If you wish to sell your business to retire or transition or you’re seeking to buy a new business as part of your growth strategy, mergers and acquisitions are a potential part of your future. Yet, mergers and acquisitions (M&As) are complex; they require various services and in-depth due diligence to ensure the deal is solid for both parties.
Getting the proper support and completing the necessary research can make or break your merger or acquisition. According to numerous studies that go back decades, 70% to 90% of M&As fail. One of the reasons behind this alarming rate is a lack of due diligence.
Rest assured, there’s help available to you. In this guide, we’ll explain the critical services you need during an M&A. Whether you’re a seller or a buyer of a business, you’ll find information here that will allow you to move forward with confidence.
Services for the Seller of the Organization
As a seller, you want to do what it takes to position your business for a successful sale. This means completing necessary steps such as preparing accurate financial statements and understanding what your business is worth.
Let’s dive a bit deeper into the seller services you’ll want to acquire during the process.
Doing sell-side due diligence can definitely increase the likelihood of a successful M&A. And there are several reasons why. For example, due diligence helps you uncover weaknesses you could resolve before the sale, thereby increasing the value of your company. It also helps you avoid differing expectations in business value, which can derail the process.
Business valuation is one of the most important services you should get during an M&A. You must determine the market value of your business to get a jumpstart on negotiations. After all, understanding what your business is truly worth ensures you don’t leave money on the table.
Business valuation also ensures you don’t scare your buyer away with unrealistically high numbers that don’t make sense for your business. During a business valuation, you’ll also uncover your organization’s financial weaknesses, allowing you to take care of them before negotiations get underway.
Financial Statement Audit
The next critical service you should seek is a financial statement audit. Auditing ensures your financial statements are in order so that your buyer has updated financial information to view. This includes making sure your monthlies are up to date and reconciled.
Inaccurate financial statements may surprise your buyer during the process. Or they may lead the buyer to believe that you have something to hide. This could lead to lost interest with the buyer deciding to walk away. Buyers typically don’t make a habit of purchasing businesses whose finances aren’t in order.
Review of Company Documents
Finally, you’ll want to have a review of your company documents such as your operating agreement, debt agreements, and lease agreements to ensure they’re up to date.
Services for the Buyer of the Organization
As a buyer of a business, you’re facing great risk. To avoid a deal that negatively impacts your bottom line, you’ll need to weigh the business’s strengths and weaknesses.
Buy-Side Due Diligence
The most critical step in an M&A for buyers is due diligence. It’s important for understanding the risks, liabilities, and true income offered through a potential business. You need to know exactly what you’re buying.
There are various services necessary for quality buy-side due diligence, including:
- Business valuation: To make sure you’re able to buy a business for the right price, valuation is in order. An accurate business valuation takes into account all financials, current and projected. It should also consider outside influences such as the economy, key staff who play a role in the business, and any other internal or external factors that may impact business operations.
- Financial analysis and projection: You need to understand the financial health of the business now and in the future. This includes understanding the company’s liabilities, liens, debt, assets, and more.
- Physical asset analysis: You’ll also need to know what physical assets are included in the business and their value. Physical assets may include everything from equipment to office buildings to land.
Performing in-depth due diligence helps you answer the question: How quickly do you earn back what you purchased the business for? Only then can you decide if a deal is right for you or not.
Quality of Earnings Reporting
You shouldn’t depend on the financial statements alone when deciding whether or not a business is worth the purchase price. That’s why we recommend getting a Quality of Earnings report completed by a professional.
A Quality of Earnings report, also known as a QOE report, tests the quality of the financial statements to ensure the income the seller states is appropriate. The QOE dives into other financial aspects of the business that may not be included inside your typical financial statements.
For example, a QOE report would uncover strange accounting entries and or any variances in statements. It would also include any exaggerated assets (or understated liabilities) the company may have. As a result, you can see a clearer picture of the financial health of the business before signing on the dotted line.
The Above Services Are Critical Regardless of Merger or Acquisition
The above services are necessary whether you’re selling a business or buying one. Due diligence is a critical step that is priceless for any successful M&A. We recommend involving a professional CPA and financial advisor to help you perform all of the above services.
As a busy business owner or entrepreneur, you may not have the time to dedicate to doing the level of prep work an M&A needs. But doing so haphazardly will only slow the process or result in a failed M&A. Allowing a professional to help can make all the difference.
Going Through an M&A? We Can Help.
Whether you’re in the consideration stage or moving forward with a merger or acquisition, we can help. At Boeckermann Grafstrom & Mayer, we offer various M&A services to support you from initial due diligence to close.
To learn more about our services or to get in touch with one of our team members today, send us a message.
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