By Kenneth R. Rosenfield, CPA
How do you find the hidden gems or various stages of cancer when conducting due diligence in dealership acquisitions? Where do such items hide and can they be found? The answer is yes, but you need to know where to look.
Start with the books…and look for items that are not normal. Take journal entries for example. DMS systems are pretty much menu-driven and fill-in-the-box. Journal entries can be made, but their job is to fix mistakes or make adjustments, not for entering transactions.
One way to check the quality of the accounting department and internal controls in the office is to review journal entries. It is easy to run a list of all the entries and review them. Look for anomalies such as non-system generated control numbers. As DMS Systems generate their own control numbers, a non-system generated one is a good indication of an entry being used to manipulate the accounting records or create entries that are not typical. Conduct an analysis to see if they make sense.
Other places to find “buried treasure” would be in running some “off the wall” reports, such as a missing documents report, voided documents (repair orders, counter tickets, checks, etc.) and items out of sequence reports. Interesting finds can also be found in “sub accounts”, account titles that exist under other accounts that may or may not make sense. Review these for activity and adjustments and perhaps see where they are “mapped” to the financial statements.
In conducting due diligence, if the buyer is considering keeping the accounting department intact, review the staff resumes, job functions and cross training. Also look at their tenure with the organization and perhaps obtain references from the manufacturing and from their banking relationships if you are on good terms with them. Obtain the independent accountant’s journal entries and adjustments and perhaps review their workpapers if you can get permission to review them. It is not unusual to request these kinds of documents in today’s environment.
Heading towards the back end of the dealership, lets find some goodies in the service and parts department. Conduct some of your own analytics in reviewing repair orders and counter tickets. Do the time and op codes seem in line with the work requested and performed? Do estimates and final invoices appear correct?
Review the time and payroll runs and compare to technician performance and efficiency reports to see if they make sense. A review of technician productivity reports can also determine if they are efficient and performing work above, below or to their skill level. These reports will also be a tell-tale sign if repair orders are being dispatched fairly and to the right skill level.
Parts management reports will also show whether that department is run efficiently. Look for parts turns, aged inventory investment and obsolescence indicia to see if the parts managers are operating at a high skill level.
All this work will help in due diligence investigations to determine the operating level of the staff in their respective departments. These are just some of the items to look at. Happy hunting!
Ken Rosenfield is the managing partner of Rosenfield and Company PLLC, a CPA firm with offices in Orlando, Florida, and Manhattan. The firm has one of the largest automotive practices in the country, with a nationwide client base. He can be reached at email@example.com and 407-849-6400