Sección en Inglés It’s time to buy a “good” business By: Eduardo González-Green, CPA, CFF, CFE egonzalez@adacpa.com
It may be a bad time for some people, but it could be a good economic time for others! During this tough atmosphere, some businesses are falling on hardtimes and others, specially baby boomers are retiring from their businesses and in some occasions, a succesion plan is not possible. Therefore, for those looking for an economic opportunity, it may be the right time to buy a business. Every Business Has Secrets. Sometimes a seller knows certain things that he or she definitely doesn’t want you to discover. Now the question is: Are you going to learn the secrets before or after you buy the business? Legal and Financial Due diligence is the way to discover a great deal about the business to be purchased. This is important because once you close the deal it is final and the consequences can be significant. Due diligence investigations are valuable to entities or persons contemplating major business decisions like mergers and acquisitions. It’s an investigation of a potential investment, and serves to confirm mainly all material facts about the sale. Due diligence investigations should be reasonably executed to find all the facts of material interest to the parties involved in the business transactions. Originally, the term due diligence was limited to public offerings of equity investments; but over time, it came to be associated with investigations of both private and public mergers and acquisitions, among other things. In business transactions, the due diligence process varies for different types of companies. The scopes of the investigations are unique to each engagement and depend on criteria such as the size and complexity of business to be acquired, buyer’s business experience, knowledge of the industry, and information of the target.
gies that will be created by the acquisition. These synergies need to be identified on cost reductions, and those based on possible revenue increases. It is important to inquire of client and target concerning their reasons for pursuing the acquisition and sale. It will help determine which type of transaction our client should consider. (i.e.. stock transaction or purchase of assets). This is important to determine tax advantages and other matters regarding the acquisition. Each significant area needs to be analyzed. The areas may included market and corporate overview, culture, personnel, assets and debts evaluation, tax implications, sales, and costs (profitability). Imagine that a seller tells you the following statement: My business is very profitable because our mark up is 75%, we have had sales of $20 million during the past 10 years, a normalized net income of $4 million, have 100% long term contract with customers, and don’t have any labor issues, claims or suits. This representation needs to be evaluated during the due diligence. It’s important to build a team including a CPA (or similar professionals), lawyer (or group of lawyers), among others. Mr. Eduardo González-Green, CPA is an audit partner at Aquino, De Córdova, Alfaro & Co., LLP.
The relevant areas of concern may include the financial, legal and labor matters as well as tax, risks and opportunities (including synergies) of the target. A financial due diligence review would not only look at the historical data of a business but also consider projected financial performance, its business plan and surrounding reasonableness of them. Why Due Diligence? Go/not go with decision for acquisition Determine value of transaction Allocate risks in transaction Allows buyer to remedy problems before acquisition In other words, to a potential acquirer, due diligence means, “making sure you get what you think you are paying for.” Entities considering buying a business normally evaluate the synerEL CPA • MAYO 2011
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