When evaluating the purchase of a business, buyers naturally focus on the purchase price, revenue, profitability, and growth potential. However, some of the most important decisions are made before negotiations are finalized. One of those decisions is selecting the professionals who will conduct the due diligence.
A strong acquisition team should examine the business from multiple perspectives. For transactions involving significant operating assets, three outside professionals can be particularly valuable: an M&A attorney, a CPA firm experienced in transaction advisory work, and an industrial machinery and equipment appraisal firm.
Each professional has a different responsibility, but their findings often overlap. Together, they can help a buyer determine whether the proposed transaction is supported by the business’s legal, financial, and tangible-asset realities.
Begin by Understanding the Assets
In an asset-intensive business, it can be beneficial to understand the physical assets early in the due diligence process.
Manufacturing businesses may own CNC machines, production lines, fabrication equipment, forklifts, compressors, tooling, and other specialized machinery. Contractors may own excavators, loaders, cranes, trucks, and trailers. Medical businesses can have substantial investments in imaging, diagnostic, surgical, and laboratory equipment.
An experienced industrial appraisal firm can help determine the value of these assets in the appropriate marketplace.
This is important because original cost and book value do not necessarily represent current market value. A machine purchased for $500,000 ten years ago may be worth considerably less today. Conversely, a fully depreciated machine with little or no remaining book value may still have substantial value in the secondary market.
Depending on the transaction, the appraisal may include Fair Market Value, Orderly Liquidation Value, or another appropriate standard of value.
Buyers should look for an appraisal firm with experience valuing the specific types of equipment involved and the ability to produce a well-supported, defensible report.
Determine What the Assets Mean to the Lender
An equipment appraisal can also provide information about the collateral supporting acquisition financing.
A buyer may be purchasing a company with millions of dollars in machinery, but lenders generally do not base collateral decisions solely on the seller’s balance sheet or the equipment’s historical acquisition cost.
The lender may be more interested in what the equipment could reasonably generate in a secondary-market or liquidation scenario.
Understanding these values early can help the buyer identify potential financing gaps before the transaction reaches the closing table.
The appraisal may also reveal other important issues. Equipment could be obsolete, highly specialized, difficult to resell, leased rather than owned, or approaching the point where major replacement expenditures will be necessary.
Those findings can influence more than collateral value. They can affect future capital expenditure requirements and the overall economics of the acquisition.
Have a CPA Test the Financial Story
Once a buyer understands the assets, the next question is whether the company’s financial performance supports the proposed purchase price.
This is where an experienced CPA firm becomes critical.
Financial due diligence goes beyond verifying that numbers appear on a tax return or income statement. The CPA should evaluate whether the seller’s earnings accurately reflect the business’s sustainable earnings.
Depending on the size of the transaction, this may involve a Quality of Earnings analysis.
The CPA may examine adjustments to EBITDA, owner compensation, unusual expenses, related-party transactions, customer concentration, accounts receivable, inventory, debt, working capital, and other factors.
Small adjustments can have significant consequences when a business is being valued using an earnings multiple.
If an acquisition is priced at five times EBITDA, for example, a $300,000 change in normalized EBITDA could potentially represent a $1.5 million change in the indicated transaction value.
For this reason, buyers should seek a CPA firm with actual M&A and transaction advisory experience, not simply a firm that handles routine bookkeeping and tax preparation.
Protect the Transaction With the Right M&A Attorney
The attorney’s responsibility is to help convert the proposed business deal into a properly structured transaction while identifying and addressing legal risks.
An attorney who regularly handles mergers and acquisitions can advise the buyer on asset versus stock purchases, representations and warranties, indemnification, contracts, leases, employment matters, intellectual property, regulatory concerns, and other potential liabilities.
The attorney can also respond to findings from the other due diligence professionals.
For example, suppose the industrial appraiser identifies several important machines that are leased rather than owned. Legal counsel can investigate the underlying agreements and determine whether those leases can be transferred.
If the CPA discovers an unusual related-party expense or obligation, the attorney may need to determine whether that relationship continues after closing.
The attorney is therefore not simply reviewing documents. The attorney helps establish protections when the due diligence process identifies risks.
Choose Experience Over the Lowest Fee
Due diligence costs can add up quickly. Buyers may be paying attorneys, accountants, lenders, appraisers, consultants, and other professionals before the transaction is completed.
That can create pressure to select firms based primarily on price.
This approach can be shortsighted.
The better question is whether each professional has the qualifications and experience necessary to identify issues that could materially affect the transaction.
Buyers should ask about previous M&A engagements, industry experience, professional qualifications, reporting standards, and who will actually perform the work.
Saving several thousand dollars on professional fees provides little benefit if inadequate due diligence contributes to overpaying for a company or overlooking a major liability.
One Transaction, Three Different Perspectives
Effective due diligence is ultimately about seeing the same acquisition from several different angles.
The CPA asks: Are the earnings and financial statements reliable?
The industrial appraiser asks: What are the machinery, equipment, and tangible assets actually worth?
The M&A attorney asks: What legal obligations and risks will the buyer assume, and how should the transaction be structured to address them?
Those questions are different, but the answers frequently intersect.
A successful acquisition is not simply about finding a good company. It is about understanding what is being purchased before committing the capital.
Building the right professional team early in the process gives the buyer better information to negotiate the purchase price, arrange financing, structure the transaction, and decide whether the opportunity makes financial sense.
In many cases, the most valuable result of due diligence is not confirming what the buyer already knows. It is discovering what the buyer did not know to ask.
