Due Diligence Traps to Avoid

The key to having a successful due diligence process, whether for an actual exit or just a fundraising event, is to be well prepared ahead of time and to look into issues that could potentially create problems down the road. Here are a few items we tend to review annually at KN+S with our clients to make sure they have no surprises in the future:

• Have you conducted an audit or seller-side QofE (Quality of Earnings) process for a period of years?
• Business vs. personal expenses – how are they handled? Items like vehicles, insurance, travel, etc. should be delineated.
• Have there been any secondary market stock sales already? If so are these fully vetted for tax and accounting issues?
• Does the company have good 409A valuations for stock or option purposes?
• Has management determined their revenue recognition is proper under GAAP 606 rules?
• Has the determination of NOLS and R&D usage been reviewed and assessed for full utilization?
• Have sales and use taxes been paid when appropriate and assessed annually to determine exposure? Do you have exemption certificates on file from customers if appropriate?
• Has the employee vs. consultant classification been made with full knowledge of any tax exposure
• Nexus for income tax reporting? Has the company engaged in a process to review where you are operating, what types of events could “tie” you to a state, and any potential risks while building in the need to look at the specific economic nexus rules for each state?
• Have items such as accrued interest and other types of accounts been handled properly between periods?
• Is the stock ledger clean and accurate? If an S-corporation, do you have IRS acceptance on hand?

We would be happy to meet to discuss these and other topics if you are considering a due diligence process in the future. Give me or your KN+S professional a call.

Jeffrey Solomon, CPA, CVA, Managing Shareholder at Katz, Nannis + Solomon, P.C. If you have any questions or would like to speak with one of our tax professionals, please contact our office at 781-453-8700.