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3 Steps to Prepare Your Business for an Acquisition or Liquidity Event

3 Steps to Prepare Your Business for an Acquisition or Liquidity Event

As an entrepreneur, you likely have a never-ending to-do list that includes meeting with employees, calling disgruntled customers, reviewing company finances, and more. While the list of to-dos never seems to end, you might have an idea in the back of your mind to someday exit the business you have built.

If you have plans to sell your company or a portion of it, anytime within the next 2 to 3 years, the time to start preparing is now. Do not wait until you receive your first letter of intent from a potential buyer. The more effort and time that you can give to preparing for your eventual exit, the smoother the transition can be when the time comes. You’ll likely feel that more work is piling onto your plate, but this is expected as exiting a business, via acquisition or liquidity event is always time-consuming.

Think of it as more effort now, less stress later. The more you can prepare your business for the possibility of an acquisition, the more value you are adding to the company today. Keeping in mind that the business will be better off when the time comes to transition.

Below are a few steps you can take to prepare your business from a financial perspective.

1. Allow Time to Maximize the Potential Value of the Company

From a financial standpoint, it is advised to begin preparing for a liquidity event at least two years before the potential exit. Doing so will ensure you have ample time to make changes that are necessary to improve the business and maximize the future value of your company.

While it is always important to optimize your company’s profitability and value, it is even more so if you are planning to sell. This can be accomplished by streamlining financial statements to ensure management can review them effectively.

For example, simplified and organized financials will enable you to evaluate profit margins by individual revenue stream, develop Key Performance Indicators (KPIs) and ratios applicable to your company, as well as identify and consistently report on the metrics that drive profitability and value. It is vital to begin this process in advance of any sale or liquidity event, as your management will need time to identify, implement, and benefit from the changes made.

2. Get Your Financial Records in Order

When preparing your company for an acquisition, it is critical that your financial records are well maintained. Keeping pristine financial records helps avoid any pitfalls that may be uncovered through the due diligence process.

If you believe your accounting department may not be technically strong, it is encouraged to hire an outside accounting consultant to help sort through the critical information. An independent consultant or team can ensure you’re fully prepared for the financial due diligence process. They do this by gathering information and creating a strong package of financial information that clearly explains the results of your business operations. Even if you believe your accounting department can handle this process, we recommend having a qualified consultant perform the initial review to provide an outsider’s perspective.

3. Plan Ahead with Sell-Side Due Diligence

While certainly not required, engaging an outsourced accounting firm to perform what is known as a “sell-side” due diligence (or a quality of earnings report) process could save you from significant headaches and distractions during this already stressful time.

Sell-side due diligence allows you the opportunity to go through the due diligence process in a more reasonable timeframe. Proactively doing this allows your management team more time to find, organize, and interpret the financial information. Throughout this process, leaders should identify questions that may be raised by potential buyers, so they are better prepared to respond to items in an organized manner.

The sell-side due diligence team will also identify what are known as “add-backs.” These are described as non-recurring or unrecorded revenues or expenses that are added back to the Earnings before interest, tax, depreciation and amortization (EBITDA) to generate a normalized figure. Add-backs can be subjective in nature; therefore, it’s valuable to identify them before the buyer brings them up so you can prepare how to argue for or against those items in question.

Having a prepared sell-side due diligence report could also limit the amount of investigative work that the buyer determines necessary as they may be willing to rely on some, or all, of the results of the report.

Next Step: Due Diligence

You are ready to sell your business, your financials are in order, and you have just received your first letter of intent from a potential buyer. Next, it’s time to prepare for what many believe is a terrifyingly brutal process – due diligence. Read our blog post on the financial due diligence process to learn what is required and how to prepare your business to ensure a successful acquisition.

Prepare Your Business for an Acquisition or Liquidity Event

If you have plans to sell your company, Signature Analytics can provide ongoing accounting support and forward-looking financial analysis to ensure you get the highest value for your business. Contact us for more information or a free consultation.

Financial Due Diligence: What is Required & How to Prepare Your Business to Ensure a Successful Acquisition

Financial Due Diligence: What is Required & How to Prepare Your Business to Ensure a Successful Acquisition

So you have decided to sell your business, and you’ve received your first letter of intent from a potential buyer, exciting! Now, it’s time to prepare for what many view as a terrifyingly brutal process – due diligence.

There are several types of due diligence, including legal, financial, tax, operational, IT, human resources, commercial, and more. In this post, we will focus on financial due diligence as it’s one of the most commonly executed forms.

Initial Requests

The due diligence process typically begins with an overwhelming list of requests which are expected to be provided in a short period of time. This timeframe is usually due to the time limitations of the letter of intent.

Financial information is typically requested for the year-to-date and the previous two fiscal years. If the due diligence team uses the term “TTM,” they are referring to financial records for the 12 month period (or Trailing 12 Months) which ends with the more recent month.

Once the monthly trial balances are provided, there will likely be requests for schedules, such as ones that relate to customer revenues and costs. Once those are submitted, they should agree with the trial balances.

Each balance sheet account typically includes numerous requests for supporting documents to prove the accuracy of the balance throughout the period. Preparing these just before the due diligence process can be very time-consuming and can distract management from the day-to-day operations of the business.

Once all of the requests have been prepared, they are then stored on an electronic drive known as a virtual data room (VDR).

On-Site Visit and Meetings with Management

Once the data has been provided, the due diligence team will schedule a visit to your facility or offices. These meetings with management often take multiple days to cover all of the questions and clarifications needed.

Typically, meeting agendas could include:

  1. Overview of the business operations.
  2. Tour of the facility and introductions to key members of management.
  3. Discussion regarding customer base, types of agreements, fluctuations of revenue by customer, revenue recognition, attrition of customers, and concentration of customers.
  4. A walkthrough of the entire trial balance. Questions may be asked on fluctuations of the balances on certain accounts, breakdown of items within accounts, and justification for the accounting method used.
  5. Throughout this process, the due diligence team is attempting to identify any unusual or non-recurring items, and any transactions that may not have been recorded or occurred but are expected to be incurred in the future.
  6. Understanding of inventory and accounting methods.
  7. Understanding any trends in pricing or future expectations for pricing.
  8. Determining whether all liabilities have been properly recorded.
  9. Understanding headcount, payroll expenses, and other benefits employees currently receive, as well as committed employee contracts that may include acquisition-related bonuses.
  10. And many other topics – so be prepared!

The on-site process can be grueling for a company. The due diligence team usually requires the attention of the more senior or experienced employees, the ones who are integral to keeping the company’s operations running. Part of the preparation process will be helping these individuals on what to expect. If your management team can answer all the due diligence questions thoroughly and clearly, doing so will avoid multiple follow-up questions. This type of preparation allows them the ability to continue focusing on their daily tasks.

Final Report and Negotiation

When the due diligence team concludes their visit to your facility, the expectation is that they will review all of the information provided in detail and communicate any additional inquiries. Then, they will complete their report and submit it to the buyer. It is up to the buyer to use the results as a negotiation tool when determining the purchase price or other key terms in the purchase agreement.

The Risk of Not Being Prepared

By now, it should be evident that being adequately prepared for the financial due diligence process is critical to the completion of a successful acquisition.

Business owners who become distracted by the number of financial requests can lose sight of the negotiation process, and therefore not receive the greatest value possible for their business.

If the financial information is considered disorganized, not accounted for properly, or not supportable, the buyer could assume that the results provided may not be an accurate depiction of the business. The buyer could view this as an additional risk and discount the potential purchase price as a result.

Prepare Your Business for the Financial Due Diligence Process

Signature Analytics has supported several companies through the acquisition and financial due diligence process. Our team can ensure your financial records are accurate and organized before the start of the due diligence process. Our experts can help prepare supporting schedules and documentation that may be requested by the due diligence team. We can gather and arrange a sell-side due diligence or quality of earnings report, so you’re fully prepared for the financial due diligence process.

Don’t go through the financial due diligence process underprepared or alone, contact us for more information or a free consultation.