Business Advisory, M&A, and Due Diligence FAQs

Financial due diligence is a focused review of a target company’s financial information to help a buyer understand the business’s historical performance, financial position, cash flow, working capital, debt, and potential financial risks.

The review may include:

• Historical financial statements
• Tax returns
• General ledgers and trial balances
• Revenue and gross profit trends
• Customer and vendor concentrations
• Accounts receivable and payable
• Inventory
• Payroll and employee-related costs
• Debt and other liabilities
• Related-party transactions
• Owner compensation and discretionary expenses
• Capital expenditures
• Working-capital requirements
• Significant accounting adjustments

Related Service

Business Advisory, M&A, and Due Diligence

Financial due diligence is not the same as an audit and does not provide an audit opinion or assurance regarding the financial statements.

The scope depends on the transaction, available records, buyer objectives, financing requirements, industry, and identified risks. Due diligence may also require separate legal, tax, operational, commercial, technology, environmental, or valuation reviews.

A buyer should generally review enough reliable financial and operating information to understand how the business generates revenue, incurs expenses, produces cash flow, and manages its assets and liabilities.

Relevant records may include:

• Financial statements for multiple periods
• Business tax returns
• General ledgers and trial balances
• Bank and credit card statements
• Sales reports and customer information
• Accounts receivable aging
• Accounts payable aging
• Inventory records
• Payroll reports
• Fixed asset and depreciation schedules
• Loan and lease agreements
• Owner and related-party transactions
• Significant contracts and commitments
• Sales, payroll, and other tax filings
• Budgets and forecasts
• Information supporting proposed adjustments to earnings

Related Service

Business Advisory, M&A, and Due Diligence

The records should be reconciled where possible. Differences among tax returns, financial statements, accounting records, bank deposits, and seller-prepared schedules may require further investigation.

The availability of financial records does not by itself establish that the records are accurate, complete, or prepared under an appropriate accounting framework.

In an asset purchase, the buyer acquires specified assets and may assume specified liabilities of the business. In a stock purchase, the buyer acquires ownership interests in the entity that continues to own its assets and liabilities.

The structure can affect:

• Which assets and liabilities are transferred
• Tax basis and depreciation
• Allocation of the purchase price
• Contracts, licenses, and permits
• Employees and benefit arrangements
• Existing tax exposures
• Legal liabilities
• Accounting for the acquisition
• Future sale consequences

Related Service

Business Advisory, M&A, and Due Diligence

Certain asset acquisitions may also create federal reporting obligations involving the allocation of consideration among the acquired assets.

The preferred structure cannot be determined from tax considerations alone. Buyers and sellers should coordinate with qualified legal, tax, accounting, and valuation professionals before finalizing the transaction.

ABC CPAs advises on accounting and tax considerations but does not provide legal services or independent valuation services.

No. Adjusted EBITDA may be one measure used to evaluate operating performance, but it is not automatically the value or purchase price of a business.

Proposed adjustments may involve:

• Owner compensation
• Personal or discretionary expenses
• Nonrecurring income or expenses
• Related-party rent
• Unusual professional fees
• Startup or expansion costs
• Changes in staffing
• Unsupported or projected cost savings
• Revenue expected after the transaction

Related Service

Business Advisory, M&A, and Due Diligence

Each adjustment should be evaluated for factual support, recurring effect, and relevance to the buyer.

Business value may also depend on factors such as:

• Industry conditions
• Growth prospects
• Customer concentration
• Management dependence
• Working-capital needs
• Capital expenditures
• Debt
• Contractual obligations
• Operational risks
• Market conditions
• Transaction structure

ABC CPAs may analyze historical financial information and proposed earnings adjustments as part of a due-diligence or transaction advisory engagement.

ABC CPAs does not provide independent valuation services.

ABC CPAs may assist buyers, sellers, investors, and business owners with accounting, tax, financial review, and transaction-support matters.

Depending on the engagement, assistance may include:

• Reviewing historical financial statements and tax returns
• Analyzing revenue, margins, expenses, and cash flow
• Reviewing proposed earnings adjustments
• Evaluating working capital, debt, and other liabilities
• Identifying accounting and tax issues
• Reviewing asset-versus-equity transaction considerations
• Assisting with purchase-price allocation information
• Reviewing financial schedules provided by the parties
• Supporting buyer-side or seller-side due diligence
• Assisting with post-closing accounting and tax implementation
• Coordinating with attorneys, lenders, investors, and valuation professionals

Related Service

Business Advisory, M&A, and Due Diligence

Due diligence cannot eliminate all transaction risks and does not guarantee future performance, financing, valuation, or a successful closing.

The scope should be defined based on the transaction size, structure, deadlines, available records, industry, and objectives of the parties.

ABC CPAs does not provide legal, investment advisory, investment banking, or independent valuation services.