By Jeffrey D. Solomon, CPA, CVA
Katz Nannis + Solomon, P.C.
Despite the recent roller coaster activity of the public markets, we’ve seen an uptake in the technology M & A activity in New England. This is why we have over ten current transactions in process at our firm. As a CPA that works with clients from their inception to get them ready for their big “payday,” we know there are certain steps you can take now to make the transaction a success. According to Peter Alternative, an investment banker at Mirus Capital, the New EnglandM & A activity continued its expansion trend through the 2nd quarter 2011, which was up 8.5% from the same quarter last year. Mr. Alternative states his firm has seen significant increased strategic buyer interest in its lower middle market clients, many of which are localNew England businesses. In addition, he believes large corporations are turning to M & A to augment their organic growth strategies.
So what should you do to prepare? Below is a list of items you should consider:
Identify your Prospects Early On
Consider, at the outset of your venture, where you want to be, and what type of potential exit is most likely to occur. You and your team should discuss the attributes of each potential buyer and the value you could potentially provide to them. Make a list of contacts at these Companies. This list should include competitors, strategic buyers, aggregators, financial buyers and even potential buyers not necessarily competing today but that could potentially be interested in the future. Make sure you get to know them at trade shows and, more importantly, that they know who you are!
- Determine The Metrics that Drive Value in your Business.
It’s important to know what will create more value in your potential buyer’s mind. We work with some companies whose management teams focus exclusively on EBITDA (earnings before interest, taxes and depreciation and amortization) and others that know that the top line (revenues) will be the driver of value for their acquisition. This does not mean you should focus solely on these issues to compromise short term needs and growth, but that you should always know what factors your buyers will use to determine your value.
- Determine your Price (and method of sale)
Think about the size of your potential sales range, or specifically, what price would be too low and one that you would do in a minute. Most likely, your offer will be some place in between, but you should have this range in mind going into any negotiation. Do not waste time with potential suitors without knowing that your range and their range are in the same ballpark. Also, consider the very real costs of an asset sale (potential double taxation) vs. a stock sale. Work with knowledgeable tax advisors who have done this before so you know the potential additional cost of each type of sale and can find and address potential issues that may arise such as golden parachute payments.
- Get your Equity Table Clean
It’s not uncommon that certain stockholders have a different understanding of what they own than the historically maintained tables maintained by the Company. Clean up your options, your cap tables and what their exercise prices look like and what each of your shareholders has for rights. It’s better to do it early on.
- Choose your Advisors Wisely
I almost always recommend the use of an investment banker to our client companies, even if they have identified the potential buyers. The use of a banker that knows you, and your industry, will almost always add much more value to the potential deal. Let them be the negotiator, especially if you are going to work for the buyer, so that there are no bad feelings between the two parties going into the new relationship. In addition to having a good finance team, a qualified and experienced CPA firm and law firm is critical. For instance, a good lawyer that works closely with you will make sure that all patents and contracts are clean and without conflict in a transaction. An experienced CPA that can guide the buyer through due diligence is imperative. There are always issues that come up that require these professionals to act quickly and having a team that is experienced is so important.
- Do not Underestimate the Time it Takes
Even if your deal is moving fast, it will take months. I’ve seen transactions last over a year to complete. This is not unusual. The amount of time that you or your CEO will spend on the deal will not allow you to do much else. This can hurt a Company that needs everyone moving the business forward. It may make sense, for this reason, to use the banker and a good finance person (CFO) to assist with this special project.
- Get your Books Clean and GAAP compliant now
One of the questions we get asked often by the CEO’s and their boards or audit committees is whether they need to spend the money for an audit. Many times it is required per financing or equity documents, but sometimes it is a luxury. If your time horizon is less than five years and you think that an M&A transaction is imminent within that time, make sure you have a good financial person internally maintaining a set of books that are compliant with generally accepted accounting principles (GAAP) and that all audit issues have been addressed. I’ve seen too many situations where revenue recognition, for instance, has impacted the payout because GAAP was not being followed. It’s not unusual that we get called in late in the game and have to restate a year’s worth of financials. Align yourself with an outside CPA firm that can handle your audit and add value to your team not only during the audit but during the M&A process.
The market is hot right now and if you can think ahead a bit, you should be able to take advantage of it when that that call comes in from a potential buyer.
Jeffrey D. Solomon, CPA, CVA is partner at the accounting and business consulting firm of Katz, Nannis + Solomon, P.C. in Needham, MA He heads the technology/emerging growth practice for the firm. He can be reached at email@example.com