M&A: What You Need To Know

Q: What is the most common hurdle a buyer and seller face when attempting to consummate a transaction?

A: The most common hurdle is the gap between what the seller feels the business is worth, and what the buyer is willing to pay. For the seller, it can be an emotional decision and they may rely on valuations of other companies that do not correlate with the size and structure of their business. For the buyer, valuation is guided by market norms and historical valuations of businesses with a similar size and profile.

Q: What characteristics of a seller’s business are important to a buyer when considering the structure and valuation of the offer?

A: Some of the business characteristics a buyer considers when formulating the structure and valuation are, in no particular order:

  • Customer concentration. Is revenue spread out among many customers, or a handful of customers?
  • Compliant HR and regulatory practices. Are independent contractor and employee hiring procedures up to date and compliant?

  • Post closing owner participation. The selling owner’s willingness to remain with the business after the sale mitigates integration risk at the customer and operational level, providing the buyer a much better chance of a successful integration.
  • Infrastructure. The quality of the IT, accounting, sales and general operating procedures of the selling company.

Q: As a seller, do I need to have audited financial statements?

A: Audited financial statements are not a requirement, but the accounting records should be accurate and in accordance with generally accepted accounting principles. The buyer will normally hire a third-party accounting firm to prepare a Quality of Earnings (Q of E) Report. This report is not an audit, but it is intended to confirm that the accounting statements and records are an accurate reflection of the financial picture the buyer relied on to formulate the offer.

Q: When is the most opportune time for an owner to sell the business?

A: The best time to sell is when the revenue and net profits are on a steady incline. Businesses that are flatlining or declining will require investment on the part of the buyer to "right the ship" and grow the business. The buyer will consider these factors when formulating an offer, negatively impacting the valuation to the seller.

Q: Does a business owner keep the accounts receivable upon a sale of the company?

A: Accounts receivable is a component of working capital (current assets minus current liabilities on the balance sheet). Working capital always accrues to the benefit of the buyer. Without working capital, the buyer would be forced to invest additional cash into the business over and above the purchase price to meet day-to-day obligations of the company.

Please contact Eric Mautner with any questions.

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