By Dennis Michaels
We’ve made it through the first three steps to consider when planning to sell your business: planning and preparing, valuation and control, and considering the effects of key relationships. I’ll conclude this series with a look at possibly the most important aspect of them all: The financial impact of the sale, on a professional and personal level.
Financial statements are usually one of the first items reviewed by buyers and typically serve as a basis for most of the economics of the sale. Most buyers will want to know whether these financial statements have been prepared using GAAP — and if not, how they differ from those standards.
Likewise, another key question is, have the financial statements been audited, or are they auditable? Failure to offer audited GAAP financials is rarely a deal killer, but it can certainly present some challenges. If accounting practices differ significantly from GAAP, the buyer and seller may have a very different view of the value or profitability of the business.
Likewise, deal terms like earnouts that are based on historical accounting practices may end up in disputes if practices change post-deal or are applied more rigorously. Ultimately, any inconsistencies will reduce the valuation a seller would receive and shift more risk to the buyer in the event inconsistencies arise post-deal.
Sellers should carefully review items like accounts receivable aging. To the extent possible, every effort should be made to try to bring accounts into as current a state as possible, and keep them there. Many buyers will discount any accounts receivable that are outstanding for more than 90 days, and often for shorter periods as well.
Likewise, liabilities like accounts payable and bank loan balances should be reviewed. Sellers will typically end up with responsibility for all debt on the balance sheet (whether directly, by requiring their liquidation, or as an offset to purchase price). Planning to minimize these balances where possible will leave more money in a seller’s pocket.
Finally, a careful assessment of potential or contingent liabilities of the business should be professionally conducted. Is there ongoing litigation? Is the outcome predictable? Is all or a portion of any liability covered by insurance?
Are portions of the business more likely than others to be the subject of disputes, litigation or regulatory actions? Are there any conditions or circumstances that might hold the risk of some future liability, such as use of hazardous materials in the business?
Whether or not these items exist, a seller should develop an understanding as to how these factors may impact valuation and risk allocation in any deal structure. There may be steps that can be taken in the near term (e.g., changes in insurance coverage, corporate restructuring, etc.) that could minimize the risk to the business and ultimately a future buyer.
Personal Financial Impact
Finally, each seller should consider the impact of a sale on their own personal financial situation. Tax minimization and estate planning considerations should be evaluated at the beginning of the sale process. A seller may not be able to control all variables, but most buyers are reasonably indifferent to structural alternatives that may benefit the sellers if they don’t change the cost or risk to the buyer.
Estate planning arrangements made well in advance of a contemplated sale may permit a seller to preserve more of the proceeds for themselves and their heirs than if those activities are undertaken post-sale.
Dennis Michaels is an experienced business lawyer focused mainly on start-ups, angel and venture capital financings, mergers & acquisitions, and corporate law. Dennis advises entrepreneurs, investors and companies about business issues throughout the corporate life cycle from formation through finance to exit. You can e-mail Dennis at DMichaels@boutinjones.com.
Originally published: Sep 23, 2011