This article was posted prior to the passing of more recent tax legislation. Before acting on any of the information in the following piece, please consult with a tax expert to learn if and how current legislation might impact or nullify what is stated in this article.
Preparing for an Acquisition – Top tips for maximizing your valuation
In the current economic landscape, it’s common for startups and businesses to seek a buyout or acquisition — in fact, it’s frequently the goal from the start. Preparing for an acquisition as early as possible can help alleviate the stress of an unplanned opportunity as well as put your company in the best situation for the strongest offer when the decision is made to sell the enterprise. To ensure your company is on the right track for success, here are some helpful tips to stay ahead of the game and ready for the perfect opportunity.
1. Know your business
Be able to clearly articulate what you sell, how you sell it and who you sell it to. Know your competitors and what factors set you apart. This messaging should be concise and get progressively more fine-tuned as the company matures. Your message should be easily expressed and the business lines should fit into a few buckets that are easy to explain as well. Make sure you align financial reporting and projections about the future of the business to your overall message. Aim to make your projections feasible and defensible. The buying team will be looking at the projections, which if reasonably supportable, will allow you to sell the company for more money and close faster.
2. Books and records
Understand your accounting policies and know how your accounting aligns with expectations in your industry. Watch out for complex areas such as accounting for revenue, inventory, contingencies, equity instruments and consolidation. Preparing for an Acquisition Top tips for maximizing your valuation By Jeff Stark Additionally, organize your accounting records consistently and in a method that is easy to understand. Documentation such as invoices, bank statements, payroll information and other records should be well organized and easy to obtain.
3. Electronic storage
Consistent with the point above, get your books and records in an electronic format. Ideally, that would mean a cloud based solution to facilitate sharing while providing control over who has access to that critical data. Keep these records organized and sorted in a consistent manner that is easily searchable.
4. Independent audit
A successful purchase is about having your buyer’s trust and confidence. Having audited financial statements will provide your buyer with a trustworthy source of your financials and operations. In addition to setting a solid baseline for historical financial information, an audit engagement is a good test run to experience what the due diligence process may look like for management going through an acquisition for the first time.
5. Tax positions and filing requirements
Whether your company is generating profits or operating at a loss, taxes are a significant risk area in any acquisition. Depending on your location and industry, your company may have federal, state, foreign and sales tax filing requirements, all of which will be heavily scrutinized by the potential acquirer. It is important to understand the tax positions that the company has taken, what elections were made on returns, what returns were filed, and the risk that may exist for not filing certain returns.
6. Contracts and obligations
Go over all your documents to uncover any mistakes or breaches. Leave no stone unturned, and be sure to dig deep. More than 50% of deals fail, often due to uncovering skeletons in the closet. A disclosure schedule should be as thorough as possible to avoid any information that might make your potential buyer question your accountability and should cover key contracts, equity holders and options, litigation, intellectual property and warranties.
7. Employees and contractors
Many companies utilize contractors as a way of tapping into unique and specialized skills. In many instances, consultants can be cheaper and carry less risk. If the consultant fails to be a good fit for the company, you simply do not renew the contract — which can be less messy than terminating a permanent employee. However, the legal definition of an employee versus a contractor can get tricky. There are numerous state and federal laws to consider as they can provide significant risk to the company. If this is a potentially convoluted area for your business, it’s a good idea to clean it up prior to entering due diligence.
8. Protect your intangibles
Any intellectual property should be properly documented in order to avoid question of ownership. When using others (employees, contractors, third parties) to develop your technology, be sure that ownership of IP is assigned to the company. This is a complex area and one that generally merits consulting with proper intellectual property legal expertise. If questions arise as to the propriety of ownership of IP, your valuation could be negatively affected or the deal scuttled altogether.
Jeff Stark is an Audit Partner and leads the mergers and acquisitions practice at Sensiba San Filippo. He specializes in revenue recognition, complex debt accounting and purchase accounting for a wide range of clients. Sensiba San Filippo, like Waldron Rand, is a member of Morison KSi; our international network of accounting firms.