This blog series explores the steps in buying and selling a business, which tend to be much more complex than many business owners realize. In my last two blog posts I explained how due diligence comes into play and the nature of due diligence requests related to the structural underpinnings of the business entity to be sold. In this post, I will provide some examples of the types of financial information that the purchaser requests from the seller in the due diligence process. Specifically, a purchaser is likely to make due diligence requests in regard to both tax-related and accounting-related documentation. If you are selling your business, you should be prepared for these sorts of requests, and do some advance preparation with your attorney and your certified public accountant to make sure that your business’s financial house is in good order. Here are some examples of the types of financial information a typical purchaser will request:
- Taxes: At a minimum, the seller can expect to be asked to produce copies of all federal, state and local tax returned for the last three years. If business is conducted in any foreign jurisdictions, the foreign tax returns will also likely be requested. If the business has been audited, the seller will likely need to provide a description of the nature of that audit. The purchaser may request copies of any correspondence to and from the Internal Revenue Service (IRS). If the seller’s business entity has filed a tax election, such as an election to become a subchapter S corporation, that document will be relevant to the due diligence process. If the seller has requested a revenue ruling from the IRS, the purchaser will undoubtedly request a copy of the related documents. Additionally, if the seller has received any legal or accounting opinions related to its tax reporting, the purchaser will likely request to examine those opinions.
- Accounting: On the accounting side, the purchaser will likely ask the seller to produce standard financial statements for the last three years, including a balance sheet, income statement, profit and loss statement, and a statement of cash flows. These reports will likely be requested both on a year-end and on a monthly basis. The purchaser may request information regarding the bookkeeping and accounting processes of the business to be sold, to ensure that the financial documents have been properly prepared. Detailed trial balances that support the financial statements may also be requested.
My next blog post will discuss additional areas of investigation covered by the due diligence process.
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