Before selling an ARM or OBS company, an owner has to ensure that the financial side of the business will be ready for analysis by prospective buyers. If you are not in a distressed situation or turnaround mode and have time – ideally 1 to 3 years – prior to starting down the path with a prospective buyer, focusing on the following key themes can help get the financial side of your business ready for sale.
- There is no requirement for a company, depending on size, for an audited financial statement from an outside CPA to be required to make a sale. Or even a review for that matter. There is no doubt it is nice to have one, and it will make a potential transaction easier. But simply having a compilation or tax return with a QuickBooks file is certainly OK, too.
If you are a larger company – $3 million in adjusted EDITDA or more, there can be a reason to get it done in advance because it can make things easier from a transaction perspective. For example, take the most recent completed fiscal year and have it audited. However, it is not required. On a go-forward basis get your numbers audited. It is not necessary to go back to the beginning of time and start auditing your financial statements. That is a time consuming, unnecessary scenario unless there was a particular issue with your financial controls that would warrant that. Taking a look at the most recent completed fiscal year and the current year in advance of a sale will make things easier, faster and more efficient for everyone involved.
- Take a look at who is running finance and accounting in your business. If you have an outside or internal person handling your financials – bookkeeper, CFO or controller – it is very important for the person in that role to really understand your numbers and be able to speak to them. When questions come up from a prospective buyer – for example, why is this expense booked in this particular way – you want someone other than you, the owner/seller, to be able to answer that question.
Obviously, if you are a small company you may not have a choice in the matter and it will be you answering the questions. If you are a larger company, making sure that a person is able to not only speak to the numbers but was involved in preparing them, will help to assure that the numbers you are providing to the buyer are real, legitimate and vetted by someone other than yourself. This person is absolutely critical in helping to get a deal done.
- If there are any financial “skeletons in the closet” – not necessarily compliance-related – for example, there was fraud going on in the business at some point and as a result of that you had a lot of unexpected expenses related to that potential fraud. The key is to identify what those “skeletons” are and determine how they impacted your financial statement. You want to have plenty of time to clean up and also be able to explain the issues. It will come up. You won’t be able to hide anything. You want everything out in the open, as much as possible. If you have time you can start getting the facts, story and numbers right as to what the effects were and how you fixed the problem.
- Figure out your adjusted EBITDA and determine what would be accurate expenses to add-back to your earnings. Many owners may run personal expenses through the company – meals, entertainment and travel – some of these expenses may not have anything to do with the business. Assess those expenses to see if they can be viewed as an adjustment to help show higher profitability. Those expenses would go away after a sale.Another example of a potential adjustment would be extreme weather events we have been having during recent years. For example, you may have had a hurricane come through leaving water damage in your facility. This would be something expensed through the income statement that isn’t happening every year. Superstorm Sandy caused a lot of damage to companies in our industry. If those expenses run through the income statement there could be a potential adjustment. Getting the data and records to support those adjustments is critical. The buyer isn’t going to take it on face value that you had this expense. The buyer will want to see you had and paid the expenses, using AMEX statements or invoices showing real expenses that ran through the business.
- Look at “profitability by the client” to assess who is driving your margins month over month, and quarter over quarter. Develop a way to track profitability by client or stream of business. This is no easy task. There is no packaged financial model you can use to pull it together.Every company has different cost structures and ways of managing how they deal with clients, specifically contingency or “fee for services” clients. Being able to have that model in place prior to sale will help immensely in figuring out any issues you may have. You may have significant concentration with one or two clients who make up a bulk of revenue and profit. You can begin to make a plan to diversify to help lower your concentration risk for that buyer, which means the buyer may pay you a higher multiple or a higher valuation if the concentration isn’t significant. By working with an M&A advisor to assess profitability by client, it not only helps determine deal structure but can help the seller determine if they want to keep a client, fire a client or change staffing levels on a client based on how they track with profitability.
Should OBS owners be looking at a 1 – 3 year window to get their financial house in order?
Some companies have all their financial controls in place. They don’t need to wait three years to go to market. But some companies have a QuickBooks file with so many issues as to how they managed the numbers. As a result, being able to quickly pull together all the information needed to have a conversation with the buyer can take a long time for some companies. You don’t want to share numbers that aren’t accurate. If you start rushing you could make errors in sending out information to the buyer. The numbers are critical to figuring out whether you can value or structure a deal that will work out for both the buyer and seller. You don’t want to have many mistakes out of the gate. The more time you have to make the effort the better off you will be.
Do most OBS companies put this information together on their own? Or is it usually better to look for outside support in getting this information together?
Most companies are able to assemble key information. Assembling it is one thing, but figuring out how to analyze it and go through what is there to identify issues is more complicated. This is why having an advisor – an accountant, a lawyer, an M&A person, a consultant or anyone else who really knows the financial or accounting side of the process is really important to have alongside the owner when selling the business.
The more PREPARATION you do when it comes to your financials in advance of a sale will help lead to a positive outcome for you as an owner. It will also lead to a more efficient process when selling your company.
CAS oversees and executes on M&A engagements, investment opportunities, compliance/regulatory assessments, valuation and expert witness litigation matters for constituents of the Outsourced Business Services (OBS) sector.