Even in a normal operating environment, the sales process is often a complex and daunting undertaking that has a transformative effect on a business. Lingering complications from the COVID-19 pandemic may make the transaction even more arduous as leadership juggles recovery efforts, monitoring of financial performance and customer demands with basic health and safety concerns for their employees.
Financial leaders whose organizations are considering or in the process of selling to an external buyer will have their hands full in the transaction. By understanding the overall vision for the sale, and managing the financial side of the house, CFOs can make the transaction process a little easier.
Leadership Wants to Maximize Business Value Before Engaging a Buyer
Once company leadership sets the course for a sale to an external buyer, business owners will want to evaluate the company’s value drivers and stoppers. The evaluation helps set expectations for what the owner may get for a transaction price. For CFOs, the evaluation will include a closer review of the company’s financial performance. Potential buyers will be particularly interested in the expected financial impact that the COVID-19 pandemic has had on the organization both in the short-term and long-term. CFOs should be prepared to present performance indicators to the transaction team including projections for future quarters and years.
Questions may also be asked about whether the finance department has a formal close process and normal or typical reconciliations. Some of the other points that may be of interest to the transaction team include whether the finance department keeps numerous workbooks outside of the financial system or has turnover in key roles. It may be that the leadership team chooses to augment financial staffing through co-sourcing to help formalize reporting processes and clean-up any inefficiencies before a buyer would perform its financial due diligence.
CFOs in the early stages of a transaction may also want to look to external accounting services for added expertise.
Financial Statement Audits
Smaller, private companies are often not required to undergo a financial statement audit; however, obtaining audited financial statements before the transaction begins ensures the transaction team can walk into the transaction with no surprises about the company’s financial reporting position. An independent financial statement audit also provides assurances around the strength of your financial statements.
Financial Systems Update
The company’s financial systems and technology tools can be a significant selling point to a potential buyer. Leadership may ask for an external review of your current technology platforms to determine whether upgrades or reconfigurations could help with KPI monitoring and benchmarking.
Due Diligence Will Take Some Planning
After leadership gets a high level picture of where the company stands with its value drivers and stoppers, the transaction team may start doing some sell-side due diligence into financial and tax reporting. By uncovering and resolving unaddressed liabilities up front, the company will be in a better negotiating position when it comes to agreeing on a transaction price and closing the sale.
Generally, an external accounting provider performs the financial due diligence and tax due diligence review. Financial executives should be prepared to field questions and information requests from the due diligence team. Your department may want to consider appointing a due diligence officer to help coordinate the requests. It will be good practice for when the buyer performs these reviews before close.
It may also help for CFOs to understand the types of information that due diligence teams will be looking for, particularly when it comes to the review of tax reporting.
Multi-State Tax Implications
Multi-state taxes frequently catch companies off guard, and in the remote work environment of 2020, many companies may find they have more state and local tax obligations than they ever have before.
Developments in the state and local tax space are adding to the risks of unaddressed state tax liabilities. The Supreme Court decision in Wayfair vs South Dakota created an opportunity for states to impose sales tax obligations on out of state vendors that were not historically within their reach. Many states have adjusted their sales tax requirements to reflect the decision, and as a result, your company may find it is now subject to tax reporting requirements in states where it previously was not required to file state income and sales tax returns.
Many companies have turned to technology to assist with their ever-increasing sales tax obligations. While the use of a sales tax software generally increases compliance and decreases human error in the process, CFOs need to be proactive in the software implementation process to ensure the software is set-up correctly. A common mistake is setting the software to collect sales tax in all jurisdictions instead of the select jurisdictions where the company is properly registered and remitting tax. This can lead to an accumulation of sales taxes collected and not remitted, which can be a costly mistake, especially if uncovered in a business transaction.
Companies may also be surprised to learn they have unclaimed property liabilities. States require companies to report annually any property that is of a certain age, including items such as uncashed vendor checks, unredeemed gift cards, unclaimed customer credits, and uncashed payroll checks that may be owned by another entity. Many companies are not in compliance with escheatment requirements. CFOs can prepare for a potential sale of a business by reviewing their organization’s unclaimed property requirements and remittances prior to a buyer’s due diligence.
CFOs can also help their organization mitigate state and local tax and unclaimed property liabilities by participating in voluntary disclosure agreements (VDAs) or amnesty programs. VDAs allow companies to anonymously disclose a tax liability to the tax jurisdiction, and in exchange, receive a limited look-back period and penalty and sometimes interest waiver. VDAs can limit a company’s overall spend on past due tax liabilities and if completed before a business transaction, can be managed internally rather than by the buyer who has less incentive to minimize the taxes paid.
In cases where a business hasn’t been reporting properly in each state or they haven’t been reporting at all, other complex tax issues may arise during the transaction, including:
- Working-capital adjustments
- Understated receivables
- Improperly stated inventory
- The need for a flexible tax-reporting structure
- Tax escrow that is set aside and never received
- Purchase price reductions
Your Role is Vital During the Transition
The company’s financial performance immediately following the sale will be vital. It may even have implications for the amount the departing owner receives for the sale of the business. Buyers are pushing for a greater percentage of consideration paid to the departing owner to be in the form of an earn-out provision because of the uncertainty around financial performance in the COVID-19 environment.
CFOs should be prepared to work closely with the new management team to ensure the team understands where the organization stands with its finances. Financial system integration may be a significant piece of that puzzle, and CFOs should ensure that the new ownership team can have the same granular insight into financial performance that the departing owner had before the sale.
The sale will also come with transaction accounting considerations that may require some additional consideration. You may consider enlisting the help of members of your M&A team to help navigate any unforeseen issues with the post transaction transition, particularly during the first 100 days.
The CFO has a crucial job in ensuring the success and value of the sale of their business. With planning, CFOs can help businesses realize the full value of the deal. For more information, please contact us.
Published on November 05, 2020