2018 Fall issue of Horizons

beneath the surface that the acquirer would want to know. Due diligence encompasses more than just financial information and should also include tax, legal and environmental concerns. Tax due diligence reports on the current and future tax liabilities of a business. Legal due diligence assesses contracts, loan covenants, changes in business structure (sole proprietorship, partnership, corporation, etc.) and all other legal matters. Environmental due diligence assesses real estate and the risks associated with potential contamination and usage. Not considering all elements of due diligence can adversely affect a transaction if risks and issues were to arise post-acquisition. Asset Management Fraudulent activities normally center on misappropriation of a company’s assets. Through an acquisition, it is imperative that the acquirer has a firm understanding of the acquired company’s assets (including inventory, intangibles and capital expenditures). Inventory levels should be investigated through financial due diligence to ensure that normal levels of inventory are being held and that the inventory does not include obsolete or damaged goods.

company’s books. A complete inventory count on the date of closing a transaction is a good practice for ensuring consistent inventory valuation. Intangible assets’ fair value needs to be determined. It is best practice to have an independent, third party value these intangibles so the acquirer may properly record their value. In the event that the acquirer is a public company, a purchase price allocation will be necessary to properly value the intangible assets. Capital expenditures (CapEx) need to be accounted for as well. An investigation into the acquired company’s future CapEx plans as well as an understanding of its capitalization policy should be undertaken. A capitalization policy outlines at what dollar threshold a company capitalizes an asset instead of expensing it. For example, a smaller company may have a lower capitalization threshold of $1,000 to not adversely affect its profit and loss (P&L), whereas a larger business may prefer a higher threshold of $50,000 since expensing expenditures under that threshold would likely not affect its P&L by a wide margin. As noted with intangible assets, it is best that an independent third party handle these offerings. It is important for the acquirer to determine its own capitalization policy going forward: whether continuing with the same or adopting a new policy post-acquisition.

Obsolete and damaged goods should be properly accounted for on the acquired

Fall 2018

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