By Jeff Stark, Sensiba San Filippo LLP
Preparing for an Acquisition: 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. Also know your competitors and what factors set you apart. This is critical for businesses at any stage of development and even more so when you are preparing to sell your business. This messaging should be very 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. It is also important to make sure you align financial reporting and projections about the future of the business to your overall message, which will be meaningful to potential acquirers. 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
When it comes to planning for an acquisition, time is your greatest asset. You should understand your accounting policies as well as understand 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, among others. Additionally, it is very important to 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 all 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 where you operate and the type of business you are in, your company may have federal, state, foreign and sales tax filing requirements, all of which will be heavily scrutinized by the potential acquirer looking for possible liabilities. 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. Taxes are a complex area and issues here can stall or derail any deal.
6. Contracts and obligations
Make sure to go over all your documents to uncover any possible breach of contracts that may have occurred by mistake. Leave no stone unturned, and be sure to dig deep. More than 50% of deals fail, with the demise often being the result of 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. Your disclosure schedule should cover key contracts, equity holders and options, litigation, intellectual property and warranties — to name a few.
7. Employees and contractors
Many companies utilize contractors as a way of tapping into unique and specialized skills that are often hard to find. In many instances, consultants can be a lower cost option as well as 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 (IP) 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.
When thinking of an acquisition, it is always advisable to begin preparations as early as possible. Having the time to collect and organize all the necessary documents the buyers will review will make the process much easier for you and the purchasing party.
If you have any questions about how you can better prepare for an acquisition, feel free to reach out to our firm at 925.271.8700 or at firstname.lastname@example.org.
Jeff Stark is an audit partner at Sensiba San Filippo LLP. He assists businesses with building a road map to guide you to the best possible transaction by conducting thorough due diligence, preparing quality earnings analysis and advising on general business and tax advantages. He can be reached at 408-286-7780 or email@example.com.