Source : CPA Australia
Date issued: 15 January 2007

More than 80 per cent of potential buyers would have paid too much for a business if they hadn’t carried out financial due diligence, according to a new CPA Australia survey.

And one in five respondents said that 70 per cent of their clients didn’t go ahead with the purchase after doing so.

Financial due diligence involves accountants verifying that the information sellers provide is accurate, and that the proposed profitability is likely. The survey asked CPA Australia’s accounting and audit members about their perceptions of clients’ business decisions after having undertaken this exercise.

In particular, CPA Australia was interested in whether prospective business owners changed their minds about buying a business, be it to reduce the purchase price, or not proceed.

More than a third (35.7 per cent) said that at least half their clients would have paid more than the business was worth, all respondents said that at least some of their clients would have been out of pocket had they gone ahead with their purchase without undertaking due diligence. “A lot of people wouldn’t dream of buying a second-hand car without having it checked by a mechanic,” said CPA Australia’s Audit and Assurance Policy Adviser, Jessie Wong.

“They might not think of using an accountant to check the financial state of a business, but the consequences for their business, their staff, their own livelihoods and families are compelling.

There are around 1.2 million small businesses across Australia, employing nearly 3.5 million people.

“Many are family businesses, so poor financial decisions could have a very strong personal impact on their lives,” Ms Wong said. “It’s not surprising that small business owners are the biggest users of due diligence. It’s of benefit to them to be able to draw on the practical, professional experience of accountants in such circumstances.”

Of the members who responded, 68 per cent said they relied strongly on their personal professional experience, and 47 per cent relied on their firm’s experience. More than a quarter said they relied on their professional accounting body for advice and guidance.