A Costly Mistake: The Importance of Due Diligence in Business Acquisitions

Acquiring a business is a complex process that requires careful consideration and thorough analysis. Failure to conduct proper due diligence can result in significant financial losses and legal complications.

In this article, we will discuss a real-life case study of a man who made a costly mistake during the due diligence process and explore the common mistakes that buyers make, as well as how to avoid them.

The real case

Den V. (name changed for confidentiality) purchased a luxury furniture company after receiving accounting reports from the seller. The reports appeared to show that the company was profitable and in good financial standing. However, upon closer inspection after becoming the owner, Den discovered an abnormally large amount of revenue that turned out to be a loan received by the company, falsely entered as profit by the seller. Subtracting the loan from the profit revealed that the company was actually on the brink of loss.

This discovery illustrates the importance of conducting thorough due diligence before purchasing a business. Buyers must not rely solely on the reports provided by the seller and should investigate the primary documentation and basis on which the reports were formed.

Common Mistakes in Due Diligence

  1. Excessive Arrogance

One common mistake buyers make is thinking they can handle everything themselves to save money. However, unless the buyer is an expert in finance, accounting, and US corporate law, and can check the physical condition of the objects, this approach can be risky. It is essential to find and hire professionals to assist with the due diligence process, even if it means incurring additional costs. Read more about the help of professionals in the article "Who checks the business".

  1. Wrong Priorities in the Search for Assistants

When searching for professional assistants, buyers often prioritize cost over qualifications and expertise. However, it is crucial to clearly define goals and assign specific tasks to the assistants to ensure they understand the buyer's needs. CPAs must also follow deadlines, and it is essential to set expectations and communicate them clearly.

  1. Reading Reports Only

Relying solely on reports provided by the seller is another common mistake. While these documents are important, checking the primary documentation and the basis on which the reports were formed is essential to obtain a full picture of the company's affairs.

  1. Insufficiently Decisive Confrontation with the Seller's Subcontractor

Confronting the seller's subcontractor, such as the accountant, can be challenging. However, it is crucial to obtain all necessary documentation, and buyers should not accept excuses from the seller or their subcontractors for withholding information. If necessary, legal action may be required.

  1. Insufficient Attention to Staff

Buyers often overlook the importance of checking the employment information of the company's staff. This is particularly critical in industries such as restaurants, where labor laws are often violated. It is essential to verify employment information for each employee, especially if the buyer is applying for immigration status.

How to Avoid Mistakes

5 ошибок при проверке 3

To avoid making costly mistakes during the due diligence process, buyers should:

  • Hire professional assistants with expertise in finance, accounting, US corporate law, and physical inspections.

  • Set clear goals and assign specific tasks to assistants and ensure that they meet deadlines.

  • Check not only the company's reports but also the primary documentation and basis on which the reports were formed.

  • Be persistent in obtaining all necessary documentation, even if it means confronting the seller or their subcontractors.

  • Pay close attention to the company's staff and verify their employment information.

Conducting thorough due diligence is essential when acquiring a business. Buyers must not rely solely on reports provided by the seller and should investigate the primary documentation and basis on which the reports were formed. Read about expectations and reality during the verification process in our article.

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