When a client announces that they are selling their business, many accountants feel pressed to get the accounts up to date quickly or perhaps feel the need to prepare management accounts and projections ASAP.
There’s nothing wrong with that as such… but therein also lies the problem.
They can be so focused on these jobs that they fail to grasp how important their role has finally become.
No longer are they compliance clerks who churn out annual accounts and prepare the tax return… now is their chance to shine as the lead actor!
Tales of woe
Confused? Let me share some tales of woe with you – problems that could have been avoided or at least dealt with better had the company’s accountant taken a more proactive role in the run up to their client putting themselves up for sale.
Remember that usually the accountant is the first to know of their client’s intentions, but sometimes can be one of the last. This tells you all you need to know about their client relationship!
Interested buyers who are serious and keen to do deals walk away in the following common scenarios, which with advance planning by the accountant could be nipped in the bud or mitigated. In other words, you need to be first at the party before your client approaches a business broker. You need to be the first professional responder once the idea of selling is floated.
Lucrative earnings opportunity
Not only is it a matter of giving your client the best service you can, you are also missing out on a lucrative earnings opportunity, one which your client will really appreciate, unlike your annual accounts bill. Here are five scenarios that illustrate what to look out for…
- Excess stock – the buyer noted the very high stock figure, amounting to four months worth of sales. As a competitor she knew that there was no way this level of stockholding was necessary. It made her have serious doubts over the efficiency of the operation and she walked away, but not before making a derisory offer. Word spread quickly and other likely buyers all gave the firm a wide berth.
- Obsolete stock – the seller just couldn’t bring themselves to make the necessary stock write-downs over a period of 20 years and needless to say the accountant just accepted whatever they were told. Crunch time came during due diligence by a buyer, who subsequently slashed what had been a good offer.
- Debt collection – the balance sheet was showing six months of sales tied up in debtors. The buyer asked if we were selling a bank or a manufacturer! Upon closer inspection it transpired that 75 per cent of the debtors were not recoverable. The buyers said they would sit it out until the seller went bust and mop up the customers themselves.
- Margin variations – this is probably the most common problem. In the year prior to selling, out of the blue the gross margin improves noticeably. Amazing isn’t it? No amount of explaining will persuade a buyer that something funny hasn’t gone on.
- Excess margins – everybody makes 43 per cent gross margin but your client is consistently making 51 per cent . Buyers scratch their heads and when advised that the firm’s director has been sourcing very keenly and is a crack negotiator, they start to wonder how they will manage once your client retires and the buying wizard has performed her last act. Once again interest slowly evaporates.
These five scenarios, and others besides, should be on the radar of the accountant.
And when you have the discussion about exiting, you need to get in your car and head straight down to your client’s operation, get a feel for it and look at it closely just like a buyer would.
Let your clients benefit from your professional expertise and experience in dealing with a variety of businesses.
Work hand in hand with them to groom the business for sale and extol the virtues of the exercise.