Acquiring a Business: What Can Go Wrong

Buying a business is similar in buying a piece of real estate.  The outside appearance of a house may not always reveal inner complications that could negatively affect its value.  Just like hiring an engineer to conduct an inspection on the house before the closing date, it is always recommended to hire an accountant to assist with the due diligence when acquiring a business.  Preferably a forensic accountant.  You may be qualified to operate the business once you purchase it, but you may not be as proficient in identifying its deficits that might deter you from purchasing it in the first place.

In addition to hiring a forensic accountant to take a look underneath the hood, it may be more beneficial to hire an attorney who specializes in mergers and acquisitions to help you close on the deal, rather than your corporate attorney.  The reason is very simple.  For as qualified as your lawyer may be, merger and acquisition attorneys have seen all the scenarios play out in this area of the law and may be able to forewarn you of problems that their previous clients have encountered.

So at this point, you’ve found a business that you want to buy and you have your forensic accountant and mergers and acquisitions attorney.  What could go wrong?  Have you considered why the business owner is selling?  Most business owners don’t want to sell a profitable and otherwise successful business.  There could be some legitimate reasons.  Maybe they’re ready to retire and don’t have any children to pass the business down to.  Maybe they have some health issues that are preventing them from continuing.  However, don’t let the excitement of owning this business cloud your judgement in assuming that something could be very wrong and that’s why the owner wants out.

If your accountant reviews the financial statements and the numbers seem to check out, know that it is not beyond the realm of possibility that the figures have been falsified.  This is a fraudulent tactic that is punishable by law but don’t assume that it isn’t done.  There is also a possibility that something devastating has happened to the business since the last financial statement was compiled.  For example, key accounts could have been lost shortly after the previous owner’s accountant completed the last financial statement that reflected robust earnings.  This means that more than just the financial statements have to be looked at.

It’s not unreasonable to ask to speak to employees or clients.  If the owner seems dubious about you questioning employees or clients or for some reason feels that doing so would cause some type of fallout, it might be cause for suspicion.  If your forensic accountant is good at what he/she does, he should be able to dig deeper.  The last thing you want is to inherit someone else’s nightmare.  The due diligence process must be thorough and don’t fall in love with the business until this process has been completed.