|
 |
|
"If you want a guarantee, buy a toaster." - Clint Eastwood
Question: What are things to look out for during escrow? I can read financials, so do I really need a CPA? What else do I need to cover? Also, the Seller and I are far apart on price. Any suggestions?
Answer:These are excellent questions, and should be understood before offering to purchase any business. The Escrow stage of any business purchase involves far more than financial review. It should also include a thorough investigation of the assets, contracts, customers, suppliers, competitors, employees, the systems, sales/marketing plan, and legal issues. More on this later.
The CPAs Role:
Regarding a CPA my answer is "yes" to have one involved in the process although they will, for the most part, contribute in the financial review aspect only. One thing that you should do is review the seller documents first, prior to your CPA - if they don't make sense to you, chances are they won't to the CPA either. Also, be sure to engage a CPA who is familiar with the type of business you are reviewing.
What to investigate:
I have copyrighted an itemized list of what to look for during escrow. This covers everything from Accounts Receivable to Websites (often overlooked). It's critically important that you organize yourself properly for this stage and getting the seller to comply with your document requests should be your first priority. Compile a list with your CPA of what is needed and my recommendation is that you do not start the clock until you receive all, or substantially all of the documents requested.
The goal during due diligence is to uncover any potential problems before you buy the business. As with any business, you will find some issues and surprises and that's ok. Try to separate incidents and catastrophes.
Additionally, your goal should be to validate everything that the seller has represented about the business. Some buyers go into this phase hoping to find problems so they can renegotiate. While some uncover serious flaws, most don't but in looking to nitpick every minor issue, they end up sabotaging the deal. As such, be thorough; actually, be flawless but don't be taken aback if/when you uncover a problem because you will find them. Keep articulate notes and decide at the end whether or not a re-negotiation is necessary.
Bridging the gap on price: My bet is if you are far apart on price, you probably will stay far apart on price. Before spending money on due diligence and CPA’s (let alone attorney fees) it is best that you and Seller have locked in on a price and a Letter of Intent which states how long the business will stay off the market, and how long you have to finish your due diligence. 45 days is typical.
Above all - take your time.
45 days seems short, but if you go in quickly with a sharp looking list of what you ask for, there should be no problem with you receiving such documents readily. If you don’t receive them in short order, then you have an argument with the 45 day restriction.
No matter what, take the FULL time allotted to you. You need to do a proper job inspecting the business.. Regardless of what pressure you get from the seller, you need ample time. Please understand that you can easily complete the financial review in five days. In fact, with good books and records, your accountant can complete this even quicker. However, a successful due diligence and inspection period goes way beyond the financials. When a buyer is rushed, it leads to uncertainty which leads to deals falling apart (it's probably why approximately 50% of all deals agreed to between buyer/seller never get to the closing table, according to industry insiders).
The rules to keep in mind for a successful due diligence are:When you encounter a problem keep a record of it. If you are faced with having to re-negotiate, you'll only be successful if you have adequate proof that the business is not worth what you and the seller had previously agreed to.
Gary McAuley
Exit Strategies * Acquisitions
www.sun-west.biz