Transactional Advisory

At Sheppard Morris CPAs, we offer transactional services designed to support both buy- side and sell-side engagements with thorough accounting and tax due diligence, as well as in-depth business analysis.

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Buy-Side and Sell-Side Financial Due Diligence:

Quality of Earnings Analysis: Evaluate the sustainability and quality of earnings.
EBITDA Analysis: Assess the integrity of historical and pro forma EBITDA.
Financial Due Diligence: Conduct comprehensive financial analysis.
Working Capital: Analyze working capital and cash flow requirements.
Pro Forma Assessment: Determine pro forma working capital needs.

Tax Due Diligence and Structuring:

Summarize the company’s tax position.
Identify and quantify tax risks and exposures.
Propose remediation plans to mitigate tax risks.
Collaborate with legal advisors on representations, warranties,
indemnifications, and escrows.

Consider legal entity structures to minimize taxes.
Analyze after-tax proceeds.
Allocate purchase prices to optimize tax basis step-ups.
Structure deals for potential tax-free rollovers.

Business Analysis:

Industry Analysis: Evaluate industry reputation, trends, and market outlook.
Management Review: Assess management’s track record.
Legal and Dispute Examination: Investigate past or undisclosed disputes and legal actions.
Labor and Regulatory Review: Address labor relations and regulatory issues.
Commercial Relationship Strength: Assess the robustness of key commercial relationships.
Pending Liabilities: Identify and evaluate potential liabilities.

Sheppard Morris CPAs provides insights you need for informed decision-making and strategic planning.

Sheppard Morris CPAs Due Diligence Guide for the Sale and Acquisition of a Business

When buying or selling a business, conducting thorough due diligence is crucial to ensure that all financial, legal, and operational aspects are properly evaluated. This comprehensive CPA due diligence checklist is designed to help buyers and sellers navigate the complexities of business transactions with confidence.

Financial Information

1. Review of Financial Statements

Balance Sheets and Profit and Loss Statements: Examine the financial statements for the past five years. Determine if the statements are audited or reviewed and ensure compliance with Generally Accepted Accounting Principles (GAAP).
Tax Returns: Inspect federal, state, and local tax returns for the last three years. Independent Verification: Confirm the accuracy of items listed on the financial statements.
Accounts Receivable: Assess the adequacy of bad debt reserves, review the aging report, and check for any offsets against receivables.
Inventory: Evaluate the inventory of raw materials and finished goods, ensuring the amount is normal for the business type. Identify any obsolete inventory and verify inventory valuation. Investigate any historical overstatements of the cost of goods sold.
Work in Process: Verify that work in process is accurately reflected in balance sheet assets.

2. Physical Assets

Plant, Equipment, Furniture, and Machinery: Verify the physical condition and adequacy for current business operations.
Liabilities: Ensure that liabilities are accurately presented on financial statements, including accrued vacation time and pension liabilities.
Bank and Cash Equivalents: Confirm the amounts in bank and cash equivalent accounts.
Deposits: Check deposits for taxes, insurance, leases, utilities, and other items, and determine if they are refundable.

Tax Returns and Tax Payments

3. Review of Tax Compliance

Income Tax Returns: Verify federal and state income tax returns for each state where the company operates, including the filing status of the company (e.g., S corporation).
Payroll and Unemployment Taxes: Ensure all payroll and unemployment taxes are paid and that employees and independent contractors are correctly classified under IRS guidelines.
Sales and Use Taxes: Confirm the proper filing of tax returns and those of other states.
Property Taxes: Verify personal and real property taxes, including supplemental taxes, and review tax bills.
Local Business Taxes: Ensure local business taxes are paid for each jurisdiction where the company operates.
ERISA Compliance: Confirm the business and its employee benefit plans comply with the Employee Retirement Income Security Act (ERISA).

Liabilities

4. Examination of Liabilities

Debt Instruments: Review all promissory notes, deeds of trust, mortgages, and security agreements.
Litigation: Identify any lawsuits against the business.
UCC Financing Statements: Obtain UCC-1 financing statements and conduct UCC searches in all states where the business operates, including searches under all names and d/b/a’s.
Loans: Review unsecured or secured promissory notes and shareholder loans, including any oral loans.
Mechanic’s Liens: Check for any mechanic’s liens recorded against real property.
Bank Financing: Assess short-term and long-term bank financing.
Pension Plan Liabilities: Evaluate any pension plan liabilities.
Contingent Liabilities: Identify potential unknown or contingent liabilities, such as personal injury claims or other tort claims.
Bulk Sales Notice: Determine if a bulk sales notice should be filed.
Workers Compensation Insurance: Verify the payment status and adequacy of workers compensation insurance.

Litigation

5. Legal Matters

Court Searches: Perform searches in federal court, federal bankruptcy court, and state courts. Review all pleadings.
Claims and Disputes: Identify any threatened lawsuits, claims, arbitration proceedings, or alternative dispute resolution proceedings.
Governmental Actions: Assess any threatened or actual claims, disputes, or actions by governmental or administrative agencies.
Financial Reserves: Evaluate risk exposure and determine if financial statements need reserves.

Claims and Disputes

6. Claims Against or Disputes With the Company

Vendors and Suppliers: Review claims or disputes from vendors of materials and services, suppliers, and customers, such as product warranty claims.
Employees: Investigate claims from employees, such as wrongful termination, discrimination, and wage and hour claims.

Environmental Reports

7. Environmental Compliance

Environmental Audit: Conduct an environmental audit with a qualified engineer.
Previous Reports: Review prior environmental reports, audit documents, and engineering reports. Obtain copies of governmental records regarding hazardous materials or environmental law violations.
Underground Tanks: Check for the presence of underground tanks.
Hazardous Materials: Assess current and past use of hazardous materials and ensure proper disposal in accordance with environmental laws.
Government Notices: Verify if there are any notices from governmental agencies regarding environmental law compliance.

Physical Inspection

8. Property and Equipment Condition

Premises: Verify the condition of the premises.
Equipment and Machinery: Assess the condition of equipment and machinery.
Inventory and Raw Materials: Check the condition of inventory and raw materials.

Personal and Real Property

9. Ownership and Liens

Personal Property: Verify ownership through invoices and check for liens via UCC search.
Real Property: Obtain copies of recorded deeds, current title reports, and old title insurance policies and surveys. Determine the need for new title insurance.

Intellectual Property

10. Intellectual Property Assets

Patents: Verify ownership of patents and check for infringement actions. Ensure necessary patents for operation are in place.
Trademarks and Logos: Confirm registration and ownership of trademarks and
logos. Conduct a trademark search.
Licenses and Royalty Agreements: Review all related agreements.
Telephone Numbers: Verify rights to business telephone numbers.
Website and Content: Confirm ownership rights in the website and its content.

Trade Secrets and Technology

11. Proprietary Information

Documentation: Obtain written information on trade secrets and technology, such
as diagrams, software, and processes.
Licensed Software: Review the list of all licensed software and other technology.

Leases and Contracts

12. Leases and Agreements

Personal Property Leases: Verify terms for equipment, telephone systems, and copy machines.
Real Property Leases: Review lease terms, rental amounts, options, defaults, and assignability. Obtain estoppel certificates if necessary.
Contracts: Examine all written and oral contracts, including bank financing, distributor, manufacturer representative, employment, material supplier, licenses, franchises, and purchase orders. Confirm no defaults and assignability.

Insurance

13. Insurance Policies

Past Coverage: Ensure the business was covered by adequate liability insurance. Verify premium amounts, policy limits, and deductibles.
Types of Insurance: Review workers’ compensation, liability, casualty, life and accident, product liability, umbrella, and automobile insurance policies.

Customers and Suppliers

14. Customer Relationships

Customer Lists: Review the list of the 20 largest customers and assess assurances of continued business.
Customer Contracts: Examine customer contracts and their remaining terms.

Supplier Relationships

Supplier Lists: Obtain a list of raw material suppliers and contracts. Identify important suppliers and associated costs.

Government Regulations and Filings

16. Regulatory Compliance

Permits and Licenses: Verify all required permits and licenses for water, air quality, hazardous waste, fire, and special operations.
Compliance: Ensure compliance with military/Department of Defense requirements, industry listings (e.g., U.L.), and other governmental requirements. Verify building code compliance.

Corporate Records

17. Documentation

Corporate Documents: Review Articles of Incorporation, Bylaws, amendments, corporate minutes, and stock books.
Business Licenses: Verify qualification to do business in each state and county.
Shareholder Agreements: Review shareholder lists and agreements, stock bonus and option agreements, voting trusts, proxies, subsidiaries, and partnerships. Ensure compliance with securities law filings.

Professional Relationships

18. List of Professionals

Key Contacts: Obtain the names of the business’s accountants, attorneys, and insurance agents.

Additional Considerations

19. Executive Discussions

Company Insights: Discuss with company executives any other documents or items affecting the business, economy, competitive landscape, new or competing product lines, and industry developments.
Executive Interviews: Conduct interviews with company executives for further insights.

By following this comprehensive checklist, both buyers and sellers can ensure that all critical aspects of the business transaction are thoroughly evaluated, minimizing risks and laying the groundwork for a successful acquisition or sale. For personalized guidance and assistance in your due diligence process, contact Sheppard Morris CPAs.