What are the differences between a business appraiser, CPA auditor, and a due diligence expert?
It has been said that you cannot judge a man until you have walked a mile in his shoes.
Over the years I have trod the business path--for much more than a mile--in the role (if not in the footwear) of business appraiser, CPA and due diligence expert.
And since setting up Due Diligence Assistance for buyers, I have gained a new respect for what knowledgeable CPAs have to go through when assisting their buyer clients in investigating a business. With very limited information they must determine if the books are "cooked" (containing false and incomplete information) and if so, by how much.
The CPA may find him or herself in the most awkward position of being informed--usually by the seller--that the business books are not completely accurate because they understate the company's earnings--a fabrication intended to reduce the seller's tax liability. Most accounting professionals who listen to that explanation have to wonder if the seller--who now has admitted to being dishonest--is also attempting to deceive the buyer by claiming the company does more business than is shown in its records.
Meanwhile, the appraiser often is asked to take the information provided by the accounting professional and use it to establish a "fair market value" on which the buyer can rely. The competent appraisal professional will, of course, analyze the macroeconomic factors--including industry trends, status of the economy and competitive environment--plus the capacity of the company (given the condition of its assets, the ability and loyalty of employees, and effectiveness of its marketing programs), to continue functioning in the future as it has in the past.
And what does the appraiser make of the figures furnished by the CPA who is analyzing the company's books and hearing about some manipulation by the seller?
The appraisal professional will have to issue a report with a disclaimer, stating either that: 1) the value is based on the figures supplied by the accountant--figures that should be verified, if possible, by the buyer; or 2) the value assumes the validity of income information which has been claimed, but has not been documented, by the seller.
This is the puzzle, not yet solved, that often is delivered to the due diligence advisor, along with the request that he, or she provide a solution.
If the CPA is a "numbers scientist" and the appraiser is a "theorist" who understands how to apply principals and formulae to specific situations, the role of the due diligence expert is to be the "professional investigator." This is the person whose skill is focused on taking all this information, mixing it with his or her detective work, and providing a sensible interpretation of what was learned, so the buyer can make an intelligent decision about whether or not to buy the business, and if so, for how much.
Among the questions to be pondered by the due diligence pro is the validity of the seller's stated reason for wanting to turn the business over to someone else. In my experience, there often is another reason--one that is not stated. And part of the job of the person conducting due diligence is to try to learn what's really going on.
Accurate answers to this question can shed a new light on the situation and help a buyer to determine--along with the other information provided by the due diligence advisor--if this really is a business worth buying, and if so, at what price.
See all contributions from Willard Michlin
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