Acquisition audit: what a chartered accountant verifies before buying a business

An acquisition audit is an in-depth examination of a target company conducted before a takeover, to verify that what is being sold matches what is being presented. It covers accounting, tax, employment, legal, and operational aspects, and it results in a report that is used directly for negotiations.

A buyer rarely has access to the same information as the seller. Annual accounts provide a true and fair view, but they do not reveal dependence on a single client, an emerging labor dispute, a lease nearing its expiration, or unsellable inventory kept at its original value. The purpose of an acquisition audit is to bridge this information gap.

Acquisition audit: what is its role in a company buyout?

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A snapshot of the company before purchase

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An acquisition audit is not a statutory audit. Its goal is not to certify accounts, but to inform an investment decision. Its objective is to validate the assumptions underlying the proposed price and to uncover risks that do not appear in the documents provided voluntarily.

Its scope is defined with the buyer, based on the size of the target, the sector, and the identified areas of uncertainty. For a service-based SME, the focus will be on revenue recurrence and dependence on key personnel. For an industrial company, this will focus on inventory, production equipment, and environmental commitments.

Acquisition audit and due diligence: what is the difference?

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Both terms refer to the same process. "Due diligence" is the standard English term used in mergers and acquisitions, while "acquisition audit" is its professional French equivalent. We refer to financial due diligencewhen the work focuses on accounting and financial aspects.

However, a more useful distinction exists depending on who commissions the work. An acquisition audit is performed on behalf of the buyer. Vendor due diligence, conversely, is commissioned by the seller before putting the company up for sale, in order to identify weaknesses in their file and prepare their responsesin advance. If you are on the seller's side, our article on selling your company covers this preparation process.

Why conduct an acquisition audit before signing?

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Ensure the price reflects economic reality

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A sale price is most often based on a multiple of earnings. However, these earnings must be normalized, meaning they must be representative of what the company will generate once acquired.

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An acquisition audit adjusts these earnings for: 

• compensation for the outgoing owner that is above or below market rates, 
• personal expenses charged to the company, 
• non-recurring, exceptional income, 
• rent paid to an owner-held real estate company (SCI) at non-market rates, 
• recent under-investment that artificially inflates earnings.

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An adjustment of a few tens of thousands of euros to normalized earnings translates, with a multiple of five, into a difference of several hundred thousand euros in the final price.

Identify risks not reflected on the balance sheet

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Certain liabilities are either not recorded or are insufficiently accounted for. An ongoing labor dispute, a guarantee provided to a third party, a notified but contested tax reassessment, a change-of-control clause in a major client contract, or a commercial lease with an uncertain renewal.

These elements do not necessarily change the price, but they do alter the structure of the transaction. They determine the scope of the representations and warranties, the amount to be held in escrow, and the conditions precedent to be included in the agreement.

Negotiating with objective data

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Acquisition negotiations often pit the buyer's intuition against the seller's emotional attachment. Due diligence shifts the discussion onto factual ground.

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A quantified and documented discrepancy regarding inventory valuation, the age of accounts receivable, or the level of provisions is open for discussion. A vague feeling of overvaluation is not. This is often where due diligence pays for itself: it provides the buyer with arguments whose value far exceeds the cost of the audit.

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Business acquisition: what does due diligence cover?

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The accounting and financial component

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This is the core of the process. It focuses on the quality of earnings and the reality of the financial position: analysis of revenue by client and activity, examination of margins and their trends, verification of the age and collectability of receivables, valuation and turnover of inventory, and the adequacy of provisions.

This is supplemented by an analysis of cash flow and debt. Normative working capital requirements are a particularly sensitive point: a takeover completed at a time when working capital is artificially low will force the buyer to finance its recovery in the following months.

Tax aspects

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The objective is to identify tax positions that could be challenged. This includes reviewing compliance with filing obligations, the consistency of applied VAT rates, the treatment of mixed expenses, transactions with related parties and their documentation, as well as any previous audits and their outcomes.

The scope of this review naturally covers all non-statute-barred financial years. A risk identified at this stage is addressed through a specific indemnity clause rather than a price reduction, as its occurrence remains uncertain.

Employment aspects

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Social liabilities are frequently underestimated in SME acquisition deals. The audit verifies the compliance of employment contracts, the application of the collective bargaining agreement, the handling of overtime, accrued paid leave, pension commitments, and any ongoing or potential litigation.

The issue of key personnel also falls under this section. Identifying employees whose departure would jeopardize operations, and reviewing their contractual clauses, is often a prerequisite for the very feasibility of the takeover.

Legal and contractual aspects

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This covers the company's structure, beneficial ownership of shares, the absence of any prior pledges or commitments, and the validity of corporate resolutions. The articles of association and existing shareholders' agreements are reviewed, with particular attention to approval and pre-emption clauses.

The review of commercial contracts completes this process: duration, termination conditions, change-of-control clauses, exclusivity agreements, commercial leases, and financing or leasing contracts. A client contract accounting for 40% of revenue that can be terminated in the event of a change in ownership is information that fundamentally alters the nature of the transaction.

How does an acquisition audit work during a company buyout?

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The letter of intent and access to information

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The audit takes place after the signing of a letter of intent, which establishes the proposed price, the timeline, and, in most cases, an exclusivity period for the buyer. This letter also governs access to information and the confidentiality agreement.

The scope of the audit is defined at this stage. It must be proportionate to the stakes involved: for a transaction worth a few hundred thousand euros, an exhaustive audit would cost more than it is worth. Choosing which areas to investigate in depth is a strategic decision in itself.

The work process and document delivery

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Documents are made available in a physical or electronic data room. The auditor works on the documents, submits follow-up requests, and conducts interviews with the selling executive and, whenever possible, with operational managers.

The duration depends on the size of the target company and the quality of the information provided. For an SME, generally allow for three to six weeks. The seller's responsiveness is an indicator in itself: late or incomplete answers to simple questions often signal an underlying issue.

The report and its conclusions

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The report is not limited to a simple summary of findings. It prioritizes the points raised according to their impact, distinguishes between what affects the price and what falls under the warranty, and provides operational recommendations for the first few months following the acquisition.

It also serves as a reference document for financing. Banks and organizations involved in the deal structure frequently request to review it before committing to the transaction.

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What should you do with the findings of a due diligence report during a business acquisition?

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Adjusting the price

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When the audit reveals a confirmed and quantifiable discrepancy, a price revision is the natural response. Overvalued inventory, unprovisioned bad debts, or a normalized profit lower than what was initially reported all justify a documented renegotiation.

The adjustment can also focus on the terms rather than the amount: extended payment terms, earn-outs contingent on performance, or vendor financing. These mechanisms allow you to maintain the stated price while shifting a portion of the risk to the seller.

Negotiating the representations and warranties

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For risks that are identified but not quantifiable, the representations and warranties agreement is the appropriate tool. It commits the seller to indemnify the buyer if a liability originating before the sale comes to light afterward.

Its drafting is directly informed by the audit findings: the duration of the warranty, the cap, the threshold, exclusions, and most importantly, the security for the warranty—such as an escrow account or a bank guarantee—which ensures it can actually be enforced. A warranty without a counter-guarantee is only as valuable as the seller's solvency at the time it is called upon.

Walking away from the deal

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This is a valid outcome, not a failure. Certain findings can make a deal unviable: disproportionate tax or social liabilities, irreparable customer dependency, or legal irregularities affecting title ownership.

The cost of an acquisition audit is negligible compared to the cost of a takeover based on flawed information. Walking away before signing is always less expensive than dealing with the fallout later, once the price has been paid and financing is in place.

Secure your business acquisition with a due diligence audit

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An acquisition audit goes beyond simple accounting verification. It determines the price you will pay, the warranties you will secure, and the way you will approach the first few months of your takeover.

The chartered accountants at Virtus Group work alongside buyers to define the scope of work, conduct the audit, and support you in leveraging its findings during negotiations. 

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Contact us before signing your letter of intent: this is when the scope of the audit and the exclusivity of negotiations are determined.