Due Diligence for Immigrant Business Purchases
Joseph A. Brannon, CPA, EA
Axiom Professional Group, P.A.
1401 Manatee Avenue West, Ste 510
Bradenton, FL34205
(941)745-8006
Purchasing a business is often part of a broader immigration strategy and most foreign investors find the prospect of such a big decision daunting at best and indecipherable at worst. The problem is that there’s often little coordination between the attorney’s efforts, the business broker’s attempt to close the sale and the buyer’s need to examine the numbers. Too many businesses are purchased on the basis of a seller’s dated business valuation or rules of thumb used by the broker. For immigration purposes bigger numbers are more attractive and neither the broker nor the seller will argue if the business is overpriced. However, after the sale uninformed buyers may find serious issues that affect the value of the business or its ability to continue as a going concern. When the business collapses so do the buyer’s hopes of a long term future in the U.S.
Investors need guidance and a game plan BEFORE they talk to their first seller or broker. In this short article we’ll lay out a framework that has worked time and time again to help immigrants find the right business.
Letting the Immigration Attorney Take the Lead
In the early stages investors need guidance on which businesses or types of businesses have the greatest chance of helping them achieve their immigration goals. A knowledgeable and experienced immigration attorney will know the preferences and criteria used by the various consulates. For instance, a business that has a good chance of approval for a UK resident may not be suitable for an immigrant from Russia. Before they go shopping investors must have an idea of required gross revenues, minimum number of employees, the price range they should be looking at, whether owning business real estate should be considered, and which industries are favored and which should be avoided.
It is hard to overestimate the value of an experienced immigration attorney. When non residents seek out due diligence assistance the CPA should first call the attorney and run through the critical numbers just to see if any further analysis is merited. CPA’s can save clients thousands of dollars by making this the first item on their due diligence checklist.
In addition to vetting potential businesses attorneys are also invaluable in laying out the time frame for the transaction. Non residents are often on very tight travel schedules due to their need to limit presence in the US for tax purposes. Clients may want a 30 day, fast-tracked due diligence engagement to meet their departure date, but the attorney may tell them the sale should not close until next year. In such a case there is no point in rushing due diligence and incurring extra fees.
Here’s one final note regarding coordination between the CPA and immigration attorney. Many immigration law practices have staff perform a quick financial workup of the prospective business as part of their early stage evaluation. While these schedules or summary reports are not a sufficient basis for the CPA’s due diligence they can be invaluable during the initial client meeting. The non-residents have spent time with the owners, they have seen the business location, and they have initial impressions that are invaluable for providing context to the CPA. When all of this is coupled with a concise financial snapshot it allows the CPA to be much more effective in the initial meeting with the client.
The CPA’s Role
Once the business has been given a green light by the immigration attorney (at least on a preliminary basis), and the timeline has been established the due diligence work begins. Due diligence is most often associated with large corporate mergers where teams of attorneys and accountants embark on a relentless search for “skeletons in the closet” of the business entity for sale. In a nutshell this is the essence of due diligence, even on the smaller scale we are talking about here. To be done effectively the CPA must depart from the traditional roles of auditor or tax advisor. Good due diligence requires the cynicism of an auditor, the creativity of an entrepreneur, the diligence and humility of a student, and the willingness to voice an opinion that may be unpopular. Let’s start from the beginning.
“Trust but verify” is an apt expression for the attitude needed by the CPA. After obtaining financial statements the work of deconstruction begins. It is important for clients to understand that this is not audit work. Instead, it involves arriving at a level of comfort that the numbers presented are not completely bogus. The only way to do this is to understand operations, and this is where CPA’s accomplish more as students willing to be taught than as $200 per hour consultants coming down from the ivory tower. Every business is different and the bar for understanding operations in due diligence is much higher than it is for preparing tax returns or financial statements. Don’t underestimate the impact of this approach. If a CPA cannot relate the financial statements to market assumptions, industry benchmarks or other key performance indicators chances are the operations of the business are poorly understood.
Knowledge of operations is so important because the second phase of due diligence is investigatory. This is the kicking over rocks part. Evaluating risks to judge the adequacy of insurance, validating reserves for future warranty claims, understanding the seasonality of cash flows and their effect on working capital requirements…these are all critical in judging the health of the business as a whole. If a CPA treats every business the same without understanding the differences in operations the analysis will be deficient.
A key element in the CPA’s analysis is risk. The more risk the CPA finds in the financial and operational parts of the business the lower the price the investor should be willing to pay. However, it is important for everyone to understand that this is not a business valuation. Valuations are static, what-if scenarios that give very little weight to operational issues. Worse, they were often paid for by the sellers or business broker. Valuations definitely have their place, but under no circumstances are they a substitute for due diligence.
In a recent engagement the sellers had obtained a business valuation that pegged the value of their business at $520,000. Four months later they were willing to sell the business for $250,000. If buyers are provided with a business valuation justifying the seller’s asking price they should deliver it to the CPA. A CPA who is able to point out the flaws in a business valuation with reasoned, accurate analysis is a very powerful negotiating tool that should be used to the buyer’s advantage.
After the analysis is finished clients should not expect the CPA to come up with an offer price they can take to the seller. The purpose of due diligence is to help the buyers determine the price they are willing to pay that provides an acceptable return on their investment while also providing the greatest chance of meeting their immigration goals. It is critical that appropriate weight be given to the latter. It is also critical that the subject business be evaluated in terms of the specific needs of the investor. We have advised against deals when all the numbers looked good, but the new owners could not provide the required hands-on management due to travel constraints. In this case a business with a more experienced management team was the answer, even though the projected return on investment was lower.
A final word about due diligence, it can be expensive. Fees often range from 1.5% - 3% of the purchase price depending on the complexity of the business. For investors already spending large sums on the purchase price and attorneys fees this may seem like a heavy burden. It is especially difficult when the result of due diligence is an unfavorable opinion of the business. Helping prospective buyers understand the benefits of due diligence and taking steps on the front end to have the attorney pre-screen prospective opportunities can greatly minimize the chances of a CPA advising against the purchase. However, buyers should also demand unbiased feedback and brutal honesty from their CPA to keep from throwing good money after bad in a deal that has little chance of long term economic benefit.
Joseph A. Brannon, CPA is the founder of Axiom Professional Group, P.A. Since 1995 he has been helping business owners get more out of their companies. He and his staff work with US immigrants in the pre-sale evaluation of prospective businesses and assist them post-sale with strategic planning, financial forecasting and tax compliance. Mr. Brannon can be reached at (941)745-8006 or through Axiom’s website at
© Joseph A. Brannon 2006