I am currently involved with one of our associates in negotiating the sale of one our client’s companies. It is a desirable, growing business that attracted five offers from a diverse group of acquirers. Three of them are strategic industry buyers, one is a strategic buyer from a complementary industry, and one high net worth individual. Like many lower middle market transactions, the transaction was structured as an asset acquisition, rather than a stock sale. To facilitate a presentation to our client, my team prepared a spread sheet, comparing the proposals on an “apples to apples” basis. On their face, most of the proposals seemed to be similar, until you got into the fine print and determined which assets and liabilities the various buyers were acquiring. The difference to our client amounted to several hundreds of thousands of dollars.
Set forth below are some of the more relevant reasons for paying attention to your balance sheet in anticipation of going to market:
Accuracy of Values – It is not uncommon for us to see inaccurate inventory or accounts receivable amounts. If you have not taken accurate annual inventories and adjusted the inventory for shrinkage and obsolescence over the years, it is likely that not only is your Balance Sheet incorrect, but your income is being misstated. If your accounts receivable contain uncollectable amounts, you may have similar issues. These types of inaccuracies will usually be discovered in due diligence and could blow up the transaction. Worse yet would be that the problems surface post-closing and litigation ensues.
Working Capital – The numbers on your Balance Sheet will likely be used to determine working capital requirements. Therefore, incorrect amounts can result in an inaccurate calculation of the amount of working capital to be included in the sale. As an aside, working capital calculations can be complex and subjective. It is advisable to work with your accountant and intermediary to determine the appropriate amount prior to going to market. The prospective acquirer will have his or her CPA and lender also involved.
Detrimental Line Items – Most buyers don’t like to see employee loans and loans to or from shareholders. The former may be viewed as a sign of poor management and the latter may be viewed as an indication of inconsistent cash flow from the business.
Cleaner and less complex Balance Sheets are usually better and may take some time to properly address some of the items needing attention. We would welcome the opportunity to visit with you and your accountant to provide a perspective from the other side of the table.
Business acquisition activity remains strong and, if you are considering going to market within the next three years, I would suggest that you consider visiting with your advisors now to determine if it is appropriate for you to consider a transaction in the near term.
(originally published in October 2015 eNewsletter)