Once the decision has been made to
plan and implement an ownership
exit strategy, much needs to be considered and accomplished well in advance
of approaching a merger or acquisition
(M/A) target.
M/A preparation may seem like a monumental and consuming project, but many
of the core concepts involved are essentially best practices that all companies
should have in place to maximize profit
potential.
“Many of the ways that an inquirer will
analyze a prospective target’s business
aren’t that different from what the target
should be doing all along,” says Tom Gard,
partner in charge, Armanino McKenna LLP.
“Maximizing your profit potential on an
ongoing basis will increase the sale price of
any future M/A deal.”
Smart Business spoke with Gard about
how focusing on optimal business performance can help to put your business on
track for a beneficial M/A outcome.
What are three preparation guidelines for a
successful M/A?
First, you’ll need to attract a buyer. Your
information has to be presented to convey
a story.
Second, this story has to be supportable
by facts. You might tell a story that sales
are going to grow by 20 percent, but if it’s
not a plausible story, the buyer won’t listen.
Prepare the facts about where the company is right now based on current operating
results.
Third, you should be critically evaluating
your operation by product line and making
the changes necessary to improve overall
profitability — whether there’s an M/A deal
or not.
How do accounting practices come into play?
Economics will always drive whether or
not the proposed merger or acquisition is a
good strategic buy. However, accounting
practices come into play when the purchaser starts analyzing the numbers. If
things are not accounted for correctly or
are not presented in a concise manner, the prospect may start to lose faith or question
the numbers. If the numbers are straightforward and the reports are meaningful
with no indications of any unusual
accounting treatments, the buyer is more
likely to be attracted.
When should a company seek assistance
from outside resources?
Planning for an M/A deal should begin at
least two to three years in advance.
Companies can certainly benefit by drafting an experienced accounting firm early in
the process that is familiar with how M/A
deals are structured. Most CPAs can perform a critical evaluation of the historical
numbers and help ensure that the company is correctly positioned prior to going
into the market.
What categories can skew an M/A proposal,
and how can they be recast?
Private companies often maintain substantial discretionary expenses. For example, a company may employ certain family
members, offer extra-rich medical benefits
plans or provide a large number of company vehicles. The prospective purchaser
may choose to streamline these operations
if they typically are not the industry norm.
This doesn’t mean that a company should
immediately eliminate these discretionary
categories, but I advise my clients that
these items need to be isolated and backed
out of the numbers so the core profitability
will look that much stronger.
How are accounting results best organized
for critical analysis?
The buyer likely will request to see
results of operation by distinct product
lines or distinct divisions. For example, a
truck dealership could present the numbers for truck sales, parts sales, service
sales and other product lines. The buyer
will want to understand what lines are
actually driving the business, and which
lines might be a drag on future profitability.
Additionally, prospective buyers will
want to know how the company arrived at
its current form. You’ll need to prepare and
provide many documents, including basics
like articles of incorporation, minutes, capitalization tables and other statistics.
Management should make sure it can run
reports like these easily, even if not preparing for an M/A. Compliance documents,
including four to five years of audited financial statements, tax returns and letters of
recommendation from auditors — or internal financials if not audited — should also
be prepared and organized for analysis.
How can negative results be mitigated before
approaching a potential buyer?
It’s rare when you find an organization
that is running on all cylinders, and any
legitimate buyer will drill down to the problem areas. This is where the critical analysis of your product lines comes into play.
Once an area of concern is identified, a
plan of action can be designed that illustrates how this lagging area can be turned
to the benefit of the purchaser. You have to
tell the story to the buyer about how this
problem can be overcome and capitalized
upon.
TOM GARD is partner in charge of Armanino McKenna LLP’s
Audit Department in San Ramon. Reach him at (925) 790-2600 or
[email protected].