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Due Diligence Services
The acquisition of the share capital or assets of a business is an important step for both a company and management. In order to truly understand the value of a business in a particular market sector you need to employ a specialist who not only understands your business but the market as a whole. This is why Trevor Jones as the recognised industry leaders, have a reputation for performing the most comprehensive dealership due diligence process. Failure to use ‘The Experts’ could leave you exposed to significant warranties which you have inherited from the previous owners.
A description of a possible due diligence approach for the acquisition of a target’s share capital and the areas of focus are detailed below:-
A general description of the business activities of the proposed acquisition including a brief historical review and management’s view of the future prospects of business.
| ii. |
Historical trading results |
Review of the historic financial performance of the company as stated in the accounts for the three years and the period covered by the latest management accounts providing a commentary on:
| (i) |
Trading performance, including a breakdown of turnover, gross profit, overheads and profit before interest and tax, commenting on any unusual items or trends together with details of any unusual or non-recurring items which, in our opinion, would either not form part of the current trading activities of the company or which are material to the interpretation of trading results for the period under review, |
| (ii) |
Analysis of turnover and gross profit should be provided for each division/product group. In particular we will review the gross profit by product group and comment on the manner in which this has been determined, |
| (iii) |
analysis, and commentary, on overheads for the company over the period under review, |
| (iv) |
analysis of the repairs and renewals and insurance claims and payments accounts for each period |
| (v) |
commentary on the level of intercompany trading for the period under review. |
| (vi) |
the cashflow for the period under review including an analysis of capital expenditure and a review of working capital movements both over the whole period and within a year to highlight any unusual seasonal trends, |
| (vii) |
any other matters of importance. |
| (i) |
Analysis and commentary on the unaudited assets and liabilities per the management accounts and the audited figures for the 3 years prior to the date of due diligence, |
| (ii) |
details of any fixed assets and any recent revaluations, |
| (iii) |
details of the age and composition of main items of plant and equipment, |
| (iv) |
full analysis of stock over the period under review including commentary on the levels of provisions. Review of any stocktake performed. If none was performed, undertake one during the review, |
| (v) |
extent, nature and accounting treatment of any off-balance sheet financing of assets, |
| (vi) |
details of the spread, age and recoverability of debtors, and comments on the company’s bad debt history and levels of provisions, |
| (vii) |
any contingent liabilities of significance including warranty, product liability and environmental liabilities and obligations, |
| (viii) |
the amount and nature of preferential creditors including a detailed review of the current banking arrangements and current level of debt, |
| (ix) |
summarise and review all the lease agreements in place, |
| (x) |
comment on related party transactions over the period under review. |
Review the working papers of the auditors for the previous 3 years, commenting on the adequacy of the audit and the reliability of the figures, highlighting any areas of concern. In addition provide details of any adjustments made to the company’s management accounts in determining the annual results and the extent of any procedures and adjustments performed specifically for the year end purposes.
| iv |
Trading from the audit date to the transaction date |
Obtain the latest available management accounts and compare actual performance to budget and to previous years obtaining explanations for any significant variances. Comment on the achievability of the budgeted performance for the year to the next audit date.
Agree the performance as reported in the management accounts to the performance reported in the composite.
Review the financial projections of the company for three years post transaction. The financial projections incorporate profit and loss accounts, cash flow statements and balance sheets on an annual basis for the last 2 years and on a monthly basis for the current year. In particular:
| (i) |
Set out the principal assumptions underlying the projections and comment on their reasonableness. In particular our comments on the turnover and margin assumptions by service offered are required by the product group, |
| (ii) |
comment upon the achievability of the projections, |
| (iii) |
comment on the adequacy/necessity of the forecast capital expenditure, |
| (iv) |
comment on the adequacy of working capital facilities, |
| (v) |
comment on the past reliability of forecasts and budgets as compared to actual performance by reference to the three year period ended at the last audit date, |
| (vi) |
confirm the arithmetical accuracy of the projections in relation to the correct application of the assumption above. |
| (vii) |
comment on the adequacy of the repairs and renewals projections based on the historical figures. |
Comment on the service/parts function specifically relating to the utilisation of staff and comment on the efficiency of this function.
| vii. |
Management and employees |
| (i) |
Details of the current management structure including names of individuals, responsibilities, salary, length of service and service contracts, |
| (ii) |
comment on the adequacy of existing management/existing Dealer Principal, |
| (iii) |
broad details of the work force including terms of employment, numbers, pay rates and bonus schemes. |
| (iv) |
an analysis of location and function of the total number of employees, |
| (v) |
dates of salary/wages reviews, |
| (vi) |
details of any incentive schemes, |
| (vii) |
calculation of the estimated redundancy and holiday pay liabilities as at the transaction date |
| (viii) |
detailed review of the employee files listing any legal actions or written warnings noted. |
Review the tax position of the company and its subsidiaries, commenting on the forecast tax charges, the availability of any tax losses and allowances, the impact of any unresolved matters from previous years and the position of the company with regard to PAYE, NI and VAT.
| ix. |
Financial controls and management information |
Review the adequacy of the financial systems and controls. Highlight any areas of concern. Indicate the extent to which existing systems, including computers, appear to be adequate for short and medium term requirements.
Comment on the adequacy of the management information provided on a monthly basis.
Comment on the adequacy, appropriateness and consistency of the accounting policies adopted in the preparation of the Accounts.
Comment on any current, and material past, litigation. Review the appropriateness of any provisions established in respect of such litigation and the extent to which payments out of such a provision have been dealt with in the projections.
Comment on other areas of importance including the following:
| (i) |
pension schemes and indication of their funding position. |
| (ii) |
adequacy of insurance cover, including product liability and buildings insurance stating the level of recent claims, and a summary of recent premiums. |
| (iii) |
any other matters which you consider may be relevant. |
| xiii. |
Financial assistance |
The acquisition may involve financial assistance as defined under the Companies Act. As part of the process of completing the acquisition we review the necessary board memorandum to meet the provisions of the Act prepared by your Lawyers. If applicable, consolidated projections will have to be considered. |
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