I want to continue discussing the role of advisors such as attorneys, accountants and business brokers in the business for sale process. The last post touched upon issues related to attorneys and, as expected, the feedback was not very positive about lawyers altogether. The overall consensus of readers mirrored my perspective in that attorneys can often times do more to divide the parties rather than unite them. In other words, they can be more inclined to be deal-breakers versus deal-makers.
Insofar as accountants are concerned, just like attorneys, they too have a very specific and limited contribution to the business buying process.
If the parties do not use them properly, they (the accountants) can prove be detrimental to the entire transaction.
Every buyer must engage an accountant to perform three specific functions: First, to validate the numbers that are being represented by the seller which is done during the formalized due diligence period. Second, to ensure the overall purchase price is broken down to provide the most effective tax scenario for their client (the purchase price allocation) and finally, to compile various future financial models so the buyer can effectively determine the viability of the investment.
The major misconception about accountants is their alleged expertise in business valuations. While I do not want to generalize their shortcomings because they do play a role, typically speaking, their take on valuations is completely skewered.
Business buyers have to pay the most attention to a company’s historical profitability, and to conduct their analysis to be sure that if all things remain status quo post purchase, the historical profitability of the business is sustainable.
most accountants generally look at a company’s balance sheet and specifically the hard assets such as equipment and inventory to determine the value.
Obviously, this presents an immediate conflict.
Assets are a means to generate revenue – nothing more.
Most small businesses are not asset rich. And so, if a business has limited hard assets but generates significant profit compared to an asset heavy company that is losing money, which one is worth more? Obviously, the profitable one.
If you value a business giving too much weight to the hard assets, the money-losing one could, in essence, be deemed to be worth more, which is ridiculous.
While the assets of a business are important for securing financing, they can not dictate the value of the business or unduly influence the purchase price.
Besides, if faced with having to liquidate the assets, rarely do they generate a fraction of what they were deemed to be worth originally.
I am a huge believer that business buyers must use accountants during this process. However, understanding and limiting their involvement to what they do best is paramount to successfully completing a transaction. They are not going to tell you whether or not to buy a particular business nor should they. They are strictly an advisory resource that if leveraged properly will prove to be a valuable asset to you.
Have a great week.
Author of the How To Buy A Good Business At A Great Price© series