accrual basis and report on a cash basis for Income Tax purposes. Therefore, it is extremely important to find out which statements represent the accrual method.

Due Diligence Checklist

If you are under contract to buy a business in late 2001, then your CPA will need to request certain documentation to determine if the business you are buying is earning what the seller is representing.

1. Tax Returns - last 4 years
2. Profit & Loss statements - last 4 years and year to date
3. Bank Statements - last 3 years and year to date
4. Sales Tax Returns for any years in business operation
5. General Ledger - last 3 years and year to date
6. Copy of Lease and addendum(s), if any
7. 940's & 941's payroll tax for last 4 years
8. Employee list/job function/Rate of pay
9. Copy of insurance policies
10. Equipment list

Please keep in mind if you are buying a cash business then you need to request from the seller purchase invoices, sales invoices, register tapes. If you are insecure with this documentation for a cash business then you should reconsider your options and buy a business that 100% documented on the tax return.

ACCOUNTANT-CPA

Jay Shapiro C.P.A
Contact: Jay Shapiro
1625 N. Commerce Parkway
Weston, FL 33326
Tel:954-385-6616
Fax:954-385-6631

OPERATIONAL DUE DILIGENCE

While financial Due Diligence is an important process for a buyer to determine the value of a business, operational Due Diligence is integral to a buyer's ability to properly evaluate a business for a potential acquisition. Operational Due Diligence involves the on-site analyses of the target business' daily processes and of how the business operates. This analysis should include an evaluation of the key employees, managers, independent contractors, suppliers and other factors that are necessary for the business to conduct normal operations. Operational Due Diligence may also extend to conducting investigation outside of the actual business, when researching market and industry trends, the community in the area surrounding the business location the potential for new market competition. A comprehensive operational Due Diligence will enable a buyer who purchases a business to have a detailed understanding of how to manage the daily business operations, which will, in turn, lead to a trouble free transition after the consummation of the acquisition.