Due Diligence Services For Houston Business Owners
Due diligence services are investment protection tools, used to assess whether a particular asset is worth investing in. In many cases, due diligence is used to analyze businesses prior to a merger or acquisition (M&A). In doing so, due diligence can confirm the following with the help of forensic accounting:
- The company’s income, balance, cash flows, margins, and debt
- The company’s legal compliance with contracts, leases, intellectual property, and environmental laws
- Whether the company is involved in any lawsuits
- The company’s tax structure and history of tax compliance
- The company’s operational processes, supply chains, and logistics
- The company’s business and marketing plans
More than half of all M&As fail, and the reasons usually have to do with incomplete due diligence – especially where the company’s “soft” factors are involved, such as the quality of management, employee morale, customer loyalty, and relationships between the employer and other parties. Thorough due diligence services will advantageously position companies prior to a transaction and are therefore standard practice for major deals.
What Types of Due Diligence are Needed During Mergers or Acquisitions?
There are many types of due diligence that may be used for pre-transaction information gathering and analysis. The types of due diligence services include:
- Financial due diligence – Financial due diligence aims to assess the business’s financial position and is therefore one of the most common and necessary forms of due diligence. Investors want to know a company’s financial strength before making an offer. To perform financial due diligence, forensic accountants will check financial statements, asset and liability sheets, balance sheets, cash flow statements, and various projection models.
- Legal due diligence – During legal due diligence, an attorney will review the company’s legal situation by analyzing its client, vendor and employee contracts, its leases, its intellectual property, its environmental compliance, its liabilities, and its organizational documents (like the business’s bylaws). The forensic accounting team will also determine whether the business is currently involved in any litigation.
- Tax due diligence – The goal of tax due diligence is to confirm whether the entity is complying with tax laws and using tax documentation like returns and account histories to check tax information. The forensic accounting team will also verify the entity’s tax structure.
- Operational due diligence – Operational due diligence looks at the operational components of the business, which includes supply chain, logistics, technology, and organizational structure. This is done through interviews, documentation review, and onsite facility inspections.
- Commercial due diligence – Commercial due diligence takes a high-level look at the company’s business plan, its strategic objectives, its customer base, and its sales and marketing departments. In short, the forensic accounting team’s goal is to determine which direction the company is heading. This involves some documentation analysis, but “soft” due diligence through interviews and onsite surveys plays a major role.
How is Due Diligence Performed by Accounting and Tax Professionals?
Due diligence is a thorough process that uses many channels to gather information. They include:
- Document analysis – Document analysis is the foundation of financial, legal and tax due diligence. Financial sheets, tax returns, contracts and other documents are among the most important for due diligence purposes.
- Forensic accounting – Forensic accounting is a specialized discipline that only some accountants are certified to manage. During forensic accounting, the organization’s transaction history is checked, along with the company’s balance, income, and cash flow sheets. These numbers are used to develop an accurate valuation for the business, which is compared to the company’s competitors. Forensic accountants have sophisticated valuation methods they can use to identify a risky vs. safe investment.
- Transactions are also verified with other parties. Suppliers and clients may be interviewed, and onsite surveys may be organized. All of this is used to confirm what forensic accounting suggests.
Interviews – The due diligence team may interview managers, employees, suppliers, clients, and any specialists (lawyers, accountants, etc.) to understand the human side of the organization. Critical for soft due diligence, interviews can reveal details that can’t be picked up in the data.
Onsite investigations – During onsite investigations, the due diligence team will get a feel for the company’s assets, its operations, the quality of its facilities and processes, and whether its current facilities will meet its future needs.
- Records and database searches – Database and record searches can discover potential high-risk issues which may not be discoverable through documentation or volunteered during interviews. Legal databases, for example, will reveal if the organization is mired in a lawsuit or has previous judgments levied against it.
There are a variety of methods available to forensic accountants, and a variety of skills are needed to perform due diligence services thoroughly. Depending on the nature of the transaction and the parties involved, your organization may need an entire team to perform due diligence services.
Four Reasons to Consider Due Diligence Services
If your organization is about to execute a major transaction, such as an M&A deal, a contract agreement, a major asset purchase, or another transaction, professional due diligence services can help in the following ways:
- Reducing risk – Due diligence is primarily used to identify a poor investment before committing to it. Unsupportable financials, poor performance projections, legal problems, and bad management can sink a merger or acquisition. Due diligence services identify these issues before your organization takes the risk.
- Improving transparency – Due diligence ensures businesses know what to expect once they finalize a transaction. If the asset is distressed for any reason, due diligence services will reveal why, and what acquiring organizations can do to mitigate them.
- Ensuring favorable transaction terms – Due diligence may reveal concerns that force a revaluation from the buyer’s side. In this way, due diligence ensures buyers come to the table with the advantage.
- Expediting transactions – Due diligence prepares organizations for the negotiation process, so they are ready to move through it quickly and save time and money in the process. Transactions may fall through due to delays, as well, and due diligence ensures both sides aren’t surprised by details that may lead to those delays.
Due diligence is a vital discovery and analysis tool that companies can use to make an informed decision about a particular transaction. Due diligence is a complex process that can take months to complete, so it’s recommended that companies work with an experienced forensic accounting team to oversee it.
Due Diligence Services Enable a Company to Invest in a Major Business Deal with Confidence
Due diligence services position companies in an advantageous negotiation position. These services set clear expectations for acquiring businesses and reveal organizational weakness and strengths, essentially protecting against bad investments.
If your company is considering a merger or acquisition with another entity, due diligence services provided through a reputable forensic accountant will ensure your business is protected.