Buying a Small Business, Accounting Tips to Minimize Due Diligence Costs

Successful businesses are often on the hunt to acquire other businesses for strategic reasons. Acquiring a competitor to increase market share or buying out a supplier to add synergy to an existing business are just a few of the many reasons businesses seek acquisitions. At times, an acquisition may be relatively small and a buyer’s cost-benefit analysis may determine that large accounting fees for due diligence work simply aren’t worth it.

The temptation to minimize professional fees is understandable. However, there exists a happy middle ground in between spending large sums of money and completely foregoing due diligence work altogether. The technological capabilities inherent in current accounting software, coupled with the current CRA online reporting abilities, make some of the due diligence work quicker and easier to perform than in the past.

Assertions can be verified with tax filings

With the online reports available through the CRA, a business can print its entire filing history and results immediately upon request. This includes its corporate tax, GST and payroll filings histories. A potential buyer can obtain and print this information from online reports, as of today, and compare them against the financial information being provided by a seller. If a buyer is skeptical that a seller has a bias towards presenting their financial records in a favorable way, the seller’s assertions can be verified with their tax filings.

Corporate tax and GST returns can be used to verify sales and expense figures being asserted by a seller. A seller may be biased towards inflating sales and deflating expenses.  But if these biases are embedded into the tax filings, the tax cost is expensive at a corporate tax rate of 13% and GST rate of 5% in the province of BC. Similarly, payroll filings can be used to verify the number of employees and family members who are on payroll. Shareholders and family members may be contributing to a business without being compensated at a full rate. The ability to retrieve these reports directly from the CRA online instead of from a business potentially being acquired should also give a buyer added reassurance. The bottom line is this: the direct availability of CRA reports on a whim readily reduces professional fees.

Accounting software, fact checking

Another large contributor to minimizing due diligence costs is the accounting software currently available to most businesses. Data can usually be extracted easily to verify against information from vendors and CRA filings. Many small businesses use Quickbooks, and the reporting functions of this software facilitate the extraction of information for various purposes quickly and easily.

Technological advancements have made traditionally costly and time-consuming fact checking tasks into easy, inexpensive, and expedient tasks. Given how technology can assist a buyer with fact checking, forgoing any due diligence would be unnecessarily negligent on a buyer’s part. It turns out that doing your homework isn’t as hard as it used to be, nor is it as costly!

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Mew & Company in Vancouver B.C.

Mew & Company Chartered Accountants in Vancouver BC are experts in helping small business owners to save time and money in managing their businesses. 

If you are looking for personal or corporate tax planning services, or if you have questions, please don’t hesitate to contact us to learn more about how we can help you!

Call us at 604-688-9198 to learn more about how we can help.