According to a 2022 Wealth Management IQ survey 70% of respondents explored an acquisition, sale, or merger on some level – whether motivated by succession planning or outside capital to fuel expansion. When it comes to mergers, acquisitions, and sales, the deal process can move at all speeds – being prepared can help your organization accelerate the process and maximize the transactional price you receive. This means taking steps to maximize the value of your organization. But how does one go about this?
Working in tandem with your CPA firm will help maximize the value of the deal and minimize potential pitfalls of acquisitions and mergers. Here are 6 points to keep in mind and discuss with your CPA.
1. Involve Your Tax Preparer Early
- Involve your tax preparer in the planning process: Share your letter of intent with your tax preparer and legal counsel so they can review how the transaction is structured. Forward a draft copy of all transaction documents to your tax preparer before they are finalized, including details about additional owner compensation or equity transactions concurrent to the sale, merger, or acquisition. This will allow your CPA to determine the tax consequences of the transaction and avoid any surprises later.
- Consider federal tax return impact: If your legal business entity is terminated because of the transaction, you may have a tax return filing requirement within 2.5 months of the transaction date. Your tax preparer needs to know when the transaction closes so they can file your tax returns timely or apply for an extension. If your business will receive sale proceeds over multiple years, you may have an installment sale which will require additional gain calculations each year as funds are received.
- Consider state tax return impact: If your business’s income is apportioned to multiple states, your tax advisor can model out how much of the transaction gain is taxable in each state. You can also take advantage of the opportunity to elect entity-level pass-through entity taxes, which sometimes have cutoff dates.
- Planning opportunity for owners’ personal taxes: There may also be an impact on the owners’ personal income taxes due to the transaction. The owners should be in contact with their own tax preparers early in the process. For example, if you are a partner who pays self-employment taxes pre-transaction, you may now become an employee who receives a W-2.
2. Financial Statement Accuracy & Reliability Provides Assurance to Buyers
- Buyers keep their eyes peeled: With a blend of earnings before interest, taxes, depreciation, and amortization (EBITDA) and revenue multiples as the most common valuation techniques, buyers will focus their efforts on ensuring financial figures are accurate.
- Audit & review frequently: Annual audits and reviews drastically reduce the risk of inaccurate financial statements. Common inaccuracies include:
- Revenue recognition – are management fees properly calculated and recorded in the correct period?
- Liabilities & contingencies – are they accurately stated (deferred compensation, including commissions)?
- Capitalization tables – are they accurate? Employee-owned firms with stock awards (restricted stock and options) can be challenging to accurately record.
- Prepare your pre- & post-transaction statements: If your company doesn’t plan to undergo an annual audit, it’s still important to ensure your pre- and post-transaction financial statements are properly prepared. Plan with your CPA and bookkeeper before the transaction to clean up the books and account for the transaction correctly in your accounting software.
3. Ensure a Healthy Control Structure Is in Place
- Proper policies & procedures: Ensuring you have these in place may increase value (qualitative factor), including pre- and post-acquisition changes.
- Effectively designed & operating controls: These are not something that can be crafted and implemented overnight. It is important to consistently monitor the control environment, especially in times of employee turnover.
- Poor controls over reconciliation of assets under management (AUM) can lead to costly billing errors.
- Lack of segregation of duties creates the potential for inappropriate personal expenses to put a dent in margins.
- Reducing errors: Overall, strong controls help reduce the risk of material errors in financial reporting, as well as strengthen defense with regard to potential regulatory examinations.
4. Confirm IT Systems Are up to Date
- Billing systems: Accurate and efficient billing systems can potentially reduce unnecessary headcount.
- Implement pre-acquisition: Implementation of systems post-acquisition can be a red flag to potential buyers.
5. Compliance Requirements
- Compliance history: Do you have a track record of mock SEC Examinations, cybersecurity, and penetration testing? These may lead to additional qualitative value (assurances to buyers).
- Rule 206 – Surprise Custody Examinations: Are you prepared to verify the funds and securities held for clients?
6. Obtain Third-Party Valuation
- Determine actual value: Often there is a disconnect between the actual value and perceived value of the firm. A third-party valuation can help you ensure that you have a clear picture of your standing.
- Determining pros & cons: A third-party valuation provides an in-depth analysis of the strengths and weaknesses of the advisory firm, offering routes for improvement.
When considering an acquisition, sale, or merger, it’s in your best interest to ensure that you are optimally positioned for a strong buyer valuation. Considering all six of these steps can seem daunting, but it doesn’t have to be. If you’re seeking assistance or guidance through your M&A process, reach out to our team today, and we’ll be sure you are preparing for success.
