Want to Sell Your Business? Talk to a Transaction Accountant First.

You’ve built the business, weathered the difficult years, celebrated the big wins, and probably spent more late nights thinking about it than you’d care to admit. So, when the time finally comes to sell, it can be tempting to think the hardest part is behind you.

Not quite.

Selling a business can be one of the biggest financial events of an owner’s career, and what happens before the company officially goes to market can have an outsized impact on what happens next. Long before buyers start making offers or lawyers begin drafting agreements, there is another conversation worth having: one with your transaction advisory service accountants.

That’s because preparing a business for sale involves much more than determining what it might be worth. Buyers will eventually dig into revenue, margins, earnings, working capital, financial reporting, customer concentration, one-time expenses, and countless other details that can influence how they view the business and what they are willing to pay.

Getting ahead of those questions can make the process considerably smoother.

Robert Esposito, National Practice Leader for EisnerAmper’s Transaction Advisory Services has spent nearly 50 years helping companies navigate buy- and sell-side transactions. His experience spans more than 850 transactions involving mergers and acquisitions, private equity and venture capital investments, strategic partnerships and financing transactions.

“This is one of the most important events in a business owner’s career,” says Esposito. “We want to position sellers to present themselves in a way that is easy and clear to the investor or buyer.”

Here are six reasons talking to a transaction advisory services accountant before putting your business on the market can pay off.

You can see your business through a buyer’s eyes.

Business owners know their companies intimately. Buyers, however, approach the same business from a vastly different perspective.

Before committing millions of dollars to an acquisition, a buyer and their buy-side advisors will scrutinize the company’s financial performance to determine how sustainable its revenue, margins, and earnings really are. They may look at everything from recurring and nonrecurring revenue to expenses, margins, customer concentration, CapEx investments, working capital, and historical trends on a monthly basis over multiple years prior to the closing of the transaction.

A sell-side transaction accountant can perform a similar analysis before the buyer ever gets access to the books. It is critical that the seller own and control the calculation and presentation of their respective financial results and not defer that to the arbitrary and biased judgment of the buyer whose primary goal is generally to reduce the overall purchase price of the transaction.

That gives sellers an opportunity to understand which parts of their financial story are likely to attract scrutiny and prepare clear explanations before those questions arise during due diligence.

“Transaction accountants don’t just look at the numbers. We look at the quality, sustainability, and normalization of the seller’s financial results,” notes Esposito. “Transactions move very quickly and there is generally no margin of error, so we have to be proactive and think ahead about what could cause things to go off course.”

You can identify financial surprises before the buyer does.

Few things can derail a transaction faster than an unexpected issue discovered during buy-side due diligence. A common and costly mistake made by many non-experienced sellers is to provide internal financial results to the buyer before such financial results have been properly vetted and pro forma adjusted from a Quality of Earnings perspective.

Certain expenses may have been historically categorized inconsistently. Perhaps revenue recognition practices require adjustment, reclassification or additional explanation. Unusual owner expenses, one-time costs, non-sustainable revenue, non-operating or normalized expenses, or changes in normalized working capital may be perfectly reasonable yet difficult for an outside buyer to understand at first glance.

Transaction advisory services accountants may also review the business’s overall tax structure and how financial information is organized. While many companies are accustomed to reviewing certain figures quarterly, a transaction often requires a much more granular view, with financial information organized and supported monthly. The goal, according to Esposito, is to make sure the information presented to a potential buyer is both “consistent and correct and presents a trend analysis over a minimum 24-to-36-month period prior to the transaction close.”

Identifying those issues early keeps the control of the financial information in the hands of the seller, and gives the seller time to investigate, remediate, organize and present supporting documentation that clearly presents the currents status of the company to the buyer during preliminary and confirmatory buy-side due diligence.

It can also help prevent an avoidable problem from becoming leverage for the buyer later in negotiations.

You can tell a clearer story about what your business actually earns.

A company’s historical financial statements tell part of the story. Buyers often want something more specific: the business’s underlying revenue sustainability, margin throw-off, earnings quality, and cash flow. Generation.

That is one reason Quality of Earnings, or QoE, analysis plays such an important role in many transactions.

A sell-side QoE can help separate recurring operating performance from unusual or nonrecurring items and give buyers a clearer picture the company’s pro forma financial performance (including but not limited to revenue, margin, operating expense, EBITDA, and net working capital / cash flow) at closing. Transaction accountants can also help management identify and support appropriate pro forma, normalized EBITDA adjustments, strengthening seller preparedness when presenting historical and pro forma financial results to potential buyers.

For a seller, doing that work ahead of time can help substantiate the company’s financial performance, enable the seller to control the pace and extent of the buy-side transaction process,  and create a more organized foundation for discussions around valuation, net working capital, earn-outs and post-transaction operating plans..

“Companies often wait until the 24th hour, but a sophisticated seller is thinking years in advance,” says Esposito. “That gives you time to identify and manage near-term future performance trends, make adjustments to historical financial reporting and operational performance metrics and track the results well before a transaction begins.”

Don’t sign a letter of intent before talking to your transaction advisors.

When an interested buyer puts a letter of intent in front of you, signing it can feel like an exciting milestone. It can also be a point where sellers unintentionally give away proprietary financial information and negotiating flexibility.

That’s why Esposito strongly advises business owners to involve their transaction advisors before signing an LOI.

A letter of intent can establish important economic and structural terms that shape the rest of the transaction. Depending on the deal, those decisions can affect valuation, working capital, taxes, and the ultimate structure of the sale.

Having transaction advisors involved early in the transaction process and well before any legal documents are signed gives sellers an opportunity to understand those implications while there is still meaningful room to negotiate. They can help sellers think through issues involving earnings, purchase-price mechanics, basis of accounting, working capital targets, components and definitions of debt and debt-like items as well as pro forma EBITDA, net working capital targets, and other financial considerations before those terms become more difficult to revisit later in the transaction due diligence and negotiation stages. Most sellers focus on the “non-binding” legal nature of LOIs or IOIs, whereas buyers and investor’s view LOIs as the conceptually binding transaction terms and framework for drafting a Sale and Purchase Agreement, which results in harder positions and less flexibility to renegotiate and re-trade the transaction closer to the transaction date.

You may be in a stronger position when it’s time to negotiate.

The numbers uncovered during diligence do not stay confined to a due diligence, quality of earnings (QoE) report. They can influence some of the biggest economic terms of the deal, from overall purchase price adjustments, escrow holdbacks, shareholder rollover, valuation and working capital.

Preparing earlier means sellers can enter conversations with a stronger understanding of their business’s numbers and how to discuss them with potential buyers. It also means having someone at the table who knows what questions buyers are likely to ask during negotiations and performs the research and analysis to prepare the seller when being questioned by the buyer.

“It may be their first time going through this process, but as an experienced transaction accountant and advisor, I have gone through the transaction process hundreds of times,” says Esposito.

That experience can help sellers anticipate common sticking points, respond to buyer questions with greater confidence and accuracy, and avoid mistakes and missed opportunities that can weaken their position later in the transaction process.

You can spend the sales process running your business instead of scrambling for information.

Selling a company can quickly become a second, 24/7, job for a business owner.

Buyers and their advisors may request years of financial records, customer information, contracts, revenue details, and explanations for individual transactions, all while the seller is still responsible for keeping the company performing.

Transaction accountants help determine what financial information buyers are likely to request, organize supporting materials, and identify gaps before the diligence process accelerates.

“Having someone who’s been through this process means you have someone who has seen it and understands it and can provide the seller with various scenarios and options to maximize the overall enterprise value and purchase price of their company,” says Esposito. “They can help you make the adjustments you need and get your house in order in preparation for the single, most important transaction in the history and corporate life cycle of the respective company.”

Getting that information organized ahead of time can also allow owners to keep their attention where it belongs: on managing and growing the business in a profitable and sustainable manner through the close date and into the post close earn-out period.

For business owners, having the right transaction accounting and tax advisors in place can make the preparation ahead of a sale invaluable.

“Hiring a transaction accountant during this process is one of the best returns on investments you can make in your business, from a financial, operational, and HR perspective,” says Esposito. “Avoiding spending that critical analysis and planning time and money upfront can ultimately cost you multiplied more on the back end.”

Ready to start the conversation? Visit EisnerAmper.com to learn more. 

This is a paid partnership between EisnerAmper and Philadelphia Magazine