Working with another client recently I was struck once again by the importance of analyzing and recasting – and possibly even restructuring – your company’s financial statements as the first step in getting your business ready for sale.
Over a period of years, the business had been expensing and/or depreciating all of its capital equipment purchases to the maximum extent allowable under the tax code, and expensing all of its research and engineering activities. As a result, the business appeared to be marginally profitable – and in some years actually showed a loss – and as a result paid very little in taxes.
However, when it came time to sell the business, a potential buyer looking at the business’ own books and records and tax returns would have a difficult time discerning the intrinsic value of this business. The net book value of its equipment was shown at a fraction of its market value, and its annual income appeared to be very modest compared to its sales volume.
By analyzing and recasting – and in this case – restructuring its financial statements to better reflect the company’s true value we were able to:
- Discover that the company had failed to take advantage of significant tax credits for its research and engineering expenses. By working with their tax accountant to file amended returns for the past few years, this client was able to generate additional tax credits totaling ~$100,000.
- Document that the company was substantially more profitability over the last several years, and therefore commanded a substantially higher market value.
- Document the significant investment the company had made in developing several new products whose sales were just beginning to take off, creating additional streams of income and cash flow for the buyer, and
- Document the current market value of its plant and equipment
…all of which contributed to a much higher market value for the company.
This is a fairly common scenario with most privately held companies. Their corporate financial statements have been prepared with the goal of minimizing taxes, rather than maximizing market value. As a consequence, their corporate financial statements and tax returns do not provide an accurate picture of the true value of the business to a new owner.
To create a more accurate picture of the true market value of any business, an experienced M&A advisor will work closely with the business owner and his/her tax accountant to recast and restructure the corporate financial statements, making certain that they still tie back to the tax return. This is an important first step in assuring that the seller achieves the best possible price and terms in the sale of his/her business.
If you know of someone who’s thinking of selling or buying a business, who might benefit from a complimentary, confidential, consultation, have them contact me directly at 813.299.7862, or firstname.lastname@example.org
Mike Ertel, CBI, M&AMI, CM&AA
Managing Director, Transworld M&A Advisors
©2022 J. Michael Ertel PA