Due Diligence Saved Buyer’s Retirement Savings

A previous client was considering buying a furniture store in a prosperous community. The financials looked good on paper.

The client asked David Moore & Partners to take a closer look and confirm the store was as profitable as the seller claimed.

Moore set to work. “I look at all the financials and see if anything’s wrong with that company, so my buyer doesn’t get burned,” he says. “No one wants to buy a company that’s losing money.”

Moore has found that people hired to perform due diligence often focus on the profit and loss statements and the balance sheets. If everything matches the tax return, they assume it’s all accurate.

Moore dug deeper. He researched the bank statements and payroll reports. The payroll expenses on the bank statements didn’t match the payroll reports.

Is the asking price worth it?

It turned out the seller was paying herself a set salary and taxes on it each year to boost her future Social Security benefits. But she wasn’t actually withdrawing her salary from her business account and depositing it in a personal checking or savings account.

“If she had taken the actual paycheck, there wouldn’t have been enough cash to support the store and it would have gone out of business,” Moore says.

The practice is perfectly legal for a privately owned business, and the owner didn’t use it with the intention of defrauding anyone. Still, the price she was asking for the store wasn’t justifiable. It should have been half of that, Moore says.

If the potential buyer had purchased the company, it would likely have gone bankrupt in several months. The buyer would have lost his retirement savings – $800,000.  “The buyer were going to purchase the store with their 401(k) and the money would have just vanished.”

As Moore says about his success in uncovering the problem, “You have to know where to look.”