Financial Due Diligence
The firm provides client-focused business diligence, financial advisory, debt and lease restructuring, and legal/accounting diligence services. A diverse network of relationships with investment bankers, legal and advisory service firms combined with dual legal and financial experience provides the contacts required to achieve the results you desire. You receive big-firm results at small-firm rates, with the personal attention you expect.
We perform due diligence on investment and financial proposals, including new business investment, bridge financing and refinancing, commercial real estate investment, and single-investor and leveraged equipment leasing investments. Diligence services are performed personally by Paul Lechner, who is both an Attorney and Certified Public Accountant and who has served as Adjunct Professor in the Financial Fraud Program at the Chicago Police Department Academy.
Schedule a Consultation Call (708) 460-6686
Due Diligence Services
Business Acquisition Diligence
Before committing to a business acquisition, buyers need an independent assessment of the target’s financial condition, earnings quality, working capital, contingent liabilities, and tax exposure. We perform buy-side diligence that goes beyond reviewing the financial statements — we analyze the assumptions behind the numbers and identify the risks that could affect post-closing performance.
Investment Proposal Review
We evaluate investment proposals for private equity, bridge financing, commercial real estate, and equipment leasing transactions. Review includes analysis of the financial projections, sponsor track record, collateral value, exit assumptions, and legal structure of the investment vehicle.
Debt & Lease Restructuring Advisory
We advise borrowers and lessees on restructuring existing financing arrangements, including analysis of lender rights and remedies, negotiation of covenant waivers and forbearance agreements, and evaluation of refinancing alternatives.
Valuation Support
We provide valuation analysis in support of transactions, litigation, and estate planning. Experience includes FAS 142 goodwill impairment analysis, equipment portfolio valuation for institutional investors, and business valuation for buy-sell agreement funding and estate tax purposes.
Litigation Support
We provide financial analysis and expert support in commercial litigation matters involving financial fraud, breach of fiduciary duty, business disputes, and damages quantification. Our combined legal and accounting background allows us to translate complex financial records into clear, court-ready analysis.
Frequently Asked Questions
When should I hire a due diligence advisor before buying a business?
Due diligence should begin as soon as you have a signed letter of intent and the seller has agreed to provide access to financial records — and before any non-refundable deposit or exclusivity payment is made. The purpose of diligence is to verify the representations in the purchase agreement and identify risks that would affect the price you are willing to pay or the structure of the deal. Common findings in buy-side diligence include overstated earnings (revenue recognition issues, undisclosed add-backs), understated liabilities (deferred expenses, pending claims, tax exposures), and working capital that is structurally lower than the seller has represented. Finding these issues before closing gives you negotiating leverage; finding them after closing means you own the problem.
What are the red flags for financial fraud in a small business?
Common indicators of financial fraud in a closely held business include: revenue that grows significantly faster than industry peers without a clear explanation; gross margins that are substantially higher or lower than industry norms; unusually high related-party transactions; owner draws or management fees that are inconsistent with the reported profitability of the business; bank balances that do not reconcile with reported cash; customers or vendors that cannot be independently verified; and financial statements that are prepared only on a cash basis with no accrual-basis reconciliation. When multiple red flags are present, a forensic review of bank records, general ledger detail, and related-party transactions is warranted before making any investment or acquisition decision.
How is due diligence different from an audit?
An audit is a formal engagement governed by generally accepted auditing standards (GAAS), resulting in an opinion on whether financial statements are presented fairly in accordance with GAAP. Due diligence is an investigative engagement tailored to the specific risks and decisions facing a buyer or investor. It is broader than an audit in some respects (examining legal contracts, customer relationships, and operational risks that audits do not address) and narrower in others (focusing on the issues that matter most to the transaction rather than covering every account). Due diligence can be performed on financial statements that are unaudited, tax-basis, or prepared under a compilation engagement — which is the common case for small privately held businesses.
Related Services
- Corporate Law — transaction documentation, buy-sell agreements, and M&A advisory
- Business Succession Planning — valuation and deal structure for business exits
- Commercial Finance — debt placement and investment advisory
- Civil Litigation — fraud claims, breach of fiduciary duty, and business disputes
- Tax Planning — tax consequences of acquisitions, restructurings, and investments
Concerned About Fraud? Understanding the Elements of a Fraud Claim
To establish a prima facie case of fraud, the following elements must be proven:
- Misrepresentation made by defendant
- Scienter
- An intent to induce plaintiff’s reliance upon the misrepresentation
- Causation
- Justifiable reliance by plaintiff upon the misrepresentation
- Damages
Misrepresentation
General: There is usually a requirement that the false representation be of a material past or present fact. In certain cases a misrepresentation of opinion may be actionable.
No General Duty to Disclose: No general duty to disclose a material fact is imposed. A simple failure to disclose will not generally satisfy the first element except where the defendant stands in a fiduciary relationship to the plaintiff, or where a defendant speaks and his utterance deceives the plaintiff.
Active Concealment: Where a person actively conceals a material fact, he is under a duty to disclose and failure to do so satisfies the first element of a prima facie case.
Scienter
Plaintiff must prove that defendant made the representation knowing it to be false, or that it was made with reckless disregard as to its truth or falsity.
Example: A corporation’s president states falsely that last year’s profits were $100,000 without having looked at a profit and loss statement. Scienter is present.
Intent to Induce Reliance
The defendant must have intended to induce the plaintiff or a class of persons to which the plaintiff belongs — to act in reliance upon the misrepresentation. An exception exists for “continuous deceptions” such as mislabeled products or misrepresentations in financial statements.
Causation
Plaintiff must prove that the misrepresentation played a substantial part in inducing him to act as he did — i.e., “actual reliance.”
Justifiable Reliance
Plaintiff must prove that reliance on the misrepresentation was justified. As a practical matter, reliance on representations of fact is almost always justified. Courts will not impose a duty on plaintiff to investigate the veracity of defendant’s representations of fact.
Reliance on statements of opinion, value, or quality is generally not justifiable unless the defendant has superior knowledge of the subject matter, or the statement implies the existence of facts which are false.
Damages
In an action for intentional misrepresentation, plaintiff may recover only if he has suffered actual pecuniary loss as a result of reliance on the false statement.
Negligent Misrepresentation
One may also be liable for negligent misrepresentation (which is not “deceit”). Liability will attach only if reliance by the particular plaintiff could be contemplated. The ambit of liability for negligent misrepresentation is more confined than for deceit.
For more information contact Paul Lechner, Esq., CPA at (708) 460-6686 or schedule a consultation online.