Don Johnston, Mark Wolstoncroft, and Amber Pinskey kicked off GYF’s annual CPE Day with the first of a two-part, game-show themed presentation related to M&A transactions. This presentation, Let’s Make a Deal, focused on issues related to buying a business. (click here for the sell-side recap)
Don began the conversation by discussing the difference between acquiring a business through a stock purchase and an asset purchase, noting that an asset deal would be favorable for a buyer. He also reviewed the critical issues that come into play in making this determination, including legal considerations, reporting and regulatory considerations, tax issues, valuation, and purchase accounting.
Mark talked about the planning phase of a purchase, and common problems that may arise. He discussed the importance of considering different aspects of the deal such as structure, financing, and evaluation of potential risk and opportunity. He also focused on assessing the business’s value and acquiring the proper internal and external team. Mark noted that a strategic approach to the purchase of a business may motivate the buyer to pay more for the business than a buyer who has financial motivation. Further, the people involved in such a decision ‒ everyone from accounting to IT to sales personnel ‒ should be of the highest quality.
Mark noted common problems that could arise during the planning process of buying a business, such as poor accounting records, insufficient procedures, and lack of proper accounting talent at the acquired entity. He discussed how these factors would be discovered as inquiries are made of management throughout the process and emphasized that it is important to consider how these factors will affect both the purchase price of the business and the dynamics of the business itself, once acquired. Mark also talked about the effects of unfavorably large working capital adjustments and considerations regarding closing dates. Lastly, he touched on the importance of obtaining and reviewing a Quality of Earnings (Q of E) report and understanding the true EBITDA of the corporation.
Next, Amber took the stage to review accounting due diligence prior to purchase, as well as post-closing considerations. She began her portion of the presentation by noting that she views due diligence of this nature as an iceberg: it is essential to first review external financial statements, then dig deeper to a more granular analysis of the monthly numbers, policies in place, contracts with both suppliers and customers, internal controls, and potential customer concentrations. Amber emphasized the importance of performing analytical procedures over the financial information to identify trends and any potential accounting adjustments that may need to be made.
Amber also discussed how buyers should move forward with the newly acquired business after closing the deal. At this stage, it is important to put into practice the observations that were made during the planning stage, such as team restructuring, taking advantage of identified opportunities, purchase accounting, and integration of accounting and enterprise resource planning (ERP) systems. Further, it is important to consider any new factors, such as compliance with any covenants that have been imposed by a bank.
Don closed the presentation with tax considerations associated with a transaction of this nature. He discussed the differences between the execution of a stock deal and an asset deal, the most notable of which is the difference in tax liabilities assumed by the buyer. Don noted that, in a stock deal, the buyer is essentially stepping into the role of the seller, and may be liable for various tax obligations, such as income and sales tax state filings, cash versus accrual basis impacts, corporation status election compliance, and any other tax liabilities imposed on the entity since its inception. Don also emphasized that a stock acquisition will require more due diligence and legal work. Filing requirements, and the buyer’s knowledge of such, is essential to maintain compliance with tax laws once the deal has been finalized.
Overall, this presentation was very informative overview of accounting considerations related to buying a business from start to finish. Buying a business is a complex decision that requires careful consideration and assistance from a knowledgeable team.
Click here to access copies of the slides, links to resources and a video of the presentation
About GYF’s CPE Day: The firm presents this program each year to bring together clients, friends of the firm, and other professionals who are interested in gaining knowledge. The day is always filled with interesting presentations and great networking opportunities, and is generally attended by 300+ guests. If you have any questions about the material covered, or other issues we did not have time to address, please reach out to your GYF Executive or contact the office at 412-338-9300. We look forward to seeing everyone next year!
