Is it necessary to hire an accounting firm to verify due diligence?

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January 11, 2021

by a searcher from University of Calgary in New York, NY, USA

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Reply by a searcher
from Washington University in St. Louis in Denver, CO, USA
If the deal is being financed I have only seen this waived if it was a small add-on to a broader platform (that was generating cash) or an asset deal where we were not buying 'substantially all' of the business, otherwise it was always required. You will also want some form of 3rd party work for peace of mind as well if this is a search fund deal (and the platform). Everyone will tell you that they keep great books until you start digging in (accounting is not likely the primary area of focus for many businesses but it becomes front and center at deal time and they are trying to get highest and best for their business). I have seen a few situations where there were expenses stuck in prepaids that would have made a meaningful difference in profitability profile that the accountants found ahead of time, and also did a carveout where certain things were missed and it made a difference the other way so you would want to CYA. I have also found it easier to get answers to tougher questions if it's not you asking, rather the accountant (you can save some goodwill for other points in the deal process).

One last point on this, be wary of sellers providing 'audits' on 3rd party firm letterheads that are in fact 'reviewed' or 'compiled' financials, meaning the external firm hasn't done too much of a review either so I would not hang my hat on those.

Even if you have seen or been through a QofE yourself (or have closely managed the firm doing one) and know where to look and feel comfortable with what to do with the GL review and a cash proof, your investors/lenders will make this decision for you I suspect. I know a couple of smaller shops and an individual (ex. accounting partner) who I can suggest/connect folks to if interested. I have also worked with CohnReznick in the past and I can say that do great work as well (@Jeff Michelson).
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Reply by a professional
from Harvard University in Atlanta, GA, USA
^redacted‌ I've seen it done without a CPA. If so, you may want to consider our "Red Zone Review" which takes in a searcher's own analysis and with that input we do our own independent review of your work confirming the analysis is good and giving you piece of mind. I will send you a message.
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