This page contains a Flash digital edition of a book.
Most companies that have the capability to produce this report

can produce it aſter any billing or payroll cycle. In examining this report, buyers will be looking for consistency in the accounts from one period to the next, as well as how the information by period compares to the overall site level profit reported on the internal financial statements.

• Interim Financial Statements with Month End Accruals— Meaningful interim financial statements show the results for the current month compared to the same month in the prior year, as well as year-to-date amounts compared to the same period for the previous year. It may also show budgeted figures (although not as important as the actual results). Also, if the selling company has multiple office locations, there should be a financial statement for each branch.

• Sources of revenue and related costs should be identified— In helping a buyer beter understand and verify profits at the account level, the statements should also identify revenue ac- cording to source (i.e.; permanent accounts should be separate from temporary accounts, regular straight-time billing separate from overtime premium billing, and any other service/product should also be a separate line item). Te labor and other costs for the various sources of revenue should also be separated so the buyer can readily determine the profit by category of service or product.

• Proper cut off of billing and expenses—A common mistake many companies make is not having a proper cut off of billing and expenses. Tis is especially true where a company has several billing periods available for clients that do not match the payroll period. When this is the case, the company should have a proce- dure in place to book the revenue that has been performed, but not billed, in order to get the billing in the same period as the recording of the labor for the respective service. Another common mistake is not properly recording advanced billings. If the invoice has been prepared and entered in the financial system before the service is actually rendered, the billing should be booked as advanced bill- ings then recognized as the service is actually performed.

• Certain below the line expenses should be detailed—Not only will the buyer be scrutinizing the financials to determine the reported profit at the account level, but the buyer will also be looking at the costs below the account level profit line. In scrutinizing these costs, the buyer will be looking for possible other costs that may be important to running the site, but may have been leſt out of the account level profit computation; and it’s common for companies to leave certain costs out of the account level profit section. Some of the costs commonly leſt out of this section and put “below the line” are: non-billable su-

pervisors; dedicated equipment—special equipment required at the account sites; and various insurances (where it’s not con- venient to break out the total insurance bill between accounts). Also, there are some costs that should be detailed, even though they may not be account level expenses.

• Insurance—Insurance expense should be separated to show the amounts for workers compensation, general liability, employee hospitalization and health, etc.

• Classes of Compensation—Compensation should be separated to show the amounts for non-billable supervisors, executives, clerical personnel, dispatch personnel and any other classes of la- bor. Te beter detail, the more it will help the buyer understand what it takes to run the business.

• Vehicle Cost— To the extent that it can be easily identified, vehicle cost should be separated by supervisors and executives.

• Year End Financials—Te internally generated year end finan- cials, which usually are very detailed, should agree with the out- side CPA accountants’ financial report. Tis means the company books will need to be held open until all the adjustments from the outside accountant are received. Tis is necessary in order to produce an accurate report (with all required adjustments) that has all the detail the buyer needs. What does this mean for owners wanting to sell now, but do

not have these financial controls in place? The good news is that sellers needing or just wanting to sell

now, can still get a good deal in the marketplace even without these elaborate systems in place, because there are buyers that are looking to make acquisitions. But the selling price may not be quite as good as it would be if the seller had these systems in place; unless the seller can otherwise prove how much profit it’s making at the site level. In fact, I find that there are very few of the smaller companies that strictly adhere to GAAP (Generally Accepted Accounting Principles) accounting rules and some do not have systems that show the profit by account or site on a regular basis. However, the better the financial system, the bet- ter the chances are that the seller will command the premium it’s expecting and deserves from the sale because it takes away the “margin of error” or “guess factor” the buyers have to consider when they can’t get all the information they need to properly evaluate the company. ❚

Ken Will of AdMed Consulting in Bismarck, ND has over 35 years of experience in acquisition and sale of businesses; coordination of M&A transition activities; all exclusively within the background screening/drug testing/urgent care industry.

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