WHERE FINANCE AND M&A MEET: HOW THE RIGHT FINANCE AND ACCOUNTING SUPPORT IS KEY TO A SUCCESSFUL BUSINESS SALE OR PURCHASE

Written by Kevin Briscoe, Managing Partner, CFO Selections

When it comes to business transactions, preparation and expert guidance are essential components of success. In this comprehensive guide to buying and selling businesses Kevin Briscoe, the Managing Partner of CFO Selections, provides key insight into the finance and accounting information you need regarding middle-market business sales, acquisitions, and mergers. It is meant to provide guidance to business owners, CEOs, and/or finance and accounting teams that do not have previous experience with these types of business transactions, particularly in the areas of finance and accounting. This resource can help to augment their preparedness by offering the advice of professionals who are experienced in these types of business deals. We hope you walk away with some actionable advice on how to be better prepared for a business sale or acquisition!

Preparing Transaction Deal Documents

Documentation is a key component of an organization’s preparation for M&A activity. An understanding of the role played by the Letter of Intent or Term Sheet and the corresponding required content is helpful in paving the way for the due diligence process as well as establishing the framework for the Purchase and Sale Agreement.

Transaction readiness in the areas of finance and accounting has the benefit of:

• Minimizing disruption to the underlying business while the transaction is being negotiated.
• Increasing the likelihood that the structure and details of the transaction are mutually beneficial to all parties involved.
• Accelerating the completion of the transaction.

From a seller’s perspective, an in-depth knowledge of the company’s financial, legal, and operational structure can be very helpful in tailoring the otherwise generic representations and warranties that will comprise much of the Purchase and Sale Agreement.

> Takeaway: A significant amount of business sale documentation either directly or indirectly forms part of the Purchase and Sale Agreement and must therefore be compiled and organized to finalize the transaction. This is an area where the presence of finance and accounting leadership with prior transaction experience may be of great benefit in completing the transaction in a timely manner.

Types of Buyers

When considering how best to prepare for a business sale or purchase, it is helpful to understand the difference in types of buyers, and how each type of buyer will influence the kind of finance and accounting preparation needed.

Financial Buyers

A financial buyer is usually a private equity firm looking for a return on funds provided by its investors. As such, a financial buyer generally employs reasonably specific business valuation criteria and is unlikely to pursue a business with volatile or below average financial performance.

Many financial buyers go into a transaction with some form of holding period in mind, after which they intend to exit the investment through sale to another investor or a strategic buyer. As such, financial buyers pay particular attention to the:

• Strength of the business model
• Quality of management
• Competitive positioning
• Sustainability of profits and cash flows

Financial buyers often employ outside consultants to perform pre-acquisition due diligence in areas such as accounting, tax, risk management, employee benefits and information technology.

> Takeaway: Because financial buyers almost always employ a formal, disciplined, and detailed approach to their due diligence, a seller’s management team (especially its finance and accounting staff) must be well-organized and possess the bandwidth to effectively respond to data requests and analytical inquiries while continuing to support ongoing business operations.

Strategic Buyers

Strategic buyers are generally companies in the same or a complementary industry as the seller who are looking to profitably expand their operations through business acquisitions.

While financial performance and anticipated returns are often key considerations to strategic buyers, “strategic fit” and potential operational synergies often provide a greater impetus to complete a transaction. In particular, the strategic buyer is likely to focus on its ability to sustain or expand the seller’s revenue stream while eliminating the portion of the seller’s cost structure that duplicates resources the buyer already possesses.

Reducing or eliminating the seller’s overhead after the acquisition is often a critical operational synergy and means the acquired business will likely see staff layoffs once the transaction has been completed. Sale to a strategic buyer may therefore bring with it an element of uncertainty or instability in the seller’s workforce that the seller must be prepared to face.

Finance and Accounting Support

Buy Side

Buyers often employ deal-experienced finance and accounting resources to provide the analysis aimed at confirming that the deal is the right decision at the right price. This support, and the resulting transaction documentation, can be useful in addressing the concerns of the buyer’s stakeholders who often exert scrutiny regarding acquisitions.

Buy-side financial resources will analyze the relationship between historical and projected future financial performance to enable the buyer to focus on deal drivers that pose the greatest investment risk or opportunity for return.

On the Buy Side a financial transaction support team will:

• Conduct a profitability analysis by business segment, customer, product, or service that is fundamental to supporting the buyer’s investment thesis.
• Identify or confirm synergies that may be employed in strategic business modeling.
• Evaluate a potential acquisition’s financial reporting systems.
• Lay the groundwork to determine the financial statement impact including accounting policy and purchase accounting analysis.
• Enable an understanding of all liabilities, on and off the balance sheet, as well as assess the quality of the assets which may be critical in arriving at a final purchase price for an acquisition.

This support group will employ tools such as a detailed trailing 12-month trend analyses that overlay historical results on top of projected future performance and can provide a roadmap to potential transaction landmines or post-transaction value creation opportunities.

Sell Side

Middle market business sales often involve an ownership group that is looking to monetize all or part of its investment. In addition, a founder or family-owned company may be looking to fund retirement, support future generations, or find a partner who will protect the legacy of the business.

> Takeaway: A business owner with no prior transaction experience is likely unaware of the resources required to accelerate the transaction close and simultaneously minimize business disruptions. The right finance resource can assist ownership in evaluating divestiture risks and rewards and prepare them to execute the transaction.

On the Sell Side a financial transaction support team will:

• Perform a “quality of earnings” analysis (including an identification of one-time or non-recurring items to calculate a “Normalized EBITDA” metric) that enables it to substantiate the business value in advance of due diligence.
• Conduct a trialing 12-month trend analysis.
• Demonstrate consistent customer volumes to mitigate customer concentration concerns from financial buyers.
• Carve out accurate standalone financial data (including a P&L, balance sheet, and cash flow statement) for any business segment that the company is looking to divest.

Sell-side finance and accounting support includes assisting ownership to prepare for the transaction process and identifying exposure areas to avoid or reduce value erosion. But mainly, the finance transaction support resource is critical in guiding the seller’s due diligence process.

Due Diligence

Buy Side

A company considering expanding through business acquisition must assess the ability of its internal staff to perform the level of meaningful due diligence required to ensure the acquisition makes financial and strategic sense and represents the best use of the company’s resources.

> Takeaway: Organizations that successfully perform their own due diligence generally possess staff with significant prior transaction experience and skills including the analytical and communication abilities required to summarize findings in a manner that allows for informed and well-supported decision making.

Formulating data requests, performing analysis and follow up and communicating with the target company’s key staff while respecting the seller’s confidentiality requirements and operating under time constraints is a balancing act many middle market buyers have difficulty pulling off. A business with outside investors or a board of directors will usually need to justify the rationale for the acquisition through the effective summarization of the detailed due diligence performed. Lenders may also take a keen interest in the results of the acquisition due diligence, such as any measures the buyer took in validating the target’s cash flow as well as assessing the seller’s assets that may be used as collateral to support a loan.

Sell Side

The probability of finalizing a sale in an efficient manner is directly tied to the seller’s ability to “manage” the due diligence process. Without prior transaction experience, it is difficult for business leadership to anticipate and plan for the effort required to deal with the operational disruption that a business sale can cause.

From a finance and accounting standpoint, companies that are best prepared to undergo a sale transaction have:

• Experienced, highly competent staff
• Very clean books and records (including audited or reviewed financial statements)
• Comprehensive budgets and financial forecasts
• Well-organized, accurate, and timely management and operational information

> Takeaway: In most transactions, the seller’s finance and accounting functions will be required to populate a data room with a wide variety of documents including financial data, contracts and agreements, legal and corporate governance documents, insurance and employee benefits data and a significant amount of operational information.

Often, the seller’s management team will simultaneously be dealing with requests from its own investment banker, the buyer’s transaction team, and the buyer’s due diligence consultants while at the same time managing responses to be provided by its own advisors (such as accounting, tax, and legal service providers). Nothing slows down a transaction more than the seller’s inability to produce the information required by the buyer’s due diligence objectives. No matter how much data is provided, the seller will almost inevitably ask for more information, including analyses that the seller may not have previously prepared. The seller’s staff must therefore be both responsive and judicious in dealing with data requests (especially if a request is made for data that the company has not prepared in the past). The seller must clearly understand why this data is being requested, what its significance to the transaction is, and what the implications for the transaction are if it remains unavailable.

Whether you are the seller or buyer in a business transaction, your goal is to complete a successful transaction. Preparation and expert guidance are the keys to achieving that goal!