If you are planning to take over a business while limiting the risks, it is essential to carry out an acquisition audit (also known as due diligence). This enables you to check the information provided by the seller and ensure that the sale price is not overestimated. Depending on the project, the size of the target company and its sector of activity, different types of audit may be required, such as accounting and financial, tax, corporate, legal, contractual, organisational, etc. audits.
What are the issues involved in an acquisition audit?
The acquisition audit is a crucial stage in the process of taking over a company, enabling an overall diagnosis to be made and a negotiation strategy to be defined. The overall diagnosis aims to identify the strengths and weaknesses of the business to be taken over.
If the audits reveal weaknesses, it is important to find solutions that will be discussed during the negotiations. It is therefore advisable to ask for specific guarantees to cover these risks, such as asset and liability guarantees, bank guarantees, earn-out clauses, etc. Negotiations should be conducted diplomatically, as excessive demands can bring negotiations to a halt.
The main aim of the acquisition audit is to establish a basis for negotiation and to justify any changes to the sale price and the introduction of guarantees.
Difference between diagnosis and audit :
A diagnosis of the business enables information to be gathered and an initial analysis to be made in order to decide whether or not to go ahead with the takeover project. The acquisition audit, on the other hand, aims to verify the accuracy of the information obtained during the diagnosis, through an in-depth analysis carried out by experts.
What are the main topics covered in an acquisition audit?
The list of subjects covered during the acquisition audit depends on the business takeover project. It is important to distinguish between the acquisition of a business and the acquisition of company shares.
The purchase of a business consists of acquiring a set of intangible and tangible assets intended for the operation of a business. The buyer does not take over the company’s debts and receivables. In this case, the analysis focuses mainly on the company’s sales and contracts.
Buying a company involves acquiring the company’s assets and liabilities. In this case, an in-depth analysis of the company as a whole is required, and various audits can be carried out, such as accounting and financial, tax, legal, social and organisational audits.
How should the acquisition audit be organised?
It is recommended that the acquisition audit be carried out after the letter of intent (pre-protocol) has been signed, but before the transaction is finalised. However, it should not be carried out too early or too late. Ideally, the audit should be carried out as early as possible, after you already have a good knowledge of the target and have negotiated certain key elements of the deal.
The cost of the audit depends on the number of audits to be carried out and the level of expertise of the professionals involved. Usually, the costs of the audit are borne by the buyer (but it can as well be split). An engagement letter must be drawn up to define the purpose of the assignment, the scope of the work, the duration, the information to be provided by the vendor, the auditors’ fees, etc.
At the end of the audit, a report is submitted to the purchaser. This report summarises the reservations expressed by the auditors, the company’s strengths and weaknesses, and the solutions to be considered. Depending on the report’s conclusions, the buyer will decide whether or not to continue negotiations.
Who can carry out an acquisition audit?
A number of professionals can carry out an acquisition audit but specialized lawyers are well placed and experienced to provide the best audit service. MFL registered lawyers remain at your entire disposal to assist you with an overall audit in the event you plan to sell or buy a business. MFL will provide you with the best lawyers to handle your issues and give you the appropriate advices.