It is a common rule of thumb that business owners should begin exit planning no less than five years before a desired exit. This is true for a wide range of reasons, but perhaps most importantly that most acquirers of size or sophistication are going to want to see a historical track record and trend analysis of financial performance and results, and this has a direct impact on the desirability of the Company and the ultimate enterprise exit value attained by the owner. Potential acquirers will want financial information formatted to buyer norms, validated with outside accountant audits/reviews, and demonstrated favorable execution against annual budgets. However, timing rarely, if ever, works as expected and it is for this reason that companies should endeavor to “professionalize” their accounting and finance function sooner rather than later.
I recently rejoined Nperspective after several years as CFO for a South Florida-based company. The Company was acquired last year by a strategic, national, private equity-backed company for an above-market EBITDA multiple. Our company was not seeking or anticipating a sale, but rather was focused on our expansion plans and growth trajectory. We were working on our own acquisition plans until the CEO and owner received an unsolicited “cold call” from the ultimate buyer. The good news is that when I joined the Company, we started down the road to upgrade our accounting function and financial information – for example, moving from cash basis of accounting to an accrual basis, completing outside accountant audits/reviews, enhancing the Accounts Receivable collection function, developing a custom online payment portal, and implementing monthly budget, cash flow projections and flash reporting, putting us in a position when the unexpected call and offer came to respond timely and efficiently gaining top value and closing the acquisition inside of 90 days.
Not surprisingly, the list of items requested by a buyer for due diligence once an offer has been accepted and Letter of Intent completed between the parties is extensive in breadth and detail. For due diligence, from a financial perspective, we provided:
- our full QuickBooks Enterprise file,
- financial data from our ERP systems such as business analysis reports, accounts receivable aging detail, invoice history data and top customers rankings over past 6 years,
- Allowance for doubtful accounts calculations,
- Budgets and cash flow projections,
- copies all outside accountant audit/review reports,
- debt and lease schedules, and
- historical financial data for acquisitions we completed.
In our due diligence meetings with the buyer, we got very granular about yearly and monthly trends on revenue composition by product, cost of sale and overhead components, payroll by departments, gross and EBITDA margins, and balance sheet accounts. We spent considerable time on revenue recognition issues, pricing strategy, seasonality, our accounts receivable collections, tracking and management, occupancy analysis, accounts payable process and oversight, and our transition from cash to accrual basis accounting. This is all before the massive amount of information download around such items as contracts, agreements, intellectual property, insurance detail, HR documentation and benefit plans in the disclosure schedules as part of the acquisition documentation.
For many business owners, the value of the business is their main source of net worth. The moral of the story is even if you do not anticipate an exit in the near to medium term, you do not know when the knock on the door will come and you want to be on solid footing, ready and prepared as best as possible for that eventuality. Investing in the necessary resources to “professionalize” the accounting and finance function has real and significant valuation implications, if not also being the critical means to manage and understand your business and should be started well before you anticipate needing to provide the information to a potential buyer.