As seen in Crain’s Cleveland ACG Corporate Growth & M&A edition, January 2020

There are a myriad of diligence issues that can adversely impact purchase price and sometimes kill the deal. While there is no absolute on completely avoiding these issues, there are several areas owners should consider as they evaluate selling their business.

1. Sell-side representatives

Most business owners are far from experts at selling a company. Build a strong transaction team, which may include a banker, an attorney and tax professionals to help navigate the sale process and generate the highest possible return on the transaction.

2. Accounting v. economic earnings

GAAP earnings from audited financial statements don’t accurately represent economic earnings. Look back at least three years to develop a normalized picture of earnings while also considering other potential accruals versus cash earnings adjustments.

3. Depth of management team

If there is not much depth in the management team, build a capable, diverse team to ensure the transition and future success of the business.

4. Customer and products

Concentrations of revenue and profit with a small number of customers or products can negatively affect valuation. Diversify your customer base and consider expanding into new product offerings.

5. Vendors

As with customers, you’ll want to reduce concentrations of material or services with one vendor or sole-sourced product sourcing and diversify.

6. Excess net working capital

Excess NWC can be difficult to argue for additional purchase price. Start by improving receivable collections, managing down inventories and maximizing vendor payment terms at least 12 months prior to the sale. Then the seller can convert excess NWC into cash ahead of the sale.

7. Tax issues

Tax professionals can help identify potential exposures ahead of the deal and properly posture issues with buyers. Examples include valuation of net operating loss, accelerated tax-basis depreciation, inappropriate deductions/expenses and verifying income and tax compliance practices.

Ideally, sellers should begin to address and mitigate these common diligence issues years in advance of going to market. We can help owners develop their strategy to manage these common diligence issues and position your business for the best outcome.

 

About the Authors

Steve C. Swann

CPA/ABV, CFE
Partner, Transaction Advisory Services

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