Let’s say you’ve decided to sell your business. After determining that your company is fit to be offered for sale, your team is ready, and you’re mentally prepared for the months ahead, you have four primary objectives:
- Make as much profit as possible,
- as quickly as possible,
- while saving money and
- keeping the deal secure and problem-free.
On paper, it seems simple. Straightforward. In reality, mergers and acquisitions (M&A) are anything but. From pricing your business and finding a buyer to conducting due diligence and drafting contracts, the road ahead is laden with obstacles of serious financial weight. As a seller, you’ll probably never engage in a larger deal at any other point over the course of your life.
Doing it yourself is not an option: you need to have the right accounting partner by your side. Take a look at the major facets of an accountant’s role during M&A to understand exactly why.
You Need an Accountant for Preliminary Valuation
How much is your business worth? No, there aren’t any magic calculators out there to plug and play with (and if there are, we don’t recommend using them!). If you’re considering a sale, you may already have a number (or a range) in mind. Until you solicit input from an accounting professional, however, your idea is just that—an idea.
Accountants support sellers by providing objective valuations. Acting as a financial advisor, an accountant will help you ascertain your material assets and liabilities: what you own, what you owe, and what will be included in the sale.
Perhaps more importantly, an accountant can generate a picture of your income over time and assign concrete value to the more fluid and variable aspects of your business: past earnings, cash flow, balance sheets, equity statements, and the company’s performance related to economic and market conditions at large, as well as any liabilities that may be lurking under the surface.
You Need an Accountant’s Perspective When Organizing and Structuring the Deal
Every M&A transaction is different. A “sale” could, for instance, refer to a merger between two similar companies, the takeover of one company by a large conglomerate, or the formation of a new enterprise or shell company. You might be selling your company’s assets such as intellectual property and equipment, majority stock ownership, equity, or a combination thereof.
Your financial advisor’s job is to figure out what kind of deal structure will net you the highest asking price with the fewest complications. In this context, an accountant acts as a translator, taking the language barrier out of the sometimes-arcane world of finance and breaking down the pros and cons of various options.
Without an accounting partner on your team, you will have to become fluent in these matters by yourself. And if you lack financial fluency, you’ll not only have a difficult time at the negotiating table, but you may not understand what you’re on the hook for when the deal is done: your transaction might obligate you to remain involved with the business until certain conditions are met, or you might only receive a portion of the purchase price at closing. Unless—and even if—you know your way around liquidity ratios, escrow, earnouts, and so on, you need a financial advisor.
You Need an Accountant’s Tax Expertise
If you think business tax codes are complicated, get ready to be completely mystified by M&A. A typical merger or acquisition has tax implications in several state and federal jurisdictions, and sometimes on an international level. Just as deal structures vary, so too do their tax requirements. And when a transaction involves tens or hundreds of millions of dollars, taxes matter more than ever.
That’s only one part of the equation. You’ll need an accountant with auditing experience to organize, document, and verify your business’s tax filings as well as give you sense of the other party’s tax status. Private or public, an M&A deal may be subject to oversight by various regulatory bodies such as the SEC and the IRS. If you don’t have someone on hand to answer regulators’ questions, you’ll wind up in trouble.
When your buyer tries to make adjustments to the purchase price—and they will—your financial advisor will explain the tax consequences, thereby keeping the deal moving, safeguarding your best interests, and saving you time and money.
You Need an Accountant for Risk Evaluation
Aside from negotiation, you’ll spend most of your days during an M&A transaction conducting due diligence: a thorough investigation of your potential buyer’s company and portfolio. At the same time, you’ll need to do the same thing internally in order to discover and address any practices, possessions, or other liabilities or that could make your business appear unattractive to your buyer.
As an objective advisor, your accounting partner will help you coordinate due diligence efforts and assess and assign measurable values to each of the accompanying risks. A financial point of view eliminates the need to make decisions principally based on emotions. For example, rather than breaking off contact with a supplier because the arrangement “feels wrong,” you’ll be able to cite the revenue loss in numbers—or decide that the relationship doesn’t pose much of a risk at all.
You Need an Accountant to Help You Plan Your Life After the Sale
The sale of your business is only the beginning of the rest of your life. Retirement, early stage financing for your next company, investment—whatever you plan to do next, it pays to strategize with the help of an accounting partner. Your financial advisor will help you and your family make the most of your newfound wealth.
What’s next? Once you’ve brought a financial advisor on board, you should hire an attorney. Depending on the nature of your transaction and your available resources, you may also need to work with an investment banker and general M&A advisor.
After that, you’ll need to start surveying the market and researching potential buyers, and conducting due diligence. Eventually, you’ll meet with your buyer and negotiate your way to closing.
But perhaps, after reading this article and the preceding one, you’ve decided that you’re not ready for M&A, or that you’d like to look at other options. That’s okay! Mergers and acquisitions may be lucrative, but they’re only one course of action among many for business owners looking to make a transition. In the final blog post in this series, we will explore a few alternative exit strategies.
Guess what? You’ll need the right accounting partner for those too.