Jeff: Welcome to Deal Talk brought to you by Morgan & Westfield, I'm Jeff Allen. If you're looking to sell your company now or at some time in the future it's our mission to provide information and advice from our growing list of experts that you and all small business owners can use to help you build your bottom line and improve your company's value.
It's one thing to work with an accountant or a bookkeeper to ensure that your books are well managed on an ongoing basis. But when it comes time to sell your company you ought to consult the services of a CPA to drill down into the numbers and complete a full audit of your financial picture. To talk about why this is important and provide us with additional details I'm joined by Mr. Matt Turpin, a CPA licensed in the states of Florida and Alabama, and also a certified valuation analyst with Carr, Riggs, & Ingram, LLC. Mr. Turpin carries additional designations including Certified Mergers and Acquisitions Professional and Chartered Global Management Accountant. Matt Turpin welcome to Deal Talk, it's good to have you.
Matt: It's good to be here Jeff, thank you, I appreciate it.
Jeff: I have a company I'm thinking about selling Matt, how will working with a CPA help me in that process. What will he or she be able to do for me and my company?
Matt: I believe the biggest thing that a CPA can add is allow the business owner to still work while looking at buying or selling a business. An experienced CPA in mergers and acquisitions or transaction advisory services can break down the financial statements and to the best of their ability to verify what’s on the financial statements that if you're looking for return on investment or the reason why you're buying, or the reason why you're selling. To obtain those goals of why you're selling or why you're buying. CPA can go and help with the deal structure, it can help with the initial phases of, if you're selling, the pre due diligence. So that when a potential buyer comes in, a lot of the unknowns with its record keeping or addressing issues with fluctuations in revenue, fluctuations in expenses, that those are addressed and can be answered to a seller to try to reduce the seller's risk of purchasing the business. On the buy side of a transaction, a CPA can go in there and look at the financials to verify what is on the financials, to try to verify anything that's not on the financials that should be known, unreported liability or obsolete inventory just to name a few. So a CPA can also help as a filter of: is this something a buyer needs to spend their time in looking at a potential acquisition, because this is a risky industry. Or if you take a look at the financials and say, "Hey, if my return on investment needs to be in the, for example, 12 percent range and there's no way to get there” you’ve got a CPA that's experienced in this type of work to come back to you as a potential buyer and say, “We don't need to spend our time on this because it's not going to meet your objectives.”
To obtain those goals of why you're selling or why you're buying. CPA can go and help with the deal structure, it can help with the initial phases of, if you're selling, the pre due diligence
Jeff: That actually was going to lead into my next question, or sets up my next question pretty nicely, and you may have partly answered that. It’s the question of whether or not it's possible for my CPA to help me find solutions that could help me build the value, or improve the value of my company. Or is that not something that you really do, whereas you're just kind of there to validate what the numbers are saying and to indicate to me, the business owner, that here's some issues that need improvement. But are you able to actually provide solutions, or possible solutions to help me improve those numbers or the value of my company before I sell?
Matt: Absolutely. In all of this, so it's not redundant, I'm assuming that the CPA is familiar with margin acquisition or business violation, somebody that does this, it’s not something that just comes almost twice a year but this is something that is the service that's regularly provided. So yes, having a CPA that is experienced in this field as more of a consultant than your traditional tax or audit. Both of those can also be provided. But the consultant who can take a step back and say, "If I'm an investor this is what I'm looking for. What is the strategy for buying a business? What is my strategy for selling a business?" Particularly if you are buying a business you have to look for inflated sales because that is a potential. If the seller is on a track two sale, have sales been inflated to make the company look more attractive? The same thing on the sell side, if you're having a hard time increasing your sales then let's cut seller's discretionary expenses, or items that aren't directly related to the business operations, to increase that bottom line. And a CPA can help do that because most business owners that have started the business from scratch and have the sweat equity inside the business have a pre-determined, roughly 50 percent to 70 percent of business owners count on their business as their retirement. So don't you want to know what the value of your retirement account is? Because if you don't and you get to that day where you say, “I'm ready to sell,” and you don't know the value of your business most business owners are not particularly happy with the value that they receive because of not knowing what the true value between a willing buyer and a willing seller is. So starting that process three to five years before you're ready to sell allows a CPA to consult with the business owner on how we can get the maximum price for the business.
Jeff: I think that's really, really key. And you said something that I thought was interesting Matt Turpin. You said that most business owners are not happy with the results in terms of the value that they receive for their business. I think that's key. Most business owners aren’t, and perhaps it's due directly to the fact that most businesses, small business, and most small business owners do not take the time required to do their own due diligence on their own company prior to selling it. Is that the way that you're basically explaining it?
Matt: Correct, that's exactly... A large majority of the businesses in operation today would be considered mom and pop, or small business. You're right, they don't take the time to sit back and have a professional team. And I said professional being with their CPA, an attorney, a financial adviser, to say “These are my goals, this is where I want to be,” instead of "I've got to sell. I'm ready to sell within one year." And when they look at the price that the business could sell for, the taxes associated with the transaction, and the decrease in the consistent, long-term cash flow as a result of selling the business, I've seen many instances where the business owner decides not to sell. Maybe the time's not right in their professional career. But mainly it's because the ongoing cash flow outweighs the risk of selling the business and receiving a lump sum at one time.
But mainly it's because the ongoing cash flow outweighs the risk of selling the business and receiving a lump sum at one time.
Jeff: When typically is a CPA contacted prior to the sale of the business? We can just speak from your own experience Matt. Are you contacted or do you want to be contacted before the business owner goes to a professional appraiser for his or her valuation? Or will you typically work hand in hand with those individuals? Or are you called afterward by a company in order to validate everything, or go through everything and then work with the seller at that point to bring the valuation of the company up somehow? How does that typically work? Who's contacted first?
Matt: Right. There's going to be the ideal situation and typically what happens.
Matt: The ideal situation is a client say, “I'm looking at a transition period of three-five years, where I want to sell at the end of three-five years.” So you have the time to "coach him up” to get the financials where they need to be. Whether that be through having reviewed financials, or audited financials, so that a buyer coming in has a better feeling about or has lower risk, a lower off the cuff inherent risk of buying a business. What normally happens is a phone call saying “I'm selling my business and here are the transactions they did.” So typically it's far later in the deal life cycle.
Jeff: So you guys don't really have then, Matt, the time to really do your job or do you? I guess it can go as quickly as you need it to, but isn’t more time really required in order to be as thorough as possible from a CPA's perspective?
Matt: Yeah, absolutely. The more time the better, for a number of reasons. One is what we're seeing a lot of is a buyer asking a seller to hold paper on our finance. If you're going to sell your business to someone you vaguely know or have just met you're going to want to know do they have the capability to pay me as the seller if things don't go as planned when they buy a business. To having a CPA do the financial analysis on a particular buyer, are they financially stable enough to carry this business if times are lean? That takes a little bit of time. The actual deal structure itself, you’ve heard the phrase a million times, the devil is in the detail. With a transaction the seller can net a wide variety of money on the same transaction depending on how the transaction is built. Whether it’s a stock sell or an asset sell, if it’s an asset sell, what dollar amount is price allocated to your assets or tangible assets, so all those should be done well before you get the close on the table. What we do see is the earlier we get in the transaction the more success we see in the transaction itself. And if a transaction doesn't close, the client is still happy because they didn't go with the deal that they felt like they had to do to end up surprised at the end of two or three years because the long-term cash flow isn’t there.
If you're going to sell your business to someone you vaguely know or have just met you're going to want to know do they have the capability to pay me as the seller if things don't go as planned when they buy a business
Jeff: Matt Turpin is a CPA licensed in Florida and Alabama with Carr, Riggs, & Ingram, LLC, you're listening to Deal Talk. My name is Jeff Allen. The buyer is also, if they're conscientious, going to likely contact a CPA at some point. Let's say that I'm interested in buying a business, Matt. and I'm interested also in conducting my own financial due diligence. When should I consult with my own CPA?
Matt: That's a very good question, Jeff, and a lot of that depends on the individual buyer themselves. I have been in situations where a buyer comes to me and says, "I have a letter of intent. This is what I'm ready to do. Will you guys step in and do some due diligence to make sure that what I see on the financials is accurate?" In that situation the buyer has spent a significant amount of time before we’ve even been called in. Whether it's finding the business, begin their own financial analysis on is this something that the buyer wants to do, and make this transaction happen.
Jeff: Is it common that a buyer and a seller could use the same CPA for their due diligence, or is typically this something that doesn't happen very often?
Matt: Personally, I like it when the CPAs are in the same firm. Most CPA firms have more than one CPA. I realize there could be the question of a conflict of interest, but the CPAs individually are held at a high level of independence. So if a firm or a CPA within inside of a firm it feels like his independence could be violated, then they should step up and refer to another CPA firm. But the reason why I do like to work within a CPA firm is if the firm is large enough that it really can increase the level of communication with making a deal happen. If I'm representing the buyer and another CPA with inside Carr, Riggs, & Ingram is representing the seller, I'm still working for the buyer, another CPA is still working for the seller, and then the two CPAs together can really work to negotiate a deal where both parties walk away satisfied, not just satisfied, but happy.
So if a firm or a CPA within inside of a firm it feels like his independence could be violated, then they should step up and refer to another CPA firm
Jeff: The importance of financial due diligence for both sellers and buyers of businesses. My name is Jeff Allen, we'll continue our chat with CPA Matt Turpin when Deal Talk returns after this.
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Jeff: Welcome back to Deal Talk, I'm Jeff Allen with Matt Turpin, CPA and CVA with Carr, Riggs, & Ingram, LLC, and we're talking about the importance of financial due diligence. Why it is necessary for both sides, for the seller of a business and for a conscientious buyer, to seek the advice and the guidance of the CPA to really get the best deal that they possibly can. Matt, I appreciate very much having you on board today. You're providing us with a lot of great information and insight into why we need to get in touch with a company like yours regardless of where we are in the country when it comes time to sell our small business. I want to go back to the buyer for just a second though. This is going to help me as the seller determine where I really need to focus my efforts, or where my CPA needs to focus their efforts with respect to my business. How many years of financial information does a buyer typically want to review when they're conducting their own financial due diligence?
Matt: Jeff, typically five years would be the minimum that a buyer would want to review. There are certain situations where there was a natural disaster and it interrupted the business operations, where you may want to go back further than five years. The whole purpose is to see either consistently, or growth, or see some pattern, what pattern is there in this company whether it be through the revenue or expenses. So five years typically is a very good indicator of a pattern unless there's some type of natural disaster, or some type of business interruption that would substantiate more than five years.
Jeff: Matt, to go along with that, what type of information do I need to disclose to a buyer, and when should I offer this information in the process?
Matt: In the life of a transaction there's going to be the pre due diligences. This is before the letter of intent but after the non-disclosure or the confidentiality agreement. Typically you're going to be requested to hand over five years’ worth of financial statement, and that's just the initial window dressing. Once somebody’s able to pull back the windows and say okay... For example one of our cost of goods 30 percent one year and 40 percent the next year. Does it have to do with obsolete inventory where all of the CPA's year-end adjustments for the tax return and financials put into the books of the company, if the buyer is looking at in-house or company-generated financial statements. The financials, those would be the balance sheet, the profit-loss cash statement, those are going to be the first things to look at. Then there's going to be more than likely, of course it all depends on what type of the business or what industry you're in, a list of the assets. Once you get after the filing of the letter of intent which in a 5,000-foot view lays out what the terms of the transactions will look like. Then you have a certain period of time after signing that letter of intent which is going to be the due diligence period. This is where basically everything in the books is going to be opened up to where the buyer can arrive at some level of assurance that this is the transaction that they want to go forward with.
Jeff: Staying with the buyer for just a second, I'm the buyer. What are some red flags that I'm going to watch for, or that my CPA is going to be looking for, in all the information that we've been provided for those five years of financials?
Matt: One of the biggest things you want to look forward is if there is a loan that the selling company has, has it been in compliance with the covenants from the bank if they do have covenants. Are they meeting the different leverage ratios, current ratios, future financial ratios that help with the health of the company. They're an indicator of the health of the company. On the profit and loss statements or P&L you want to see what is revenue doing, does revenue increase every year, and are accounts receivable increasing on the balance sheet? Could that be a sign of either inflating sales, or sales may be good but collections are bad. You want to look for, just as an example, maybe high legal expenses. Does the company have to deal with a lot of litigation? Do they have to pay above-market salaries to key personnel? And would those key personnel stay if the business was sold? That's in my opinion the great thing about being a CPA that focuses on merger and acquisitions, and transaction advisory services is there's no standard template that says look at expenses A, B, and C, and see if they’re okay. If a buyer is looking at buying a division or a section of a company, are there related transactions or inner company transfers that would give a picture that is not entirely accurate of the financial operations of that division or sector that you're looking at.
One of the biggest things you want to look forward is if there is a loan that the selling company has, has it been in compliance with the covenants from the bank if they do have covenants
Jeff: Matt Turpin is CPA with Carr, Riggs, & Ingram, LLC here on Deal Talk, my name is Jeff Allen talking about financial due diligence both sides, seller and buyer in a transaction. Talk to us just a little about tax due diligence if you would. I mean just a little bit. We don't have a lot of time to cover a lot of ground on this subject. But when would a buyer do you think, Matt, be interested in conducting this level of due diligence with respect to taxes on a business?
Matt: Once the buyer has a reasonable level of assurance that this is a company worth either purchasing or going into that next phase of due diligence, then you do, in fact, they'll look at the tax aspects of the company. Is this going to be a stock transaction which means you're inheriting or you're purchasing everything of that business. If it's a C-corporation that has a net operating loss carry forwards, one, how was the loss generated and what are you as the buyer going to do to turn things around? Realistically not an entirely optimistic or an unrealistic view of how to turn the company around, but a realistic view of what can be done to increase the financial stability of the company. That's with a C-corporation. If you're looking at buying a flow through entity which would be a partnership or an S-corporation then you do have to look at -- the buyer has to look at their personal tax rate and realize if someone is in the 25 percent tax bracket, that your desired rate of return has to work in that tax bracket as well.
Jeff: Very, very good. Matt Turpin we are running out of time. What I'd like to do is just get a few final thoughts from you that you can go ahead and just throw it out there for our listeners today on Deal Talk who are considering selling their business and they're looking at taking first steps. Would you recommend that they get in touch with a CPA as soon as possible? I'm going to go ahead and just sit back here and let you go with this for about another 30 or 45 seconds. Just some final thoughts about what they need to do or what you would recommend as a CPA that they do and they have their first thoughts about selling their companies.
Matt: Sure. That's a great point and this would be what any potential buyer if they don't take away anything from our conversation this would be the one thing I'd want them to take away is when you initially look at a business, that's when I believe it's very important to have your CPA that's experienced in merger and acquisition to look at the very beginning because nobody wants to waste their time. If I'm a buyer and I come in, I'm looking at buying a highly competitive retail location that sells footwear, that's a very high risk. We can meet, look at the financials, and probably within 30 minutes to an hour realize this is it. Unless you're ready for the risk, unless you've got some really good plans, this is something that you may want to pass on because it's high risk and it's not something that you're doing day in and day out. Looking at a very high level, as far as the details, the financial statements, the risk of the industry, you can save a lot of time. If you have grand dreams of owning a business in a particular industry then you get to know the risk of the industry. If you're looking to buy a business, you can easily with the help of a CPA say, "I'm not going to look at this business any longer. We're not interested," and save countless hours. By bringing in professional payment advisers to look at it and say, "Here are the risks associated with buying this business,” then you go find another business to buy. I think I've been inside that level of service many, many times. Where somebody's looking to buy a business but they don't know exactly what business they want to buy. So you're looking at a bunch of businesses, we’ve got the ones that will end up being a waste of time because it doesn't meet the buyer's needs. And then you get into the businesses that do meet the buyer's needs.
Realistically not an entirely optimistic or an unrealistic view of how to turn the company around, but a realistic view of what can be done to increase the financial stability of the company
Jeff: There you have it. Time is money, money is money, and really at the end of the day you owe it to yourself to keep all avenues open for travel there. Matt Turpin, I want to thank you so much. Real quickly, if someone out there is interested in selling their business, or interested in having a CPA take a look at their financials. Maybe they're in the Southeast portion of the United States or kind of our in your part of the country Matt, you're licensed in Alabama and Florida, and of course you work with a team there, how can they reach you? How can they get in contact with your firm?
Matt: Sure, the general line would be 850-837-3141. My direct line is 850-337-3241. Or I can be reached very easily through email: firstname.lastname@example.org.
Jeff: Matt Turpin, thank you so much for joining us today on Deal Talk, it was a pleasure having you sir.
Matt: Jeff, it was a pleasure being with you. I appreciate it very much.
Jeff: That's Matt Turpin, CPA and CVA, Carr, Riggs, & Ingram, LLC.
And you've been listening once again to Deal Talk brought to you by Morgan & Westfield, the nationwide leader in business sales and appraisals. If you're thinking about selling a business or buying one call Morgan & Westfield at 888-693-7834 or visit morganandwestfield.com. And for more valuable information and insights from our ever growing list of small business experts make sure to join us again right here on Deal Talk. My name is Jeff Allen. Thanks again for listening. We're going to talk again soon.