Due Diligence When Buying An Accounting Business

What is Due Diligence?

Due diligence is a thorough investigation service of a business by a potential buyer, to establish value, assets, liabilities, potential and the associated risks.

What are important focus areas in DD of an Accounting Business?

The Clients:

• Perhaps the most important asset being purchased... so requires detailed assessment
• Focus on Client size, age, key Client relationships, industry concentrations, retention rates, satisfaction levels, and any pending or potential client disputes

The Team:

• Also important... because the team probably interfaces with Clients and produces the work
• Review qualifications, experience, recent performance, status of employee contracts, compensation structures, retention strategies, and outstanding HR issues or liabilities.
• Identify competitive threats and future hiring needs.

Financial Performance

• Past financial performance helps predict future performance
• Review income statements, revenue streams, client contracts, billing practices, accounts receivable aging reports, balance sheets, and cash flow statements
• Ensure reported revenue ties up with tax returns and bank statements
• Assess profitability, liquidity, and overall financial health

Business Processes

• Assess the company's services, complexity of the work, Client engagement processes, workflow systems, and quality control processes for improvement opportunities, synergies and risks
• This is achieved by examining a sample of Client files and working papers
• Assess fee levels relative to the work. Low fee levels may be an opportunity... WITHOUT losing Clients
• Review Accounts Receivable even if not included in the purchase, to assess payment behaviours

Technology and Systems

• Assess IT infrastructure, software, data security, and technology capabilities for compatibility, scalability, and efficiency, especially as relates to potential integrations or upgrades

Compliance and Legal

• Ensure compliance with accounting standards, regulatory requirements, and licensing obligations
• Identify legal issues, litigation, or investigations that could impact reputation or operations

What Makes the DD Process More Efficient?

Focus on Material Issues

• Start with material issues (examples above). Do high- level analysis BEFORE drilling down. That prevents a failure to grasp the 'big picture'
• Areas of potential risk (or 'icebergs') should be assessed in great detail and prioritised

Preliminary Assessments

• Initial assessments or interviews with leaders and other stakeholders help to form preliminary insights and identify red flags which require special focus

Checklists

• Use comprehensive tools, models and checklists developed by experts

Responsibilities and Deadlines

• Use astute project management practices including delegating due diligence tasks to internal and external participants along with clear deadlines

Utilise Technology

• Accounting software, data analytics tools, and document management systems streamline the gathering, analysis, and storage of due diligence

Use Advisors

• Experienced legal, financial, tax and accounting advisors assist with interpreting findings.

Confidentiality

• Deals are at significant risk if sensitive information is leaked to competitors, employees etc.

Communication

• Open communication with the seller's management team, advisors, and owners can quickly address questions
• This also helps develop trust, a critical aspect for what may follow if a transaction goes ahead.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.