By Mark Ott, CFO Consultant, Next Stage Solutions, Inc. (NSS)
While the M&A market is fairly quiet as we enter the summer doldrums, it is a perfect time for owners and boards to think about what preparations can be made now in anticipation of selling a company when the market does open up. Over the next several months, I will highlight some of the key financial issues that you should be thinking about and preparing for during this quiet period.
Are Your Historical Financials In Order?
In discussions with potential buyers, one potential red flag is a set of historical financials which doesn’t stand up to scrutiny. You should have a complete set of financial statements (Income Statement, Balance Sheet, Cash Flow) for the previous three years (two minimum) which have either been reviewed by or, better yet, certified by outside auditors as well as unaudited interim financials for the current year. If your accounting is currently on a cash basis, you should consider changing to an accrual basis (after consulting with your tax advisor) and it would be advisable to ensure that your accounting is in compliance with GAAP (Generally Accepted Accounting Principles).
Most companies have someone in house to do their bookkeeping but it is wise to have an independent company like Next Stage Solutions (NSS) come in and review the historical financials and get them in good shape. NSS has strategic-thinking CFO’s who have experience in leading companies through the M&A process. Their participation in this phase will actually pay for itself to some degree as it will reduce the cost of the review/audit by the outside audit firm and accelerate the process. Furthermore, you cannot use the same firm to prepare the financials and then audit/review them.
One other good reason to have sound historical financials is that they will better enable you to Prepare a Credible Forecast which will be the subject of my next article.