No matter what stage your company is at, it’s never too early to look at getting yourself ready for a merger or acquisition (M&A). Whether you are looking to validate all the years of hard work you’ve put in, collaborate or reach a deal with another entity, or sell your company and move on, owners need to know the ins and outs of M&As in order to prepare for the future. Because M&As have so many facets, a variety of perspectives emerge. To dive in to these, we sat down with PKF Texas’ Nicole Riley, CPA, CFE, audit manager, to get the top 10 tips, in no particular order.
Tip 1: Form a Strategic Team.
Assembling a strategic team of internal and external leaders is important, as the last thing you want is a management infrastructure solely dependent and contingent on one person – the owner. Succession planning is crucial, and you want to have the right managers in place, equipped with the confidence, knowledge and skills needed to make important decisions in the owner’s absence. When this system isn’t strong, all areas may not be covered early on in the deal and drafting process, which can lead to problems arising in, for example, unknown cost, excess reiterations of deal docs and missed diligence items.
Tip 2: Get Up to Date on Accounts Receivable.
Make sure your accounts receivable (A/R) collections’ process is in order and as up to date as possible. Bad debt and potential bad debt are often large purchase price adjustments. The more current A/R is, the less likely adjustments will occur, because there are fewer questions on current amounts. In addition, if there are key controls over allowing credit and proper follow-up on A/R already in place, this will not become a sore spot.
Tip 3: Perform Due Diligence
Honesty is a key step in due diligence, as uncertainty in what is being purchased will drive down the price. Try to anticipate all of the concerns a buyer might have, and prepare explanations for anything that might be uncovered during the due diligence process. You do not want to be caught by surprise by a simple question. Inevitably, lots of questions will arise, ranging from actual numbers and controls in place to how estimates are developed. For example:
• Are Forms 941 and 940, as well as state unemployment forms, filed? Are they accurate?
• Are any federal or state tax notices or liens in effect?
• Will you need W-4s from the new employees?
Every account on the balance sheet should have a supporting reconciliation, and the internal controls of the entity should be reviewed to ensure they have been modified as changes occurred in the company.
Tip 4: Address Post-Integration Work and Planning
It’s never too early to look at post-integration work and planning. When doing so, address these three areas:
• Timing of subsidiary cutoffs and financials, especially if a public company is acquiring a nonpublic company
• Cross selling among the entities and appropriate commission structure
• Cutoffs for accounts payable and A/R (lockbox, invoicing, collection and treasury)
Tip 5: Determine Who Pays Transfer Taxes
Address who will pay transfer taxes (sales, transportation or transfer). This is negotiable. Also, make sure due diligence is thorough in this area, because items can be missed, and be sure to check filing requirements. For example, Rhode Island requires a certificate of good standing and all tax returns filed prior to closing, which means that you have to file a pro forma preliminary tax return if you are the seller and pay an estimated tax, covering the gain on the transaction before close.
Tip 6: Review Inventory and Controls.
Review inventory on hand and make sure controls are in place. Poor controls over inventory tracking and costing can cause delays in closing and adjustments of purchase price. The estimate of obsolete and slow-moving inventory becomes a bigger issue in negotiations when there are large amounts of inventory that have been held for a long time. In addition, the inability to track inventory properly, or apply overhead properly, increases the concern of the buyers during the due diligence process and can result in write-downs of inventory and loss of the purchase price.
Tip 7: Show a positive growth trend year after year.
Know your Earnings Before Income Taxes, Depreciation and Amortization (EBITDA). Although revenue and net income are important, EBITDA is a key factor used by many buyers in evaluating a business and its potential. Your growth doesn’t have to be off the charts, but it’s important to show positive growth to make your company more attractive to the buyer. Remember, you’re not always in control of the timing of a sale, so if your financial results do not reflect growth, you need to have a story at the very least. For example, are you refocusing your business on a different market segment that will allow for and generate more long-term growth?
Tip 8: Know What the Business is Worth. The buyer is not the only one in control of a negotiation. As a seller, make sure you have a good understanding of your company’s value so that you don’t lose a deal based on your perceptions of that value. It’s important to remember that values can change each year, depending on financial performance, the economy and the buyers’ expectations for returns on capital.
Tip 9: Consider Compliance. Compliance is another critical area of focus. Payroll issues related to employees will come about in the process. Here are some compliance questions to consider:
• Will you need to register a new federal employer identification number to pay federal/state income and unemployment taxes?
• Do you have new employee transfer information for state workforce agencies and garnishments such as child support?
• Are you committing State Unemployment Tax Act dumping?
• Can you use the standard procedure for W-2 reporting, or must you use the alternative procedure that requires Form 941-Schedule D to reconcile with all Form 941s and W-2s?
• Do you change to a different deposit schedule based on increased withholding?
• Do all of the new employees have I-9 paperwork?
• Are there resident alien employees or employees on visas that need renewal? Tip 10: Protect Your Business’ Brand Ensure that your target market knows your company. To accomplish this, make sure you have a strong web presence, up-to-date and strong patents, and insurance in place to properly manage risk. Maintaining reputation is key for a quality company/product. These 10 tips are designed to give you a strong frame of reference. However, remember that every M&A situation will be different, so consider all related aspects. Contact PKF Texas for more information and guidance.
Tip 10: Protect Your Business’ Brand
Ensure that your target market knows your company. To accomplish this, make sure you have a strong web presence, up-to-date and strong patents, and insurance in place to properly manage risk. Maintaining reputation is key for a quality company/product.
These 10 tips are designed to give you a strong frame of reference. However, remember that every M&A situation will be different, so consider all related aspects.
Contact PKF Texas for more information and guidance.