North Bay Business Journal

Monday, April 15, 2013, 6:30 am

Due diligence can attract, support an acquisition

Records can show value for buyers as economy improves


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    NORTH BAY – At a time when many businesses are experiencing better cash flow after the worst of the recession, North Bay experts in mergers and acquisitions said that owners looking to sell their business could increase the likelihood of a successful acquisition by clearly delienating a number of key metrics related to their business assets and activity.

    While buyers remain cautious, an organized collection of information about current operations and a company’s ability to continue after its owner’s exit can boost buyer confidence and reduce the chance for hang-ups that could derail an otherwise ideal sale, according to those experts.

    Jim Andersen

    “We’re just now emerging from a struggling economy. Maybe there was just one good recent year, in 2012,” said James Andersen, a partner in Santa Rosa for San Francisco-based accounting and consulting firm Hemming Morse. “The seller must show that their earnings will be sustainable into the future.”

    More North Bay companies changed hands in the first quarter of 2013, with the number of sales increasing 10.3 percent in Sonoma County and 30 percent in Marin, according to to an annual business sale index by Dublin-based sale tracker BizBen. Napa saw no transactions during the period.

    Meanwhile, the wave of sales seen after the recession has slowed down, with a 21.6 percent decline in the number of businesses sold across Sonoma, Marin and Napa in 2012 compared to 2011, according to BizBen.

    After many entrepreneurial Baby Boomers put off plans for retirement while steering their businesses through a difficult economic period, a concerted effort to depict their company’s value to a potential buyer could now tip the scales towards an acceptable sale price, according to those experts.

    Business succession experts noted that prudent buyers are likely to perform deep analysis of a company regardless of whether or not an appropriate level of due diligence has already been performed. While those acts may turn out to be redundant, the early availability of information involving vendors, operating income and other metrics can help instill confidence early on. 

    Carl Saba

    “As a buyer, you have to gain confidence in the reliability of the information you are getting about the businesses,” said Carl Saba, partner in business consulting services for Burr Pilger Mayer accountants and consultants.

    Even long-time businesses often still operate from the remnants of accounting systems that were cobbled together in a company’s early days. Changing those practices is not an overnight process, Mr. Saba cautioned.

    “It can be a mad scramble,” Mr. Saba said. “It doesn’t show well for a prospective buyer. They wonder — what else is in there that I don’t know about?”

    While cases vary, many owners have served as a one-person clearinghouse for information like customer relationships. A potential buyer would want to see what those relationships are, and that the owner has worked to transfer “personal goodwill” to “entity goodwill,” Mr. Saba said.

    Jon Dal Poggetto

    “Part of what you’re buying is someone to sell those products and services to,” said Jon Dal Poggetto, managing partner at Dal Poggetto and Co.

    Other common information that buyers like to see while walking into a potential acquisition include a company’s earnings before the incorporation of interest, taxes taxes, depreciation and amortization — commonly referred to as EBIDTA — along with inventory, revenues expenses, experts said.

    “The buyer wants to know what your business will generate,” Mr. Poggetto said.

    Owners would also want to show potential buyers that the business will continue to generate income after their absence. Appointing senior managers to gradually take over their duties can be one strategy, which could entail changes to the company’s ownership structure that would help incentivize that staff, Mr. Saba said.

    “A lot of times, the business is the owner. Untangling the business from their involvement can be a huge deal,” he said.

    The information housecleaning measures can also help owners to develop a realistic concept of the value of their business, a realization that can be as much emotional as fiscal in an economy that is still climbing out from the worst of the recession.

    “Even if a business has potential, that doesn’t matter,” Mr. Andersen said. “Buyers are only going to pay based on what the books show.”

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    1 Comment

    1. April 15, 2013, 9:39 am

      by ramyadivya

      Good article. Comprehensive Due diligence is critical in reducing the risk of failure of an M&A deal and will also help in post M&A integration.

      There’s a whitepaper about this very topic “strategic growth and the impact of an effective integration infrastructure” readers will find it informative @ http://mcgladrey.com/Private-Equity-Groups/Strategic-growth-and-the-impact-of-an-effective-integration-infrastructure

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