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How Today’s Environment Affects Your Exit Strategy

03.02.10

by Perry Kaufman, CPA
Tax Partner; Practice Leader, Entrepreneurs Group
TravisWolff Independent Advisors & Accountants

The first of a two-part series

At some point — after years of hard work building a business — many business owners begin to think,
“What next?” Thinking about the future can take many forms.

• Do I expand and continue to grow the business?
• Should I sell the business to a third party?
• Is there a family member capable of taking over?

Pursuing these options requires advanced planning and often new funding — whether debt or equity
— and in today’s environment access to funding is more complicated than ever.

Being Proactive in Today’s Financial Environment
Following the Enron and WorldCom debacles the legislative response was more regulation in the form of Sarbanes-Oxley (SOX), which mandated more transparency in financial reporting. While SOX regulations were aimed at public companies, the reality is that owner-operated businesses have been impacted by the ripple effects of this legislation. Creditors and investors have a generally heightened sensitivity to the accuracy and interpretation of financial statements and, coupled with a new emphasis on the rules that guide the reporting of this data, entrepreneurs must approach financial reporting differently than in the past. Add to this a deep recession and the near collapse of our financial market.

The result: entrepreneurs have entered a whole new world as risk adverse creditors and investors seek
more clarity and transparency. The financial reporting requirements for accessing capital have never been more complex.

What do I need to do? Consider the following:

• Convert to a GAAP (Generally Accepted Accounting Principles) financial statement — Many entrepreneurs use a tax basis method of accounting. GAAP is preferred by most lenders and investors, and the current environment will demand it more frequently. The conversion takes time, so plan ahead.
• Document business systems — Many entrepreneurs rely on a small group of key personnel, and funding sources consider this a risk because all the knowledge rests with a few individuals.
• Improve system efficiencies — Identifying improvements and implementing changes can increase profitability and add substantial value to the business.
• Audit financial statements — Historically, many entrepreneurial businesses didn’t require audited financial statements. The cost didn’t match up with the benefits. However, yesterday’s approach isn’t likely to work in today’s environment, especially when contemplating a sale or seeking additional capital. With this in mind, here are a couple of things to consider in order to be prepared for a potential lender or buyer:
o Obtain an observation of annual year-end inventory — For companies with significant inventory this is one of the most difficult items to audit after the fact. Additionally, because inventory directly impacts the cost of goods sold in the income statement, the audit of the next year’s earnings is dependent on the accuracy of the beginning inventory. Many lenders now require the past three years’ inventory counts.
o Seek a review of financial statements — The time and cost of a review is about half that of an audit. It can be done with or without a conversion to GAAP and, in either case, it will get the company closer to the financial reporting requirements it may need in the near future.

Recap

• It’s never too early to start planning for the future.
• Being proactive and planning ahead will maintain and/or create additional value for the business.
• Access to capital is becoming increasingly complex. Getting financials in order and creating business systems that minimize involvement will be favorable to lenders and potential buyers.


Next: Tax Implications in Today’s Environment, the last of a two-part series





posted by Rachel Meador on 03.02.10 • comments (0) • CPA Services