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  • Accounting for Transition

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    Getting Your Books in Order

    Getting your books in order has a range of meanings, depending on the situation. Let’s start with the simplest case first.

    Standardizing Your Accounting
    Suppose your accounting system is a bit idiosyncratic: Maybe you started it yourself without any formal training in the discipline. Some companies that have grown rapidly over the years simply find that their accounting system has not kept pace. Whatever the reason, if your accounting isn’t standard, then it’s time to bring in an outside CPA to normalize it prior to due diligence. That’ll make your numbers more transparent to both bankers and buyers, in addition to fixing an obvious liability.

    Cleaning Up Your Balance Sheet
    Everybody’s heard the expression “cleaning up the balance sheet.” It’s always used in the context of a business that’s getting ready to put itself on the market. The key point is that this exercise is not about altering existing numbers. Cleaning up the balance sheet refers to changing policies, well in advance of the sale, so that the numbers tell the story of an efficiently managed, profitable enterprise.

    It’s not uncommon for a business to have specific policies in place that are designed to reduce taxes. Closely held companies often find it beneficial to be generous in their hiring policies, salary levels, perks, bonuses, and benefits. That’s because these higher-than-necessary expenses result in lower tax bills. However, potential buyers will always prefer to see normal expense levels and higher profits. Therefore it’s a good idea to start managing for profitability as soon as you decide you’re ready to sell your business.

    Staging Your Business for a Sale
    If you are working with M&A advisors, they may suggest “staging” your business to attract the best price possible. Although this is the same term that residential realtors use, it’s actually a lot more complicated than sprucing up your physical plant.

    In a business-transition context, staging involves trying to picture the acquisition from the buyer’s point of view. Is there a hidden synergy that they believe will enhance the value of the combined entity? If your consultant can help you decipher their thinking, you may be able to emphasize those aspects of your business in the materials you provide for due diligence.

    For example, suppose your consultant notices considerable overlap between your operation and that of the buyer—except you have a much bigger, more sophisticated sales force. You can make the hypothesis that the sales force is the key to the deal, and then make sure to stage your presentation of that capability in the most detailed, compelling way possible.

    Do You Need a Formal Audit?
    People often talk as though the due diligence process is synonymous with an audit. This is correct in the colloquial sense that every aspect of your business will be “audited,” i.e., examined closely, by potential buyers. But a full, formal audit, performed by a professional auditor or a CPA, is a different proposition entirely. It will be painstakingly thorough, time-consuming, and expensive.

    David Ehrenberg, who writes at TechZulu, states, “Often, you don’t really need a full audit to provide the necessary assurance of the reliability of your financial statements.” In fact, there are three other “levels of assurance” that a CPA can provide, which are easier and less expensive than the full audit. These include:

    • A compilation of your company’s financial information in standard format
    • An agreed-upon-procedures review that focuses on certain specified aspects of the company’s financials
    • A basic review that analyzes the internal logic of company financials

    Although it sounds obvious, it’s important to find out as early as possible what type of auditing your buyer and their lenders, if any, will require. This will require advance planning and, in some cases, the assistance of an M&A consultant.

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