How Much Should First-Time Buyer Expect to Pay for Financial Due Diligence?

Question:

I am seeking to be a 'first time' buyer of a business. I understand that I need due diligence, and that I need expert help, but what should I expect to pay for this service? How do they arrive at a fair figure to charge?

Answer:

For the financial due diligence of a business you will need to engage an accountant to complete the review. Before we discuss approximate costs, there are several important factors to consider which will have a direct impact on the final costs incurred for their services:

• Hire an accountant who has experience in completing the due diligence review of similar businesses.
• Use an accountant that makes sense – you don't need a Big Three CPA to review a small business.
• Layout very clearly what it is that you want them to do along with what they recommend is required.
• Have them provide you with an estimated cost to complete their work.
• Don't start the review until you have all (or the vast majority) of documents and files required for them to complete their work.
• Get a list to the sellers as soon as possible after you have a signed agreement in place.
• As a last point, consider the timing of the due diligence schedule. If it's going to be near the end of a calendar quarter or tax season, you'll want to give them plenty of notice before.

On the first day of the due diligence period, review all of the documents that the seller has provided. Chances are if it doesn't make sense to you, it won't to your accountant. Plus, if a lot of material is missing, you won't be paying the CPA to sit around and do nothing.

Insofar as costs are concerned, I have found that most small businesses being sold for under $500,000 will cost around $2,500 - $5,000 to complete a detailed financial review. Conversely, I have paid as little as $1,500 to have a very competent accountant do the work, but, I made certain that it was flawlessly organized for them beforehand. Most accountants, unlike attorneys, will provide you with a very accurate quote of what they feel the final bill will be. The difference between the two professions is that the financial review steps are fairly standard and so they can closely predict the time that may be involved.