If you have worked hard and risked much to build your business – and now you want to sell on the best terms possible – one of the first people you should turn to is your CPA.
Pairing the accountant’s keen knowledge of your accounting practices and business results with your attorney’s negotiating and drafting skills often creates a dynamic that can increase the sale price, lower taxes, and reduce post-closing liability risks.
Start with the process of marketing your company. The process of marketing your business for sale usually involves long-term planning, finding a broker or investment banker, identifying prospective buyers, assembling key financial and legal information and circulating it confidentially, soliciting letters of intent, choosing the best buyer, and closing on the deal.
In this process, the CPA should be a person you can bring “under the tent” early without worries that customers or employees will learn that you are considering a sale, so that you can get an idea of the valuation ranges and tax implications when and if you sell.
In efforts to get the highest price, your CPA can help recast your past earnings to show what the company might have earned if, for example, high owner salaries or expensive perks for family members come off the ledger. Most valuation formulas apply a multiple to the recast earnings to help set the price. The CPA can also generate reliable analyses for your broker or buyers so that the financial case for the highest price can be presented thoroughly and persuasively to potential buyers.
Establish the Baseline
In a stock sale, your accountant can help establish the baseline amount of net working capital that the business needs to operate normally. Buyers typically insist that this baseline amount of working capital remains in the company at the time of sale. As a result, the “target” working capital effectively becomes a price term: the price paid at closing will be increased if you have working capital in excess of the target, or lowered if you have less.
When you start evaluating offers for your business, “it’s not what passes through your fingers that is important, it is what sticks to your fingers,” according to CPA Kevin Doyle of Lanigan Ryan Malcolm & Doyle. In other words, you need to find out exactly what you will have left after closing on a particular offer after all closing adjustments, after taxes, and assuming no contingent compensation or earn-outs are ever paid.
This calculation is complex and includes consideration of bank payoffs, employee retention payments, assets with accelerated depreciation and other so-called “hot assets” that generate taxes at higher ordinary income rates, valuation of non-competes, and numerous other calculations. Ideally you will have this calculation in order to compare the specifics of each buyer’s offer before you choose the purchaser and sign a letter of intent.
LOI Starts the Process
The letter of intent kicks off the process of negotiating the formal stock or asset purchase agreement, and, again, the accountant’s collaboration with counsel is crucial. For example, purchase agreements include seller representations that all taxes have been paid and that all financial statements have been prepared according to generally accepted account- ing principles (GAAP). But for some businesses, or in some industries, financial reporting is not necessarily according to GAAP, so your attorney needs to consult with the CPA to ferret out variances and document them in the purchase agreement to keep
you from making inaccurate representations that would otherwise cost you after the closing.
For these reasons and more, accountant and attorney collaboration before you start, after you finish, and during all the time in between, is critical to a successful sale of your business.
Ray Sherbill is a corporate attorney who combines strategic thinking, attention to detail and drafting, and broad commercial experience to represent businesses and business owners knowledgeably and throughout the Mid-Atlantic region, as well as nationally and internationally. For more information on maximizing the sale price of your business, contact Ray at 301-347-1275 or [email protected].