67 Accounting Risks

     to Detect During Due Diligence

         for Buyers and Sellers

               of Small / Midsize Businesses

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You’ll love hating this exposé . . . Avoiding Accounting Hell.
It can help you anticipate risks during due diligence. And then solve post-completion problems.

For decades, I’ve been keeping a log of the pitfalls searchers detect before deals are done. And the costly obstacles that arise post-completion. My checklist, below, details them.

Searchers can save lots of time and aggravation using this checklist. It points to the trouble spots,  which you might see before you buy a business. Or, afterwards.

What kind of problems? Mismanagement, undesirables, inadequacies, incompetency, unnecessary risks, unrealistic foresight, errors and omissions, governmental annoyances, etc.

What’s the penalty for searchers? Buying the wrong business or buying the right business on the wrong terms.

Accounting is foundational.

Financial reporting won’t be right if the accounting isn’t right. (Garbage-In / Garbage-Out)

Do-it-yourself accounting is common, and it’s one of the most costly risks.

And that will adversely affect: Due diligence, financing, valuation, negotiating, personal guarantees, buy/sell agreements and post-completion operations.

The Checklist

Analyses

financial ratios inconsistent with industry norms.

breakeven point is a mystery.

confusing profit for cash flow.

cyber risk.

inaccurate financial reporting.

Erroneous . . .

bookkeeping (see posting history).

operating vs financing leases

classification of employees, contractors, etc..

computation of wages and withholding.

Improper . . .

accounting for deferred revenue

distributions to owners, shareholders, etc..

funding of employee benefit programs.

Inadequate . . .

accrual (especially payroll).

backup and storage procedures.

backup of personnel/cross training.

continuing education.

cost accounting.

data entry errors.

documentation of petty cash.

external accounting services lacking useful scope.

external oversight.

financial reporting.

fraud prevention.

granting of credit.

internal auditing.

invoicing timing or collection

performance standards of internal and external labor.

policies and procedures.

prepaid expenses

pricing.

purchasing controls.

record retention and storage systems.

recordkeeping for employees paid time off.

reporting

Insufficient . . .

disaster recovery plan.

outsourcing.

recordkeeping of employee benefit programs.

working capital.

Misleading . . .

skimming (not- or under-reporting revenue).

expenses paid by another entity

Mismanagement . . .

actual or undetected noncompliance with loan covenants.

history of audits by taxation authorities.

incompetent accounting personnel.

inefficient scheduling (inventory, labor, line of credit.

insecure access rights to accounting system.

instances of negative cash flow.

of accounts receivable or accounts payable.

of documentation supporting accounting.

outdated technology.

over, under, or failure to pay taxes.

not using optimum accounting software.

risky reliance on accounting software.

running personal expenses through the business.

timing and consistency of the closing the books.

undesirable accounting for inventory.

unhelpful or untimely financial reporting.

untimely/erroneously reconciling accounting with bank statements.

unwisely handling all the accounting in-house.

Misunderstanding . . .

accounting.

use of software.

the length, cost and profit of the business cycle.

Nonexistent . . .

budgeting and analysis.

contracts.

debt covenant definitions don’t match contracts

measurement of KPIs.

nondisclosure agreements.

separation of employee/accounting duties.

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You can avoid other pitfalls, and improve your opportunities, using my books:

120 Financial Lifelines for Small Businesses (Complimentary)

How to Prepare Yourself and Find the Right Business to Buy

How to Buy the Right Business the Right Way—Dos, Don’ts & Profit Strategies

21st Century Entrepreneur Ideas for Kids and Aspirational Adults (Complimentary)

How to Get ALL the Money You Want For Your Business Without Stealing It
(USA and Canadian versions.)

 

Improve your search and dealmaking:

Schedule an hour of coaching with Ted Leverette, The Original Business Buyer Advocate ®

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Email Ted J. Leverette, The Original Business Buyer Advocate ®. “Partner” On-Call Network, LLC