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Acquisition due diligence trap - opinions welcome

Acquisition due diligence trap - "Can you just have a quick look at this" - opinions welcome

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Hi all,

I have a client who is in the process of purchasing another business. We are talking £100-200k consideration - nothing big.

The solicitors have sent over a massive due diligence questionnaire and asked me to "review the due diligence as their input would be greatly appreciated, particularly in respect of the financial information provided to us".

I'm not currently engaged with the client for doing anything other than year end accounts and payroll compliance work. In the past I've done due diligence in house for a company in industry as an employee, so have done it before, but not as an accountant in practice, which I feel is quite a big difference.

My concerns are that potentially I am taking on a massive risk. Obviously I would need to get an engagement letter in place with an appropriate scope (although having not done it in practice I don't actually have a due diligence engagement letter), but I'm also very wary of the "can you just take a quick look at this - quick and dirty" approach as its easy to ask for and leaves one very exposed. My gut feel is that this should be done properly, or not at all. With fees accordingly.

If  I decline to act personally he is likely to be very cross. Potentially it could be outsourced to another accountancy firm, or I could recommend that he seeks specialist advice?

What would you do in my situation?

Your thoughts on this would be welcome 

(I'm ICAEW so bound by ICAEW code of ethics)

 

Replies (21)

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By Moonbeam
12th Feb 2021 14:31

I have an excellent accountant contact who is my alternate should I be ill. He runs a 15 person practice and every time I come across something I feel nervous about, I smartly inform the client that I'm used to forwarding clients to him for this sort of work.
My contact bills the client for his work, I keep the client, and we're all happy.
I've tried worrying myself sick about things I don't have enough experience in, and this is a much better way!

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By Paul Crowley
12th Feb 2021 14:32

You are correct
Quick and dirty mean minimum fee and exposure not in any way reduced
BUT engagement can contain minimise risk clause.

I would recommend client to seek specialist, or point out that I was not doing any due diligence and merely reading accounts and commenting there on

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By OldParkAcct
12th Feb 2021 14:38

As well as the financial input the solicitor will also (probably) be referring the tax warranties to you, so if you do not have the appropriate experience that may prove difficult.

Starting point should be getting a clear picture of what everyone wants and the timescales involved. Until you know that you cannot judge if you have the time or experience to complete the work.

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Replying to OldParkAcct:
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By Paul Crowley
12th Feb 2021 15:01

The last one I had input on was a Micro dental practice.
Off the shelf contract required a deferred tax computation included in the accounts.
My client was the seller

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By Kylo Ren
12th Feb 2021 14:57

All great advice. Thanks

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By lesley.barnes
12th Feb 2021 15:06

If you do decide to do this you need to check your PI insurance will cover you.

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By Wanderer
12th Feb 2021 16:42

"Can you cast your eye over this." = "Can you take full responsibility for every aspect of this, particularly anything financial, so we can absolve ourselves of all responsibility and open up the possibility of suing you when something crawls out of the woodwork in five years time based on some minor thing that we didn't even bring to your attention at the time but you could have asked about if you had done your job properly."

I would recommend that they seek specialist advice, which will be tied up in so many conditions and caveats that the specialist knows will absolve them of responsibility as well.

Barge pole.

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By SteveHa
12th Feb 2021 16:41

You can do it, with very obvious and comprehensive caveats, put in writing.

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Red Leader
By Red Leader
12th Feb 2021 16:55

One approach might be to say to the client "Due diligence can end up being an enormous amount of work with a corresponding price tag. Let me know what sort of budget you had in mind for dd and I'll scope my work accordingly."

Personally, I'd rather do what Moonbeam suggested above if a full blown dd is required.

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A Putey FACA
By Arthur Putey
12th Feb 2021 17:00

Solicitors make a lot of money out of batting Q&A around on the wording of SPAs and the associated DD and a lot of the issues are legal/contractual. If a client asks us to "take a look at" and haveing done so if we feel competent to do the work its a matter of setting boundaries, unless something jumps out of the wording around consideration we usually confine ourselves to checking that warranties and indemnites are in place so the buyer and his advisers are covered. If outside your experience then telling the client its not for you is the right thing to do, as is intoducing a specialist as others suggest. Same goes when asked to perform an audit or a liquidation, as we are neither auditors or insolvency practitioners.... or IFAs, lawyers, notgage advisors, marriage guidance counsellors or clairvoyants .....

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Replying to Arthur Putey:
Red Leader
By Red Leader
12th Feb 2021 17:57

Quite. There does seem a tendency to feel we can offer an opinion/do work in any financial area. Big mistake.

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Replying to Arthur Putey:
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By Homeworker
17th Mar 2021 10:26

Arthur Putey wrote:

..... Same goes when asked to perform an audit or a liquidation, as we are neither auditors or insolvency practitioners.... or IFAs, lawyers, notgage advisors, marriage guidance counsellors or clairvoyants .....


I seem to have been a marriage guidance counsellor rather too many times over the 20+ years I have been in practice! I have also ended up acting for both sides after they have split (with their agreement and without any problems!)
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By jonharris999
15th Feb 2021 08:11

1) There is no need ever to feel guilty, or that one is giving poor customer service, when pointing out to one's client that they are simply and plainly incorrect to hold that this, or anything like it, is simply a question of "just a quick look". They're wrong because of risk, qualification, time, judgement and PI (so only 5 reasons).

2) Provided PI covers you (check the terms, and if it doesn't and you really want to do the work anyway, speak to insurers - they might well add it in with a limit without adjusting premium) then only you can make the call as to your competence, in the same way that you do with every other competence that you judge you are OK to claim.

3) When quoting your fee consider what another firm or consultant would charge if your client approached them. You will probably be happy with less (because of the existing relationship and your existing knowledge of the history) and so this is still a win-win. If you client doesn't see that then they are plain wrong, and we can do nothing about clients who are determined to be wrong.

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David Ross
By davidross
17th Feb 2021 10:01

Surely there is no risk in pointing out that they should try to buy the assets not the company? That leaves most of the liability with the old owners and avoids most of the 'due diligence' that lawyers charge so much for. The lawyers are not going to vote for Christmas and point out the wisdom of such an approach.

If this is not possible you might still get the old owners to drain the pond. We had a similar situation recently and we reduced the purchase price by getting the old owners to take out the retained profits and suffer the personal liability on them. A new legal entity can have a new VAT number etc.

I know I'm a bit off topic but there is a way to win client goodwill without much work/cost by using your own knowledge.

I agree with others that 'forensic accounting' is a special skill. If you've ever seen a bill from a forensic accountant, it is a business worth getting into!

And finally, the client here has chosen to engage lawyers at such a cost that might in itself outweigh the risk they are taking! Why should they not pay an accountant (possibly not you) a similar fat fee for doing part of the solicitor's job?

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Replying to davidross:
By Moonbeam
17th Feb 2021 10:14

Thank you for the education. I'm unlikely to come across this scenario myself, but you never know.

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Replying to davidross:
By Moonbeam
17th Feb 2021 10:14

.

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@enanen
By enanen
17th Feb 2021 10:52

Say that you do not possess the PI Cover or licensing to undertake due diligence for takeovers but can give him firms to obtain quotes from. I always think that all these are for is so the Solicitor has a piece of paper absolving them of any responsibility for their own due diligence.

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By North East Accountant
17th Feb 2021 14:12

You have answered your own question - "My gut feeling is that this should be done properly or not at all"

Plenty of people will try to get you to come and swim in the shark infested waters but no matter what they say you don't have to swim if you don't want to.

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By David Gordon FCCA
17th Feb 2021 16:05

"Due Diligence" has a specific meaning.
You do not say if the Due Diligence is related to the buyer or the seller of the business.
In any case this may be the solicitor being picky and clever.
It is similar to the constant confusion between Accountant and Auditor. (Sometimes deliberate)
Anybody may carry out Due Diligence on the proposed acquisition if the the buyer has faith in that person. Bit similar to an in-depth survey of a property.
But here is the point:
The examiner should point out to the buyer that Due Diligence means that the examiner takes personal £responsibility for his report.
Including in the case of £smallish acquisitions the answer that the nature of the target with its management is simply not capable of providing the information required at economic cost.
The buyer must make his own mind up whether he wishes to buy.
This must also be explained to his solicitor.
The buyer is taking a commercial risk. Nothing is guaranteed. So apart from usual checks on creditworthiness, debtors, creditors, taxes o/s, customer quality.
None of which require Due Diligence, that is it.
In any case the cost would be excessive for business of this size. The work is not rocket science. It is what is says, examination to the Nth degree of financial details and so on, to cover your backside.
You should gently ask the buyer is this what he wants?
The buyer has to communicate with the solicitor, with your help.
You are talking fees of £300 per hour and upwards, if you ask a substantial professional firm. They may well ask for £20k upwards in advance, just to open the files and pay the insurance premium.
the reason is:
If it goes well and straightforward, the client asks "What am I paying you for"
If it turns out to be lemon, the client asks "What am I paying you for?"

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Replying to David Gordon FCCA:
David Ross
By davidross
18th Feb 2021 10:46

That is really helpful, thank you - as you say, the cost may outweigh the risk being incurred and I like the point that all business involves risk

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By David Gordon FCCA
19th Feb 2021 11:39

Dear red leader
Ouch! you may not match Due Diligence to the fee budget!
There is no such thing as a "Minimum Risk clause".
It is similar to Audit or more so. Once you sign up you are required to do the whole thing, or walk out telling the client "Sorry this cannot be done", that is it.

Professional history is haunted by the headless ghosts of firms that tried to cut the audit work to match the fee.

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