What business owners need to do to sell their company

March 26, 2013

Selling your company: What you probably don't know — but need to if you want to sell

Have you ever learned something new and thought — wow, I was totally in the dark before. You realize you just didn't know what you didn't know.

Knowledge is power. We want to pull you out of the dark and give you a new perspective. We've created a list of things to do if you plan on selling your company — things you most likely didn't know you needed to do.

Selling your business is like selling a house. You want to make sure that both the outside and the inside look good. Cracks and leaks scare buyers. 

If these walls could talk

For business, the outside of the house is your customers. You want to make sure your business is attractive and strong by having a diversified customer base. When possible, having signed long-term contracts with a diversified customer base is always best.

But what's most important is the inside. For business, the inside of the house is your numbers, systems of controls, and management team. Are the numbers on your balance sheet and income statements supported by back-up schedules and subsidiary journals? For instance, do you have accounts receivable agings that agree with your balance sheet numbers?

When was the last time you had a certified audit by an external CPA? Your selling price and your likelihood of closing the sale will improve greatly if your company has had certified audits for at least 1 year — and even better if you have them for 3 years. 

A story of missed opportunity

I have a client that hired us to go out and do some inventory counts so that when their year-end came up, we could do a certified audit. They had not done a certified audit previously. That year, before it was time for the audit, they decided to sell their company.

They got an impressive offer for $85 million. The letter of intent was signed, and the buyer looked everything over — doing their due diligence. In this due diligence, the buyer found a couple of items that were not being accounted for correctly. These errors then made the buyer question everything. Because there were no prior year audits to review, they then didn't trust the value of any of the numbers they were looking at. So they told the owner, the only way they would move forward is if the seller paid $250,000 for an external firm to come out and audit every number. Instead of agreeing, the owner got heated and the whole deal blew up — the sale was lost.

A little later, he came to KSJG to do that year's audit and we found where the two discrepancies were. They weren't even that big of a deal. But our client lost that deal because of creating mistrust in the buyer because the numbers didn't align. They put their company up for sale a couple years later and had 3 years of certified audits. It was sad because at that point, they sold the business for $20 million less than that original offer. They really lost out and it was just because of minor discrepancies. That is why it is so important to do yearly certified audits.

Numbers are your foundation

So back to the house analogy — your numbers are the inside of your house. If a buyer sees cracks in your walls, they'll question the foundation, and they're going to then question everything else.

Will your numbers stand up through due diligence? Meaning, do you do bank reconciliations? Do you have inventory back-up schedules and fixed asset schedules? Do you have clean records of your assets you own, such as office equipment, machinery, etc.?

Your numbers simply have to be supported. Your buyer will send out a team to do due diligence to investigate all the ins and outs of your business — scouring every record to make sure everything jives.

  • Traceable: Your books and records have to be traceable back to source documents.
  • Collectible: They'll look at your accounts receivable to see if they're actually collectible.
  • Accounting policy: They want to make sure you follow “Generally Accepted Accounting Policies” (GAAP).
  • Revenues: They will review sales cut-off and how you recognize revenues. They will understand revenue returns.
  • Warrantee reserves: They'll look at your warrantee reserves for products that may come back that you'll be responsible for fixing or refunding.
  • Projections: Do you prepare annual budgets? What is your next 3 or 4-year forecast? Can you show your past years' budgets? How close were your actuals to the budgets you projected previously?
  • Strategic plans: Has the company put together a detailed strategic plan of how it plans to progress for the next 3 to 5 years? It needs to be detailed and in writing. You can't just have an idea in your head.
  • Internal controls: Does your company have proper internal controls? Frauds and other errors will be less likely to occur when you've got internal controls already in place. This doesn't mean that errors cannot happen, but you're ahead of the game because you put controls in place and are ready.
  • Taxes: What type of tax strategies have you taken? Are they aligned with Internal Revenue Code? Are you current with your payroll taxes and your sales taxes? Any buyer is going to want to make sure that you do. Have you taken any tax positions, that if audited, would be found to be (more likely than not) agreed to by the IRS?

So if you are looking to sell your company, you most definitely need proof and substantiation for your numbers and you'll absolutely need a minimum of 1 year of a certified audit — with 3 years being best case. These audits will identify weaknesses in your accounting systems and will allow you to make changes that will improve any discrepancies that could be identified through due diligence.

 As you probably know, our firm offers a wide array of financial services. We are experts at doing all the items mentioned above — certified audits, projections, internal controls, taxes, etc. We feel our ability to provide a variety of financial services — and the number of years we've been successfully delivering quality work reflects our competency — as well as our passion for helping our clients prosper. 

As you know, the business world moves quickly — and we are here guiding our clients every step of the way. 

 

The information contained herein is for general information only and based on authorities that are subject to change. It is not intended and should not be construed as legal, accounting or tax advice. Your individual circumstances may vary from any examples provided and there is no guarantee that any particular tax strategy or exemption will be applicable to you. Contact KSJG or other tax professionals prior to taking any action based upon this information.



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