Acquiring an accretive business is one way business owners can grow their companies and expand their wallet share. A focused M&A strategy can enable a profitable company to achieve explosive growth and enter new geographic markets/customer segments more expeditiously in today’s global environment.

However, developing and implementing a merger or acquisition strategy is often a heavy lift that will demand a significant amount of human capital and business resources, including both time and money. Critically important to the success of the acquisition is the due diligence process. The main goal of due diligence is to establish that representations made by the seller appear factual and accurate, then evaluate whether achieving the outcomes identified during the planning and search process seem realistic under the circumstances.  The depth of due diligence is generally influenced by several factors including the type of business, value of investments, and obligations (i.e. debts, contracts, etc.), among others.

To help ensure the due diligence process is executed properly, companies in M&A mode typically retain a team of financial and legal professionals, including an investment banker/business broker, CPA, and M&A attorney.  However, an additional expert you might consider adding to your M&A team roster is a forensic accountant.

Although most savvy investors engage in financial due diligence, forensic due diligence is often overlooked. While financial due diligence is sought to provide an overview of business trends and fluctuations based on a macro-level view, forensic due diligence seeks to uncover financial irregularities, unusual patterns and anomalies identified in the transaction-level data maintained by the business.

Transaction-level data can identify red flags with respect to abnormal and/or suspicious activities.  Forensic due diligence may also involve investigating the target company’s involvement in any unlawful or unethical activities that could result in a threat to the prospective buyer.

Additionally, a forensic accountant can play a valuable role in the M&A due diligence process by:

• Helping you understand the general terms of the M&A agreement from a financial perspective.
• Evaluating the accuracy of the target company’s financial statements and forecasts.
• Identifying future growth prospects of the target company, including analyzing cash projections compared to those of competitors.
• Inspecting existing contracts to assess the accuracy of reported revenues and expenses.
• Performing investigative research into the target company’s prior dealings, including background checks on key executives and employees.
• Assessing the target company’s existing tax structure and suggesting possible tax-saving strategies.
• Uncovering important facts about the target company that could have an effect on the purchase price and deal structure.

Performing forensic due diligence often results in the identification and quantification of:

• Unrecorded and/or understated liabilities and overstated assets.
• Overstated sales and/or understated expenses.
• Inaccurate and/or unrealistic budgets and forecasts.
• Management and executive inefficiencies or incompetency.
• Business deficiencies in comparison to competitors or industry standards/best practices.

Some of the tangible benefits of performing forensic due diligence as part of the M&A process include:

• Valuable information that helps you make better decisions.
• A thorough understanding of the value of your business.
• An independent analysis of the financial statements and underlying support.
• Peace of mind through proactive attempts to minimize post-closing surprises and disputes.

Forensic due diligence can also result in stronger negotiating leverage to justify an adjustment to the purchase price to reflect the fair market value of the business.

Merger and acquisition transactions are not always black and white. Mercadien can serve as your trusted advisor throughout the M&A process and  help your business understand the risks and opportunities inherent in M&A activities. Pre-transaction, Mercadien demonstrates value by analyzing critical financial drivers in sales and purchase agreements while mitigating potential reputational and regulatory challenges. Post-transaction, Mercadien can work with companies to identify and resolve disputed financial issues and help companies maintain compliance.

If you’re interested in adding a forensic accountant to your M&A team or would like to learn more about how Mercadien can help you through the M&A process, please contact me at fpina@mercadien.com or (609) 689-2319, or my colleague Jeffrey Baresciano, CPA, CFF, ABV, CVA, at (609) 689-2386 or jbarsciano@mercadien.com.

DISCLAIMER: This advisory resource is for general information purposes only. It does not constitute business or tax advice and may not be used and relied upon as a substitute for business or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified accountant, tax practitioner or attorney licensed to practice in the jurisdiction where that advice is sought.