Operating a “Sale Ready” Business
Merger and acquisition (M&A) transactions can be daunting endeavors for both buyers and sellers. That’s why putting a financial expert proficient in valuation methods on your side, whichever side it may be, can help reduce guesswork and give you a better shot at a winning deal.
Stage 1: Pre-Deal Assistance
Financial experts can assist sellers in the early stages of an ownership transfer in many ways. And perhaps most important to accelerating a sale, he or she can help you establish realistic expectations about value based on comparable business sales and, thereby, assist you in setting a reasonable asking price. Sticker shock can turn away many potential buyers before offers are even made. It is critically important that a seller understand the true value of the business
An expert can create an informal prospectus to distribute to qualified buyers. Or, if you’re gifting interests to your heirs, a formal appraisal can be used in conjunction with a gift tax return. Perhaps a fairness opinion would help support a management buyout in such cases.
On the flip side, buyers tend to undervalue a business. When you’re considering expanding through M&A, an expert can provide an objective estimate of what the business and its underlying assets are worth — so you make a reasonable offer without overpaying.
You can also turn to a financial professional for help in identifying assets and liabilities that aren’t on the balance sheet, such as:
- Customer lists,
- Brand names,
- Undisclosed pending litigation, and
- Contingent tax liabilities.
Other due diligence hot spots include inventory and receivables verification; assignability of leases, loans and franchise agreements; revenue recognition policies; employee retention; normalization adjustments; and related-party transactions.
Stage 2: Just Before Closing
How the M&A deal is structured is critical. Why? Because it affects how the balance sheet looks in the future, how much risk the new business is exposed to and how much the new business will owe in taxes.
Experts know which terms are effective in reaching objectives of buyers or sellers. For example, earnouts are especially popular in an uncertain economy, because the seller retains some risk. If sales don’t pan out as expected, the seller will receive lower earnout payments. To minimize their risk, many sellers stay on as consultants to ease management transitions and help the business meet its short-term goals.
The parties also must agree on whether to transfer specific assets or stock in the business, and financial experts can contribute insights on which way to go. Asset sales are like a fresh start; after a new entity acquires the specific assets and liabilities, new contracts, licenses, titles and permits are required.
Acquired assets are reported at fair market value, and the buyer receives a step-up in basis, which lowers future capital gains tax and starts depreciation anew. The seller, however, must pay capital gains on the assets sold and, if the seller is a C corporation, again when winding down the business.
When stock (rather than assets) changes hands, business operations continue uninterrupted. Stock sales are generally less messy, because assets stay at book value and existing depreciation schedules apply. But stock sales carry additional risks: The new buyer inherits all of the seller’s liabilities — including undisclosed and contingent obligations.
Stage 3: After the Dust Settles
After the deal closes, a financial professional can help the parties handle their post-deal tax and accounting issues, including postclosing purchase price adjustments. In-house accounting personnel are often unfamiliar with how to account for changes following an M&A transaction.
For the seller, this means winding down any unsold business operations and handling capital gains tax issues. For the buyer, it translates to fresh-start accounting, including new depreciation schedules and purchase price allocations.
Operating a “Sale Ready” Business
Smart business owners always operate as if they’re planning to sell — because they never know when someone will come along with an irresistible offer or when tragedy might strike. So what does it mean to operate “sale ready”? It means preparing reliable, transparent financial statements that comply with Generally Accepted Accounting Principles (GAAP). It means hiring a CPA to audit your books, creating formal plans and budgets, and implementing a strong system of internal controls. It means engaging a qualified appraiser for regular business valuations.
When potential buyers must make financial statement adjustments to get a clearer idea of what’s for sale, it makes them uneasy and may decrease your selling price. These include adjustments for nonrecurring one-time expenses, related-party transactions, unreported cash receipts, or below- (or above-) market owners’ compensation. Fixed assets should be well maintained and replaced if necessary.
Decentralized management structures appeal to potential buyers, too. Train the next generation of managers, and establish contingency plans. Life insurance policies are also an important part of surviving the untimely loss of a key person.
A Little Easier
As a private business owner, you may find that an M&A transaction is the most important and difficult challenge you’ll ever face. Why leave anything to chance? Allow experts that have been through this process to help you navigate what may be the most important transaction you encounter.
The Fahrenheit Group brings experience-based, C-Suite thinking to businesses in transition. Our consultants – who have lead fast growing and profitable organizations, raised capital, and exited businesses – arm leadership teams with the strategy, knowledge, and expertise to inform decision-making and drive value. Whether you’re an emerging company or an established business, our team can get you from point A to B, including strategic planning, value creation, fund raising, exit strategy preparedness, and M&A-related services.