Financial, Tax and Operational Due Diligence
Financial Due Diligence
When it comes to selling a business, it is in the best interests of both the buyer and the seller that the books and accounts are complete and clear. Financial due diligence is a very important assessment of the financial health of the business. Future forecasts are based on historic and current financial performance and it is the future that a buyer is concerned about.
As a seller, you need to have a robust forecast in place that will stand up to the scrutiny of lenders and give comfort to the buyer that the business is financially viable and that projected sales, costs and earnings are realistic.
Ideally, the following will be in place:- Cash flow statements going back two years and forecasts five years ahead
- A third party independent review of the balance sheet, looking out for items that impact upon the P&L and cash flow
- Asset valuations, including IP
- Analysis of EBITDA to date and projected
- Analysis of key ratios such as stock, debtor and creditor days
- Analysis of debtor and creditor days, stock, liquidity and other key ratios
- Outline of the risks and opportunities to support potential financial warranties in the Sale & Purchase Agreement
Don’t leave tax as an afterthought. Too often tax implications of the deal are considered during or after negotiation and the impact can be significant enough to derail the whole transaction.
Tax risks need to be identified. As a seller, you don’t want tax issues to be used as bargaining chips by the buyer. Highlight the risks early on and make provision for them in the SPA. Advice you will benefit from includes:- Overview of the tax implications of the proposed deal structure(s)
- Discussion about tax planning post-transaction for both the business and the vendor personally
- Review the historic taxes of the business, checking accuracy and compliance of corporation tax, VAT, PAYE and CIS
- Review all HMRC correspondence, particularly in relation to prior or current investigations and queries
- Discuss taxation warranties and indemnities
- Check all employment contracts, IR35 contracts. Look at any TUPE or other employment issues arising post-sale
What are the provided forecasts implying about the capabilities of the company? And about the operational risks?
Operational due diligence provides an assessment of these capabilities and risks – it looks at the nuts and bolts of the company, including its production systems, marketing, management, policies & procedures, infrastructure, IT systems and legal compliance.
You may well need help in determining whether the forecasts are pulling in the correct data – not only about the company’s internal capabilities and risks, but also external trends and risks.
To verify these forecasts and key assumptions, we may need to discuss risk factors with stakeholders, analyse fixed contracts, assess overhead costs, and examine staffing including potential impact of losing one or more key individuals upon deal completion.
If our assessment of the operational risks and capabilities differs from the assumptions or statements made by the seller, we need to examine the impact of this on the forecast margins and cash flow of the business.
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