By John Cho, Partner, KPMG Enterprise

Essentially, due diligence is two perspectives brought together. For a potential buyer, it's a compulsory process for discovering gaps that may exist between the seller's assertions and the actual financial reality of the business. In order to prepare themselves for what lies ahead when facing a sale, the seller should adopt a buyer's mindset.

Doing this is the best way for sellers to steer clear of the dangers of pricing erosion throughout the due diligence process. By adopting the buyer's perspective, sellers can act proactively and effectively in addressing possible concerns.

While some business owners may suppose that their earnings are characteristic of cash flow, the truth is that for numerous reasons - ranging from extraordinary items to business life cycle phases to financial policy discrepancies - reported earnings and accounting financial statements may not be the best measures for the inevitability of future cash flows. Ultimately, the due diligence process raises questions that must be asked in relation to this area. The due diligence process could lead to potential adjustments to reported financial results to assess the expected level of recurring cash flow and earnings from a business

Generally, there are ways business owners can dodge those questions prior to negotiating the deal. These consist of:
  • Having a robust process in place to track and recognize atypical, non-arm's-length deals
  • Creating a strong and healthy cash flow modeling and forecasting process and comprehending where cash earnings are as opposed to reported earnings for financial record keeping purposes
  • Conducting a pre-sale due diligence test exercise prior to going to market either internally or through an external, third party organization
  • Examining detailed information in an effort to look for things that could be determined as risks to potential buyers and causing attrition in earnings such as contingent payments that should be resolved or formalized contracts that need to be endorsed.
  • Bringing to light any weaknesses in financial functions and controls and implementing a capable and suitable management team
These actions are not only helpful and advantageous when preparing for and facing a sale. They can essentially help you generate superior earnings for your business and increase value whether you're on or off the market.

John Cho is a Partner with KPMG Enterpriseā„¢. He can be reached at 416 777 3994 or johncho@kpmg.ca.

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The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG LLP. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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