What does a CPA bring to a business acquisition?
Buying or selling a business is usually the largest financial decision an owner makes, and most of what determines the price resides in the financial records. Brokers, attorneys and lenders each have a defined role. The CPA’s responsibility is to confirm that the figures everyone is relying on are accurate, and that the structure of the transaction produces the after-tax result you expect.
Buying a business: what are you really paying for?
A seller’s financial statements present one account of the business, and our buy-side work tests that account. It serves individuals acquiring a business for the first time, including those financing the purchase with an SBA-backed loan, as well as owners adding another company. We support buyers in three stages.
Learning what to look for
If you want to own a business but have never bought one, we begin with the fundamentals: how to read a seller’s profit and loss statement and tax returns, what seller’s discretionary earnings and add-backs mean, how a transaction moves from letter of intent to closing, and which questions to ask before you make an offer. Our checklist for buying a business in Colorado is a useful first read.
Due diligence on the target
Once you have a specific business in view, we evaluate its financial records to determine whether reported earnings are accurate. We reconcile tax returns to the books and to bank deposits, test each add-back, and analyze the drivers behind the figures: customer concentration, margin trends, working capital requirements, payroll and sales tax compliance, and any liabilities that do not appear on the balance sheet. You receive a written report and a call to review it together. Our business acquisition due diligence page describes this work in detail.
Acquisition advisory and setup after closing
We support the valuation, so the price reflects what the business actually earns; prepare financial statements and supporting materials to help secure acquisition financing; and advise on deal structure and support you through negotiations. After closing, we establish the accounting, payroll, tax accounts and reporting, so you operate the business on accurate, current numbers from the first day.
A scenario: why earnings adjustments matter
For example, a buyer is reviewing a company that reports $900,000 in annual earnings and is priced at four times earnings, or $3.6 million. Diligence surfaces two adjustments. The owner has been paying himself $60,000 below what it would cost to hire a general manager, and the year included a $60,000 one-time insurance recovery. Sustainable earnings are therefore closer to $780,000, which at the same multiple is a $480,000 difference in price. The figures are illustrative, but the pattern is common, and it is far better identified before closing than after.
Selling a business: why preparation should begin before a buyer arrives
Buyers want to understand how much your business earns, what it costs to generate that revenue, what you owe and what you are owed. If you can present several years of accurate, consistent financial statements, you are considerably more likely to find a buyer willing to pay your asking price, and considerably less likely to see the price renegotiated during diligence.
Our seller advisory work includes:
- A review, compilation or audit of your financial statements, through our assurance team
- An evaluation of accounting practices, HR, compliance and other functions, with improvements made before you go to market
- Guidance through the buyer’s due diligence process
- Advice on deal structure and alternatives to achieve the most favorable after-tax result
- Pre-closing and post-closing support for succession planning and transition
How is a business valued?
Valuation is not a single formula. It combines tangible assets, such as equipment, inventory, receivables and cash, with less visible sources of value, including proof of concept, growth and historical performance. For many smaller companies, value starts with seller’s discretionary earnings or adjusted earnings, multiplied by a figure that reflects the industry, size and risk profile of the business.
We use benchmarking, data analysis and other assessments to support a value for your privately held business, whether you are buying, selling, raising capital, planning succession or need a valuation for another purpose. Each of those methods depends on reliable financial records. A business without them is difficult to value, and is usually valued lower.
How do structure and taxes affect the outcome?
The structure of a transaction can matter as much as the price. Asset sales and equity sales are taxed differently for buyers and sellers, and in an asset sale both parties generally report how the price was allocated on Form 8594. We model the options with your tax planning team so you negotiate with the after-tax result in view, not only the headline price.
A framework for any transaction
Before signing a letter of intent, answer four questions in writing. What are the sustainable earnings, after adjustments? How much working capital will the business require on day one? How will the price be allocated, and what will that mean for each party’s taxes? Who will manage the finances after closing? Any question you cannot answer clearly is where diligence should concentrate. An introductory call with our client services team is a sensible place to begin.