Acquisition Audit: To Know...

Let us list the main areas that can be analyzed:

• Accounting and financial audit: analysis of the main balance sheet items – inventory, receivables, fixed assets, financial debt; formation of earnings: incoming and outgoing invoices;

• Legal audit: company registration and corporate governance; bylaws, registers, share transfers, board meetings, etc.; operating permits, compliance with standards, review of commercial leases and specific contracts;

• Tax audit: corporate income tax, advance tax payments, VAT;

• Social audit: employment contracts, compensation, collective bargaining agreements, internal regulations, employee representation, disputes;

• Insurance audit: fire, general liability, business interruption, vehicles, directors and officers;

• Environmental audit: soil contamination, emissions, compliance with environmental standards;

• Commercial relations audit: customers, suppliers, banks, corporate group.

The scope of the audit will depend on each specific case. It is essential to deepen the analysis for risk factors that prove to be critical for the target company.

The acquisition audit process is a specialist's job. It is best to use a recognized expert with experience in their field. Given the many facets to study, it will generally be a team effort. The audit is certainly not the role of the intermediary or the advisory firm presenting the deal to the prospective buyer. The intermediary lacks the necessary independence to complete this work, even if—out of professional ethics—they must present the file honestly with its strengths and weaknesses.

The auditor, on the other hand, will be commissioned by the prospective acquirer based on a written document describing the exact scope of the engagement. The audit must conclude with a detailed report.

At what stage of the acquisition process should the audit be considered? Given the time and costs involved, the audit is generally performed near the end of the process. The prospective acquirer will already have confirmed their interest in the company, met with the sellers, and examined the development potential.

It is highly recommended to negotiate the price and other terms of the sale before the audit to avoid incurring unrecoverable costs. To prevent the deal from slipping away, the acquirer may propose signing a letter of intent that grants them exclusivity in negotiations for a specified period. The letter of intent outlines the main elements of the final agreement. If the audit reveals no surprises, the transaction can proceed under the agreed terms. Otherwise, renegotiation remains possible.

The acquisition audit or due diligence allows the prospective buyer to obtain an expert opinion on the main risks associated with the targeted company. It is a exercise of due care. The acquirer will assume responsibility for the business upon transfer. But what happens if the seller has concealed important information that surfaces after the deal closes? What recourse exists if certain items were missing from the balance sheet? Representations and warranties can protect the buyer against these risks. This topic will be explored in a future article.

Illustration: Clou

Article initially published in La Libre Économique by Tanguy della Faille, partner at Fondaris, on March 7, 2010. Published/updated version on the Fondaris website with the author's permission.