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How Should You Use an Accountant When Buying a Business

In the pursuit of the perfect business acquisition, you’ve likely noticed a surge in available entities for sale, a trend accelerated due to the recent pandemic. It’s clear that this phase of economic uncertainty presents potential benefits for the strategic investor. Suppose you’ve found yourself in the fortunate seat of having multiple business opportunities at your disposal. It’s at this juncture that the expertise of an accountant becomes crucial.

However, the question arises: when is it the most opportune moment to loop in your accountant, and what can you anticipate from this collaboration? Moreover, is it worthwhile to engage a financial advisor in your acquisition journey?

Companies like Walker Hill offer a range of services for those seeking professional advice and guidance in the buying process. Their accountants are well-versed in mergers and acquisitions, capital structure, and other financial considerations that will significantly impact your decision-making process. Whether you’re just starting to explore potential business opportunities or are ready to finalise a deal, an accountant can be an essential resource in maximising the value of your investment.

Timing for Engaging Your Accountant in the Business Acquisition Process

As you consider investing in a business acquisition, reaching out to your accountant should be one of your initial steps. Don’t let apprehension over potential accounting fees deter you from seeking their advice – their expertise could prevent costly mistakes. Clarify the fee structure right at the start to avoid any unexpected charges. Remember, accountants often find it rewarding to guide clients through the acquisition process, and they usually anticipate the opportunity to continue serving you after the purchase.

An accountant’s role in this process is multifold. They can help gauge your financial capacity for the commitment, providing invaluable advice that aligns with your financial goals. If you plan to seek financial assistance, they can assist in gathering and presenting necessary information to potential lenders. Involving a financial advisor in cash flow modelling of different scenarios can further quantify risks and provide a comprehensive financial outlook.

Upon receiving an Information Memorandum, it’s recommended to forward it to your accountant for review, even at the earliest stages of your interest. Given their daily exposure to financial statements, they’re adept at spotting any red flags or areas warranting deeper investigation within a short time span. Their insights can also help identify negotiation points, making them an invaluable asset in your acquisition journey.

The Value Assessment

When in the throes of business acquisition, you might instinctively turn to your accountant, expecting them to present a clear-cut appraisal of the business’s value. And that’s a logical expectation—sometimes, accountants can indeed offer such a straightforward assessment. However, it’s vital to understand that business valuation isn’t always a simple matter of sifting through historical financial statements.

In reality, you’re not purchasing the business’s past—you’re investing in its future. The profits you aim to generate going forward are what truly matter, not a chronological account of earnings in the pre-COVID era. With this perspective in mind, you might realise that the Balance Sheet or Statement of Financial Position is potentially more enlightening than a retrospective Profit & Loss Statement.

Nonetheless, even armed with these financial documents, deciphering the value of a business can remain a complex puzzle. Accounting standards often dictate that assets be listed in financial statements at cost, minus depreciation, rather than their actual market value.

This means that for many small businesses, where assets may have been fully written off through the small business depreciation immediate asset write-off allowance rules or Temporary Full Expensing, the Balance Sheet might substantially undervalue the business’s actual assets.

Therefore, while your accountant is a fundamental player in the acquisition process, the task of assessing a business’s value is multifaceted and extends beyond the scope of traditional financial statements.

Examining Assets and Liabilities

In spite of the limitations inherent in a Balance Sheet, it remains a vital document for your accountant to dissect and understand, even though it may not typically be included in an Information Memorandum. In scenarios where Inventory and Equipment are substantial, it might be necessary to rope in a specialist valuer. However, conducting a comprehensive stocktake during the due diligence phase is crucial and should ideally be supervised by your accountant at the very least.

It’s general practice for the cash reserves and Accounts Receivable to remain with the initial owners, but this is deal-dependent. Regardless, your accountant will be eager to scrutinise these assets. An initial positive sign is the presence of cash in the bank instead of an overdraft; this is a comforting indication of financial stability.

It’s worth noting, though, that a business experiencing financial strain might still present a plausible investment opportunity, provided it is evaluated and priced in alignment with its financial health.

Revisiting the Asking Price

Once you’ve thoroughly vetted the assets and liabilities, including off-balance sheet data, it’s time to return to the Profit & Loss Statement and evaluate the asking price. Typically, the accountant must inspect the Profit and Loss Statement before Interest and Taxes, with add-backs for the owner’s salary and any significant discretionary or extraordinary expenses (such as legal fees, business coaching costs, private motor vehicles, or substantial entertainment costs). They then subtract a suitable wage for a managing role to arrive at the profits to be multiplied.

Deal Structure Considerations

Before one delves into a firm offer, it’s essential to consider the deal’s structure. Are you planning to acquire the company’s shares or its assets? Often, sellers lean towards share sales as it facilitates easier access to tax-free capital gains via Small Business concessions. However, this may not be appealing to buyers due to the potential risk of hidden liabilities within the company.

Many buyers favor starting anew with a fresh corporate structure or using their existing entities to purchase the assets. The deal’s structure could influence the pricing. Even within a new corporate setup, the new owner typically assumes existing employee liabilities. This fresh structure presents a chance to examine and establish a more tax-friendly setup. Just because the business you’re buying operates under a family trust doesn’t necessarily mean it’s the optimal structure for you.

Post-Acquisition Management

The conclusion of the business acquisition is not the end of the journey, but rather the beginning of a new chapter. Once the business is operational, the crucial phase of management and adjustment begins. Your accountant will be eager to assist you in either transitioning the existing bookkeeping systems or establishing new ones. This is vital to ensure that your financial tracking aligns with the business’s current operations and future strategies.

Simultaneously, your financial advisor will be at your side, guiding you through personal financial matters related to the business. This may encompass managing personal cash flows, making effective use of superannuation, and navigating the landscape of personal insurances. This comprehensive support system, encompassing both the business’s needs and your personal financial concerns, ensures that your acquisition evolves into a sustainable and profitable venture.

Chief Saasologist

Chief Saasologist

Myself Snehil Prakash aka Chief Saasologist of Howtobuysaas. I am a saas marketer, who loves studying evolving software that is bringing change to the world. Share the same with people via howtobuysaas platform.

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