Due Diligence: Types and How Does It Work
If you’re considering buying a business, investing in a startup, or entering into any significant transaction, performing due diligence is essential. It helps uncover potential risks, verify facts, and ensure the decision you’re about to make is based on accurate and complete information. But what exactly is due diligence, and why is it so important? We’ll explore what due diligence is, why it matters, and how SK Financial CPA provides top-tier due diligence services, helping businesses and individuals make informed, risk-free decisions.
What Is Due Diligence?
Due diligence is a process of investigation and review that verifies the facts and financial health of a business or investment. It’s commonly used before mergers, acquisitions, or significant financial commitments to ensure there are no hidden risks or liabilities that could impact the transaction. In the business world, due diligence involves reviewing a company’s financial statements, legal documents, operational structure, and tax returns to ensure the business is healthy and compliant with regulations. Conducting due diligence helps mitigate risk, protects investments, and allows you to make decisions with full confidence.
Key Takeaways on Due Diligence
-
Due diligence helps identify hidden risks, ensuring you make informed decisions.
-
Thorough financial examination involves reviewing financial data such as income, expenses, and liabilities to ensure the company is financially stable.
-
Ensures the company is following legal guidelines and paying the correct taxes.
-
Due diligence is crucial in mergers and acquisitions, where a deep understanding of the target company's operations, finances, and legal standing is required.
Types of Due Diligence
There are several forms of due diligence, each focusing on different aspects of a business:
1. Financial Due Diligence
Financial due diligence examines a company’s financial health, including revenue, expenses, profit margins, and debt. By comparing financial statements to tax returns, it ensures that the business is reporting accurately and operating on solid financial ground. For example, SK Financial CPA recently conducted an in-depth financial analysis for a client, comparing total revenues ($610,304 per books) with tax filings ($610,304 per taxes) to verify accuracy.
2. Legal Due Diligence
Legal due diligence ensures the business complies with all legal regulations. This includes verifying intellectual property rights, litigation history, and contractual obligations. Legal due diligence helps protect against unexpected legal liabilities that could arise after a transaction.
3. Operational Due Diligence
Operational due diligence focuses on the company’s daily functions, management, and human resources. It evaluates whether the business is operating efficiently and identifies potential areas for improvement.
4. Tax Due Diligence
Tax due diligence ensures that the business has paid all necessary taxes, including payroll taxes, sales tax, and income tax. It also looks at the company’s tax liabilities and explores opportunities to reduce future tax obligations.
At SK Financial CPA, we go the extra mile by meticulously comparing tax returns with financial statements. For instance, in our recent analysis, we found that payroll taxes ($10,200.19 per books vs. $10,168.33 per taxes) matched closely, ensuring that the business was compliant.
How SK Financial CPA Simplifies the Due Diligence Process
Unlike many providers that offer generic due diligence services, SK Financial CPA provides a tailored, detailed approach that ensures no stone is left unturned. Our Due Diligence Package includes comprehensive financial analysis, tax reviews, and operational assessments at an affordable price of $1,499, much lower than the typical $4,995 charged by other firms.
Here’s what sets our process apart:
-
Our services start at $1,499, significantly more affordable than other providers.
-
We complete our due diligence reviews in 7-10 days, much faster than the industry standard of 15-30 days.
-
We provide an in-depth review of financial statements, tax returns, and payroll to ensure accuracy and compliance.
Additional Due Diligence Areas You Should Know
We often discuss the importance of including "soft" and "hard" due diligence in your review, and at SK Financial CPA we also make sure to cover both aspects. Let’s dive deeper:
Hard Due Diligence:
This involves reviewing quantifiable data such as financial records, tax filings, and liabilities. Our analysis includes detailed income comparisons, such as the one performed for a client, where we examined the income for 2023 ($610,304 per books) and compared it with tax filings ($610,304 per taxes).
Soft Due Diligence:
While numbers are crucial, understanding a company’s culture, management quality, and employee relationships is equally important. Our team also conducts soft due diligence to assess whether the human side of the business aligns with your expectations.
SK Financial’s Comprehensive Due Diligence Services
When considering an acquisition or major investment, having accurate, up-to-date financial data is crucial. Our due diligence services go beyond a simple review; we provide a complete picture of the company’s financial health, from income statements to tax filings. Here’s a glimpse of what we offer:
Examination of Business Tax Returns:
The review process involves carefully analyzing the past three years of business tax returns to identify any discrepancies or errors. This ensures that all reported income, deductions, and credits are accurate and in compliance with tax regulations. By thoroughly examining these returns, potential tax liabilities or hidden issues are uncovered, providing a clear picture of the business’s financial health and past performance.
Sales and Payroll Verification:
Sales records are cross-checked against bank statements to confirm their accuracy, ensuring there are no discrepancies between reported and actual revenues. Additionally, payroll records are scrutinized to verify that taxes, such as Social Security and Medicare, have been correctly calculated and paid. This step ensures both financial transparency and regulatory compliance.
Detailed Reporting:
A comprehensive three-year industry financial report is included, allowing for a comparison of the business’s performance against competitors. This benchmarking helps identify whether the business is on par with industry standards, offering valuable insights into its market position and growth potential.
The Due Diligence Process at SK Financial
We follow a comprehensive, three-step process designed to provide you with the most thorough and accurate analysis possible, ensuring that no detail is overlooked in your transaction or investment.
Online Submission:
The process begins with a simple, user-friendly online submission. By providing your business details through our secure portal, you can initiate the due diligence process quickly and easily. This step ensures that all essential information is collected upfront, allowing us to hit the ground running without delays.
Personalized Assistance:
Once we receive your submission, a dedicated representative will promptly reach out to you. Our goal is to provide personalized assistance tailored to your specific needs. Whether you’re buying a business, investing in a company, or conducting internal due diligence, our team will guide you through each step, addressing any concerns and ensuring you understand the process from start to finish.
Thorough Review:
After gathering all relevant information, we dive into a detailed analysis of every aspect of the business. This includes a meticulous examination of financial records, tax filings, legal documents, and operational data. We scrutinize the numbers, identify any potential red flags, and assess the overall health of the business. Our comprehensive review ensures that all financial, legal, and operational factors are fully understood before you make any critical decisions.
Conclusion
Due diligence is essential in any business transaction, helping to protect your investment and minimize risks. At SK Financial CPA, our affordable, comprehensive due diligence services ensure you make informed decisions with confidence. We stand out from competitors by offering personalized, thorough reviews at competitive prices. Don’t take chances with your financial future reach out to SK Financial CPA today to learn how we can help with your due diligence needs.
Follow SKFinancial on Facebook / Twitter / Linkedin / Youtube for updates.
