Make no mistake, if you are going to sell your business, just after you sign your letter of intent some very sharp analysts will be pouring over your financial statements, reaching back years. These analysts are invariably very well trained.
They rarely miss anything, either when examining your bookkeeping, your tax returns, your tax and wage accruals, or any pre-close liabilities that should rest with you or be settled out of the deal proceeds. Their mission is to “guard the back door” of their employer (the acquirer), so that after the transaction is closed, there are no surprises, and the acquirer doesn’t end up holding the bag on a liability that rightfully belongs to the seller.
Any “home cooking” you have done with your books—even when generated with the best intentions—will be called out, and efforts to rectify any errors will often be time-consuming, delaying the closing. And that’s to say nothing of how one of these analysts may point out that “where there’s smoke, there’s fire…” and they’ll want to dig a little deeper than they might have if they found your books largely error-free.
There’s a simple remedy to this situation, and that’s to engage a well-regarded, third-party CPA who creates your financial statements (balance sheets and income statements) using GAAP methods (Generally Acceptable Accounting Principles). The objectivity of the third-party CPA will burnish the credibility of your financial statements, not only because of their reputation and professionalism, but also because the CPA often assumes a contingent liability if reporting errors are passed along to their clients.
Types of statements
When engaging a CPA, note that they can deliver three types of financial statements: compiled, reviewed, and audited.
No matter who creates the financial statements (a CPA, bookkeeper, or yourself), a compiled statement is a basic summary of your company’s financial status, with no assurances (third-party or otherwise) on its correctness, and no assurance on internal company controls.
A reviewed statement achieves a much higher level of confidence in the correctness of the financials reports. That’s because the CPA assures that the reports were created with GAAP methods. In fact, the CPA is required to sign a statement that assures recipients that GAAP was used. (Typically, when we are taking a company to market, we will accept compiled statements for some past years, but reviewed financials for the previous fiscal year and for the year-to-date intervening months.)
Audited financial statements offer the highest level of assurance to third parties and are also the most costly; audited statements are usually reserved for larger companies.
Quarterly or monthly?
Although it may cost slightly more to have your CPA create monthly reports instead of quarterly reports, monthly reports are essential in the LBM sector, largely because of how rapidly inventory costs fluctuate, and how rapidly inventory turns. Monthly reports (income statements and balance sheets) are also essential to create an accurate NWC (net working capital) “peg” that is a central element of any transaction closing (e.g. among other features, the NWC “peg” establishes how much cash you, the seller, can take off your balance sheet at closing).
Transaction experience
When selecting a CPA, look for one that has M&A transaction experience, meaning a CPA that has kept the books for a company that was either a buyer or seller in an acquisition. If the CPA works with the local carwash or car dealer, that doesn’t train them in the idiosyncrasies of M&A, like multiples of adjusted EBITDA, who pays for F-re-org tax payment “gross-ups,” or how to distinguish between capital leases and operational leases when determining indebtedness to be resolved at close.
Fact is, a good CPA is worth their weight in gold, and well worth the expense to retain one. Ideally, you’ve had a relationship with your CPA for several years, so they can attune themselves to the inner workings and idiosyncrasies of your business.
John Wagner is a managing director at 1stWest Mergers & Acquisitions, which offers a specialty practice in the LBM sector. Reach John at j.wagner@1stwestma.com
