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The Importance of Having Good Financial Records When Selling A Company

that owners would like to sell. Te problem for some of these would-be sellers is that their companies do not have the financial information in place to prove the company’s real worth, so the own- ers can’t get the premium they’re expecting and deserve. Savvy buyers today are looking at the types of accounts, geo-


graphic operating territory, number and size of accounts, average site size, quality of management going with the sale, etc., as a way to establish their initial interest in a selling company. Buyers are also placing a lot of importance on the reported profits of the seller at the account level. Buyers know how much it takes to run a branch and administra-

tive office, irrespective of what it may be costing the seller, so the profits (or losses) at these levels are not nearly as important to the valuation. But there’s not much the buyer can do to improve on the profit at the site level without jeopardizing the relationship with the major accounts. Terefore, in arriving at its offering price, the buyer relies heav-

ily on the profit the seller is reporting at the account level, which usually includes the gross billing and gross payroll, as well as other associated costs that apply to the site such as: payroll taxes, workers’ compensation insurance, medical malpractice insurance (in the

here are many atractive, small-to-medium sized, drug test- ing, background screening and medical practice companies in the market today that would be a good acquisition—and

case of medical clinics), uniforms, dedicated site equipment, non- billable site supervisors and any other costs that may be associated with running or obtaining an account. Te buyer will be performing extensive due diligence to confirm

that the figures are correct, and then plugging those numbers into their business model to see if it still makes financial sense to acquire. Te confidence level the buyer will have in the figures will depend on the quality of the financial controls and records the seller has in place. Another important aspect is the portability/survivability of client contracts (all business relationships with clients should include a writen contract that is transferable to a new owner for maximum leverage when selling). Having good financial controls and records play a very important

part in the seller receiving a premium when it comes time to sell. If the buyer can’t get the confidence level it needs, it will make a conservative offer; one that allows for a margin of error in the buyer having to guess at, or use estimates in computing the profit at the site level. Unfortunately many owners of small-to-medium sized compa-

nies do not place enough importance on these financial systems, which oſten results in the seller geting less than what the company is really worth because they can’t prove what they’re making. Te company may have a very atractive profit, but it’s up to the

seller to be able to prove it and proving it involves a lot more than just handing the buyer billing invoices and payroll registers for a couple of periods. Te proof lies in the underlying financials (typi- cally three years’ worth) that will confirm that the profit will remain at a certain sustainable level over time. Not only are a sound financial reporting system and accounting

by a qualified CPA helpful in adding value to a company when it comes time to sell, but they will be a valuable tool in helping the owners stay profitable and competitive during the time the owners are running the company. Tese practices can help with identifying the areas where costs may be geting out-of-hand or otherwise need altering, which is important in today’s challenging economy where cost containment is crucial. Here’s what buyers like to see in the sellers’ financial report-

ing system: • A customer profit report—Tis report will show every customer, by site, with the billable work, gross billing, gross payroll and any special costs that apply to the customer such as special insurance, etc. A more advanced report will further show the billable and non-billable hours (vacations, holidays, training, etc.) with the associated billing and pay, as well as overtime premiums for both payroll and billing.

18 datia focus summer 2013


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