6 DOWNSIDES TO USING A CPA FIRM FOR DUE DILIGENCE ON A SMALL- TO MEDIUM-SIZED DEAL

A CPA firm will have expertise in analyzing your target company’s financials, but they might not give you a clear picture of your deal. Depending on who you hire to deliver your due diligence report, your Quality of Earnings (QoE) can torpedo an otherwise great deal. That’s the exact opposite of what you’re paying for when hiring a reputable firm to close your deal!

Here are six downsides to hiring a CPA firm for due diligence that first-time buyers need to know:

1. Audit Background - Most CPAs have an audit background. This primes them to look for every instance in which a company differs from the perfect financial state or generally accepted accounting principles (GAAP). CPAs often have experience auditing multi-billion-dollar companies with exception lists, but that is not what a small business acquirer needs during financial due diligence.

2. Size of Deal Dictates the Quality of Professionals Doing Your Work - As a first-time customer of a CPA firm, you will likely be handed off to the newest and lowest quality professional to conduct your audit. They may add more risk to your deal than they will take away.

3. Service Outsourcing - A CPA firm may offer the price you want for due diligence services, but your work may be outsourced to meet that price. Sometimes the work will be done overseas while you still communicate with the firm you hired. Other times, a reputable US-based CPA firm will fully outsource your work to an Indian company that you don’t know. This could lead to language misunderstandings, time zone disparities, and different financial standards that will need to be translated.

4. Risk Aversion - Most CPAs are risk-averse meaning they won’t understand why anyone would want to buy an imperfect business. The fact that not every dollar is contractual or every customer has lasted for 30 years creates risk for them that they will transfer to you. Your due diligence report may cover items with considerable detail that will end up being mostly unimportant to your deal.

5. Unwelcome Power Dynamics - By asking a CPA to prepare your QoE, you give them temporary power over your deal. Since you will need a reasonable QoE to close, CPAs recognize that they have the power to block your deal. They may make it difficult to achieve a level of reasonableness, go through a longer list of items than is needed, or be overly particular around the data that they need to solve issues. Though a CPA may seem trustworthy by virtue of being a CPA, they may insert themselves as a power broker into your deal. It can be difficult to see this happening or know how to move forward when it does.

6. Lack of Prioritization - Due diligence provides an analysis of a business so you, as a buyer, can understand which issues are material enough to address with a purchase price or structure adjustment or which issues are big enough to require mitigation soon after the deal closes. Most first-time buyers will need an idea of the prioritization of issues found during analysis. You’ll need to know why an exception matters and how to negotiate retribution for it. A CPA firm won’t prioritize. They’ll leave you a list of problems that you’re going to have to solve on your own.

Your turn to share: What challenges have you had with CPAs during the acquisition due diligence process?



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