Solution
The Altus Group prefers this proactive approach to due diligence, assisting prospective buyers and sellers before a capital transaction is proposed. We understand the financial damage that can be caused when due diligence is poorly performed, leading to acrimony and lawsuits. In a similar case, Altus was called upon after a company was purchased by a venture capital firm. At the height of the market, the VC had purchased a company that sold goods to the hotel and lodging industry, which were in turn, provided to guests for their use. Shortly after the purchase, the VC wasn’t realizing it hoped for return on investment due to depressed revenues caused by the hotel industry’s high vacancy rates. They also became uneasy over this company’s treatment of sales tax on its transactions with the hotels.
Even though overall due diligence had been performed by a national accounting firm, our review uncovered an unrecorded two million-dollar sales & use tax liability. This liability occurred because the national accounting firm did not fully understand the nature of the transactions to which multi-state sales tax laws applied. While our work proved to be sound, unfortunately nobody was happy with our findings. The VC realized it overpaid for its acquisition, money that had been escrowed had long disappeared, the earn-out due to the company CEO took a significant hit, and the attorneys that drafted the contract’s indemnity language were concerned about the protections it afforded.
