As a company begins to explore and market a sale or a new investor round, it may encounter numerous opportunities to enhance the efficiency and success of the process. Presenting a clear and accurate financial picture to interested parties is key. Robust internal accounting processes can often promote a more effective transaction by supporting rigorous due diligence. This article explores how sell-side accounting strategies can help navigate the path from planning the deal to finalizing it.
Evaluating and Cleaning Up Accounting Practices and Records
Evaluating the state of a company’s current accounting function is not a routine task; it is a strategic necessity. Insights learned during analysis and evaluation can serve as the foundation for financial reports presented to potential buyers and investors. A thorough assessment of existing financial practices can also help ensure compliance with current regulations, provide comparability to industry metrics, and demonstrate a firm grasp of the company’s financial and operational performance.
Common issues that may be revealed during the evaluation and due diligence stages of the transaction include the following:
- Inconsistent application of accounting policies.
- Incomplete financial records.
- Lack of consistent reconciliations of supporting data to financial statements.
- Inaccurate financial statements.
- Weak management of working capital.
- Poor cost and debt management.
- Inaccurate asset valuation.
- Noncompliance with U.S. GAAP, IFRS, and regulatory standards.
Overlooking these issues or failing to correct them can delay or even derail a potential M&A transaction. However, the accounting strategies described below can help increase confidence in a company’s finances, lessen overall risks, and decrease the potential for value erosion and surprises.
Preparing Clear, Accurate Financial Reporting
Accurate financial reports serve as the foundation upon which investors base their decisions, providing them with a comprehensive understanding of the company's financial health and performance. By presenting financial statements that are both precise and transparent, sellers can effectively communicate the true value of their business. This transparency not only aids in building trust with potential buyers and investors but also can position the company as a credible and reliable investment opportunity. Meeting investor expectations through meticulous reporting can significantly enhance the attractiveness of the business, ultimately facilitating a smoother transaction process.
Conducting Diligence
A comprehensive diligence process is essential when evaluating business performance during a sell-side transaction. This process typically begins with gathering and organizing all relevant financial documents, including income statements, balance sheets, and cash flow statements. A detailed analysis of these documents can enable the identification of trends, anomalies, and areas that require further investigation. During due diligence, it is important to evaluate the company's internal controls and compliance, helping to ensure that the company is operating within the appropriate framework and adhering to industry best practices.
To properly assess the overall performance and potential risks associated with the business during due diligence, several key areas of focus may be prioritized:
- Financial performance may be scrutinized to understand revenue streams and revenue recognition practices, profitability, and cost structures.
- Operational efficiency may be evaluated for the effectiveness of the company’s processes and the management team's capabilities.
- Market position and competitive landscape may be analyzed to gauge the company’s growth potential and strategic advantages.
The diligence process provides valuable insights that can help decision-makers identify strengths, weaknesses, and opportunities within the company.
Adjusting Accounting Practices
Whether to adjust accounting practices or not sometimes depends on the needs of the acquiring entity. For example, a seller might use cash accounting methods, but a potential buyer may prefer accrual accounting, particularly if revenue recognition is accelerated under cash accounting methods.
Normalizing financial statements to reflect the true economic performance of the company may be necessary. In some cases, this may require removing non-recurring expenses to present a clearer picture of sustainable earnings. Sellers might need to adjust revenue recognition practices to ensure compliance with accounting standards, which can be particularly challenging for companies with complex revenue streams or long-term contracts. These and similar adjustments may be crucial to the transaction by providing a more accurate representation of the company's financial health, historical performance, and future earnings potential.
The technical complexity of certain adjustments, such as those related to revenue recognition or fair value measurements, may necessitate the involvement of external accounting experts. This is especially true for companies that lack the resources or experience to tackle the workload or technical accounting burden of a sell-side accounting diligence process in addition to their normal day-to-day tasks. Experienced financial advisors or consultants can provide valuable guidance and support in such situations. Companies may proactively address accounting challenges before a transaction is even in the planning stages because doing so can enhance a company’s financial reporting and build greater trust with potential investors.
Bolstering the Accounting Team
A robust accounting team becomes increasingly vital while preparing for and during a sell-side transaction, yet companies often lack the resources needed to meet the heightened reporting and diligence requirements. During rigorous scrutiny from potential buyers and investors, the company’s accounting team must be equipped to handle complex financial analyses, as well as identify and address any necessary adjustments to the company’s current and historical figures. A seasoned team that is prepared for sell-side transaction accounting not only aids in presenting the company in the best possible light but also helps identify and mitigate potential risks that could arise.
Companies may elect to bring in additional resources to manage day-to-day accounting tasks, allowing the core team to focus on the more critical aspects of the transaction process. Conversely, engaging external consultants may bring knowledge and experience — at both accounting and industry levels — that can help the company navigate complex accounting issues and confirm compliance with relevant standards.
Timing is everything. Management teams often wait until they are ready to begin a process to self-reflect on their team and processes, causing a costly rush to improve financial reporting and accounting capabilities. Proactive focus on the aforementioned aspects of its accounting team allows a company to be prepared to take advantage of opportunistic market conditions. Bolstering the accounting team with both internal and external resources can help a company involved in a sell-side transaction manage the increased demands on its accounting team.
Seizing Opportunities Amidst Preparation
Attracting Investment
Companies that have successfully showcased their financial health through detailed and precise reporting often find themselves in a stronger position to attract competitive bids. Accurate financial reports offer a more transparent view of the company's current and historical performance, providing reliable data that informs potential buyers and investors.
Presenting clean financials prepared after comprehensive due diligence can potentially enhance the company's valuation. Prospective buyers can assess the true value of the business without the fear of hidden liabilities, financial discrepancies, or other unpleasant surprises. Placing a strategic focus on transparency and accuracy may transform the sell-side process into a significant opportunity for growth and success.
Charting a Course for the Future
Is your company’s accounting function prepared for an arduous sell-side transaction? Our team of experienced professionals assists clients through the analysis of current accounting strategies, implementation of recommended changes, and collaboration with other parties to the transaction. Please contact the Accounting & Reporting Advisory Services or M&A and Transaction Advisory Services teams for assistance.