Due Diligence Benefits and Limitations (A Client Success Story & Learnings)

| Business, Accounting

A number of years ago a wonderful client of Munro’s approached us for assistance with the purchase of a restaurant. They had negotiated a purchase agreement and were up to the stage where a due diligence was to be undertaken. This is the story of how we helped them and how they could have received even greater value from our extensive service offerings.

The Engagement

The request from our client was to complete a due diligence. We supplied them with a detailed due diligence checklist to give them a good understanding of the key elements we thought necessary to investigate.

After our client took the opportunity to review the checklist they requested us to only focus on a specific number of items, thereby reducing the scope of the due diligence to a limited financial due diligence. Part of the reason for this decision was because our client considered the other checklist items to be of low risk.

We provide our clients with flexible service offerings and agreed to provide the limited financial due diligence; with the client accepting the risks associated with limiting the scope of the due diligence.

By the end of this story you will appreciate that while our client did benefit from the limited financial due diligence, in hindsight, a comprehensive due diligence could have uncovered, and helped them prevent, some issues that later emerged.

The Due Diligence

We promptly defined the information we required to complete the due diligence and requested this from the vendor. Upon receipt of this information, we thoroughly organised, reviewed and analysed the information. Some information was missing, so due to the importance of completeness, we made another request from the vendor.

Further, a number of written declarations were requested from the vendor in order to gain assurance over the accuracy of the information provided.

We prepared the due diligence report and before issuing it to our client it underwent a strict and thorough quality review process.

The due diligence report was presented to our client which expressed our opinion on the financial health of the business. Following receipt of this report, our client was able to successfully renegotiate the purchase price with the vendor, saving them approximately $300,000.

After the due diligence, our client received our professional assistance throughout the transition process of acquiring the business, including:

  • Assistance with new employment arrangements and payroll processing;
  • Establishment of a leading edge and proven accounting solution for business bookkeeping;
  • Structuring advice to achieve immediate and long term tax savings, together with asset protection;
  • Assistance with transfer and registration of the business name; and
  • Much more thereafter including preparation and lodgement of quarterly Business Activity Statements and Income Tax Returns.

A key takeaway from this client success story is that when purchasing a business the due diligence process is extremely important. As you have read above, the outcome helps the new business owner get the best value for their investment, and can sometimes provide additional power to the buyer to reduce the purchase price.

Learnings

Importantly though, whilst the afore-mentioned due diligence was a success, the key learning is that oftentimes limiting the scope of a due diligence is fraught with danger.

Our client learnt this the difficult way, as after they took over the business several challenges presented and led to lower profits and much more stress for the new business owner.

Unfortunately, because our client insisted on a limited due diligence, these otherwise identifiable challenges were not addressed before the acquisition. We expect that if a comprehensive due diligence had been undertaken then a great deal of those challenges would have been avoided or mitigated significantly.

It’s a perfectly normal approach to want to limit a due diligence to help save some costs and reserve funds for the business operation; however, this can be even more costly in the long term. This is because unless a comprehensive due diligence is completed, or even better a Business Validity Deep-Dive; if there are problem points in the business – as there regularly are – you're highly unlikely to see them until it is too late.

So, our key learning – if you are purchasing a business ask us for help and think about the long-term benefits of a comprehensive due diligence as opposed to the slight immediate-term cost savings of a limited due diligence.

Contact Mike Beer or Christine Prasetia of our office should you require assistance with the purchase of a business.

We also have an excellent resource available to help prospect business owners called The Purpose-Led Way to Buy a Business in the 2020s. Contact us if you would like a copy.

 

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