Prepping the Princess for the Party: Is Your Business Ready to Sell? Part One


This week on “In Process: Conversations about Business in the 21st Century,” we begin our series of podcasts dedicated to the topic of preparing your business for sale. This series leads up to the physical event we are hosting at 5:30 p.m., on Thursday, Apr. 19, 2018, in Atlanta titled, “Prepping the Princess for the Party: Is Your Business Ready to Sell?”  Visit the dedicated website of the event to learn more at

There is certainly a lot of excitement in the merger and acquisition (M&A) market currently. Interest rates are low. Capital is abundant, both at private equity groups as well as strategic investors. The “strategics” seem to have more cash on their balance sheets than ever before in history, and so that lends to a very healthy M&A environment. Coupled with tax cuts, sellers are in a position to realize some significant net cash proceeds advantages―but you have to be prepared.

In the first installment of our six-part podcast series, show hosts Evelyn Ashley and John Monahon speak with Aprio’s Michael Levy, partner-in-charge of Transaction Advisory Services, and Yelena Epova, partner-in-charge of International Services, about financial and tax considerations. Aprio is Georgia’s largest full-service CPA-led advisory firm.

“From a due diligence perspective, you get benefits from experienced professionals who understand what sellers and buyers think about when going into a transaction,” said Michael. “Many of our clients are very interested in learning about the market and the process. The earlier you can start to have those conversations, the more prepared you can be to enter into a transaction. Preparedness absolutely translates into transaction value, i.e. more dollars in sellers’ pockets.”

Being prepared for a transaction not only gets you increased value from a purchase price perspective but also affects the time you spend in the process, which is rigorous. So, when you’re prepared, the credibility with the buyer goes up that much more as well as increases the probability that you will have a successful sale transaction.

“You want to make your company is due-diligence proof,” said Yelena. “You don’t want to find out through the process ‘Oops, I haven’t done this or this is not right.’ There will always be some questions, but you don’t want to have major surprises.”

During the course of the podcast, entrepreneurs, business owners and C-level executives will learn about the:

  • Current state of the M&A market
  • Tax changes and implications to consider
  • Why due diligence is essential and the types of advisors you need
  • Importance of an audit and other financial reports
  • Options for structuring a deal
  • Pros and cons of earn-outs

Learn about the steps you can take to prepare your business for a sale now or for the future by streaming the conversation in its entirety in the player below, or download it to your mobile device via iTunes. Don’t miss a single episode, subscribe to our show “In Process Podcast” on iTunes to receive this episode as well as future episodes to your smartphone.

“Prepping the Princess” is an invitation-only event for C-level executives and business owners. The event will provide substantive information on the key elements, which most every business should possess, to make it an attractive participant at the sale dance. For more information on the event and to request an invitation, please go to






Is Your Business Ready to Sell? Part One: 

Preparation: The Key to Securing the Best Value for Your Company

(c) Trusted Counsel (Ashley) LLC. All Rights Reserved.



The Current Mergers and Acquisitions Market

Evelyn (Host):  What’s occurring with the merger and acquisitions market right now and why is this a great time to be thinking about selling a business?

Michael:          There is a lot of excitement in the M&A market at the moment. Interest rates are low, and capital is abundant, both at private equity groups as well as strategics. The strategics seem to have more cash on their balance sheet than ever before in history, and so that lends to a very healthy M&A environment coupled with tax cuts. Sellers will recognize some significant net cash proceeds advantages from some of these tax cuts, but you have to be prepared, and I’m excited that we at Aprio can participate on this podcast to talk about how you prepare for the sale transaction. There are so many opportunities. We talk to our clients daily about how to take chips off the table for future investment and also, how to find partners out there that can help you grow your business if you want to stay with the business as you enter into a transaction with a buyer.

Evelyn:             What do you think about the fact that we’ve got so much variance in the market currently?

Michael:          The volatility in the market is something that people knew would happen at some point. I can’t predict the future on this. But certainly, from a volatility standpoint, the market is a little bit uneasy but it’s interesting at this time that the volatility is being caused by a whole host of factors. Primarily the fact is that wages are up, and the nervousness in the market is that inflation may increase but also with inflation, interest rates may increase. This is very different than what we experienced back in 2008.


CPA Services

Evelyn:             What is the difference between a CPA that provides advisory services like diligence and structuring versus CPAs that provide audit and that level of tax compliance support?

Michael:          At Aprio, we provide both. From a due diligence perspective, you obtain benefits from experienced CPA advisors that understand what sellers and buyers think about when contemplating or entering into a sale transaction. And what those buyers and sellers think about primarily are the seller’s financial statements– whether they have been audited or not. Have they been reviewed? Also, important is the level of tax sophistication that a seller has employed from a tax structuring perspective.

The due diligence folks are usually those that are definitely more experienced in the M&A process, and those credentials result from years of experience anticipating and knowing what a buyer thinks about when going into a transaction process. But also, talking to sellers in order to set their expectation, not only on what to expect from a process perspective but what’s going to happen from a pricing perspective when thinking about what normalized EBITDA may be as well as what some of the tax attributes are present.


The Audit and Why Prospective Sellers Should Undertake it

John:                Talk to us about the actual importance of the audit?

Michael:          An audit is the highest level of assurance that an auditor can provide for readers of financial statements that those financial statements are in accordance with GAAP (General Accepted Accounting Principles) and that there are no significant departures from GAAP that misstate those financial statements. Buyers look at an audited financial statement as not only an insurance policy, but as a true indication of where the business is from a financial statement perspective, both from a financial position as well as a statement of operations perspective. Also, we find that audited financial statements are referenced in purchase agreements and that a buyer is expecting that the seller have reps and warranties in that purchase agreement that say, these financial statements are in accordance with GAAP consistently applied.

Evelyn:             Sellers might be able to sell their business without GAAP financials, but sellers are definitely limiting the scope of who the buyer is by not undertaking the audit.

Michael:          What are some of the steps you can take as a seller? You can think about it in order to put yourself in the best position to sell, through maybe a different type of product. Maybe a due diligence report, which certainly has a lot of creditability and value when entering into the sale process.


Discussions with Your CPA to Prepare for the Sale

John:                Clients often ask us at Trusted Counsel “When should I begin to talk to an attorney or my CPA about my exit?” Tell us, when does Aprio typically gets involved in these discussions?

Michael:          You mentioned attorneys, you mentioned your CPA, but there are also advisors such as investment bankers that you should commence conversations with, and so the earlier, the better. Sometimes you want to be in a rush to execute on a transaction. That could be a function of where the market is today, and how the market environments are reacting to a business in a particular industry. Again, the earlier you can start to have those conversations, the more prepared you can be to enter into a transaction and I think that preparedness absolutely translates into transaction value, i.e. more dollars in a sellers’ pockets.

Evelyn:             We see that often times buyers go directly to sellers and essentially start   conversations that of course get the sellers, even if they’re not thinking about selling, excited because everyone loves the idea of someone wanting to buy their business. But you are short cutting yourself in this process because it doesn’t allow for any preparation. So at Trusted Counsel, we try to spend a lot of time and I’m sure at Aprio too, stressing the importance of formalities and certainly in the early stages.

John:                You wouldn’t sell a house without staging it, right?

Evelyn:             Right. Otherwise, you’re going to leave money on the table.

John:                Sometimes strategic investors come to us a little bit late. They deal with someone, then a strategic person, and Michael I heard you talk earlier strategics have more money on their balance sheets than ever before right now to strike a deal, and they come up and they put in a letter of intent with the client and of course, they don’t feel that it’s binding and then maybe, then these CPAs and the attorneys are contacted. Can you explain the importance of pre planning before that, because aren’t there certain situations where your ability to structure things from a tax perspective can be limited, if there’s a letter of intent in place?

Yelena:            We talk to clients about what they can do ahead of time, in terms of structure. And obviously there are different types of entities available. Sometimes we would see a C Corp. and if they come to us early enough, we suggest maybe to elect S status if they qualify, because now you only have a 5 year period, when you need to wait to sell the company and not to have any taint of the C Corp. It used to be 10 years. So, if you have that luxury, very often we would suggest pass-through entity, so they have an option to sell assets versus stock.

And why is that important? For the seller, definitely stock sale is the easiest, you get capital gain treatment and you’re finished, and if you’re smart enough to move to Florida before the sale, or Nevada, or some other places where there’s no state income tax, perhaps you will avoid the state income tax too. So stock sale is  beneficial for the seller. For the buyer, especially in the tech world, it’s super important to buy assets because companies normally don’t have a lot of tangible assets on the books, it’s all goodwill

If the buyer buys stock, it’s a carryover basis, there’s no additional amortization, no additional deductions and so it becomes much more expensive for them. If the buyer asks if they can buy assets, book goodwill, amortize it over 15 years, generate tax  deductions, obviously it’s all going to have impact on cash flow. And so the purchase will become significantly less expensive for them. If you’re a C Corp., it’s going to be very expensive for you to sell assets unless you have Net Operating losses to offset the gain.

It’s a bit less expensive now with the corporate rates going down to 21% but it’s still double taxed, unless you have large net operating losses. Now there are  some additional limitations on NOLs, that you will have to take into consideration but potentially yes, you will get double taxed and you will get less than 60% on your dollar, for sure, maybe even less than that. If you’re a pass-through entity, you’re able to sell assets and pretty much pay the same tax, almost the same tax, as you would be paying if you sold stock. When our clients are able to sell assets, and this is, in most cases, the buyer will approach them saying we want to buy your assets. Or we want to buy your stock, and make an election to treat it as an asset purchase for tax purchases. So, we tell our clients who are sellers, if they’re able to sell assets that they may be able to ask for a bit more money. Secondly, we always do projections for them to see what the asset sale would look like as opposed to a tax sale. And there may be tax differential and we definitely ask for more money to pay for that, but I think companies are re significantly much more marketable if they have the luxury to sell assets. So, definitely talk to your advisors about the structure.

Evelyn:             Absolutely. We represent some buyers and they won’t do stock sales because from a legal perspective, they’re not going to pick up the liability that goes along with buying.

Yelena:            That’s another reason.

Evelyn:             Certainly, companies that have been around for 20 years when you just don’t even know what’s sitting there. Trusted Counsel is actually doing a transaction right now which we have forced an asset sale and it’s a C Corp. in California where he’s had that business since the 90s and he never made the election. So you know, he’s been an unhappy seller but he wants to sell.

Yelena:            Especially in California, very unhappy.

Evelyn:             Yes.

Yelena:            Because of the state tax.

Evelyn:             Exactly. It’s so unfortunate. Often times businesses are not willing to actually retain good professional advisors to help them through the process and I think he’s been highly profitable but he hasn’t wanted to spend the money for that, so.

Yelena:            And it’s completely understandable. If you’re a small business, you don’t want to spend all this money up front on professional advisors. But, you have to because you will pay more later.

John:                I think another thing about getting people involved early is we’ve seen a couple deals that have gone south after the letter of intent’s been put in place, and once they talk to their CPAs and they found out that the dollar amount stated in there is not going to be anywhere close to their after tax take home, after everything is netted out and then all the sudden the deal just doesn’t look quite as fun.

Yelena:            Do your due diligence. You don’t want to be finding out through the process oops, I haven’t done this, this is not right. I’m sure there will be some questions but you don’t want to have major surprises.


Thoughts on Stock Transactions

John:                There’s another aspect of structuring deals, which is sometimes a consideration that the seller receives in the deal, of course, and sometimes they’re actually paid not in cash but maybe stock. What are some of the considerations that come along with that?

Yelena:            This happens quite a bit. From the tax perspective, you need to make sure that it’s structured properly, because you may end up in the situation where you have to pay tax on the whole consideration, including stock, which obviously is not going to be a very favorable deal for you. So make sure that it’s structured the right way where you only pay tax on the cash portion of the deal. From that perspective yes, you can defer tax from the stock portion, but you also have to believe in the company that is buying you, right? Because where the stock is valued at who knows how much right now, it can go down in value in the future. Some people really love those types of structures because they know they don’t have to pay tax now. They believe the company will be sold later. If they have a good indication and they’re involved in the company obviously, to make that happen, then yes, we would support that but if you’re detached, if you’re not involved in the business anymore and you  let somebody else run everything, you may think twice before taking stock.

Evelyn:             If that’s true, that’s probably more of what I would consider a fire sale of a business because you need to get out of it, but it actually does give you the potential, although it might be slight of a benefit going forward.

Michael:          Sellers often get nervous about receiving stock in a sale transaction.   Accordingly, it is important to obtain information on the financial wherewithal of the buyer.  So, a lot of times, the seller will engage Aprio to do financial due diligence on the buyer and that due diligence could be just to understand the financial wherewithal including gaining an understanding of the normalized EBITDA of the buyer.  This  helps them make a more informed decision on the ability of the buyer to continue as a going concern.

Evelyn:             That’s really important because particularly in a private company scenario, you usually have executives that are fantastic promoters and it’s going to be fantastic. We’re going to go public in two years and your life is going to be just so supreme, you’ll be so multi wealthy but taking that information just direct without the sophistication level of being able to really analyze it from a distance. I don’t think most sellers actually have that skill.

Michael:          Yes, I’ll make one other point related to the seller’s relationship with the buyer in a stock transaction. You would typically see that the seller would probably continue post transaction with the merged company. It is the seller’s responsibility to spend time with the buyer, develop a rapport and a trust, but also gain an understanding of what this partnering relationship really means. It’s not only the roles and responsibilities but ultimately what is the business plan? How does the buyer take the sellers products or services? How does the seller take the buyers products and services? Merge them together and go to market together and show accretion to both parties, to any shareholders in the merger transaction.

Evelyn:             I think that’s critical, particularly where you’ve got a founder operated business. Founders generally have to stay after the transaction for some amount of time, regardless of what your business is, and we’ve certainly seen situations where you’ve got a private equity owned company that is the buyer of maybe a two person founded company that has a profitable business but that whole combination of how do I change the way I do things while I’m with them and potentially watch someone take that, which I’ve built over the last 14 years or 20? And change the nature of it so substantially in just a short amount of time? So, we’ve seen that from a consulting perspective, if you will that can actually be a really big challenge for sellers.

John:                A question Trusted Counsel often gets asked is the idea that when a company takes some sort of stock as consideration for selling their business, and how easily can they then sell that stock later? Exit event from your acquirer, it’s going to be pretty difficult to get rid of that and cash in on it. But, people aren’t aware that there’s not necessarily a public market for that sort of consideration.


Earn Outs

Evelyn:             Michael can you give us your definition of an earn out and its impact?

Michael:          Earn outs are a tool used by a buyer to compensate the seller for performance in the future, or an event that will happen and the seller will get compensated for that. It definitely is a commonly used transaction attribute in consideration. Buyers absolutely use that earn-out to mitigate risk in the form of not over paying for a transaction, but also acknowledgment that they need to reward the buyer for increased profits, revenue achievement, gross margin achievement, some event that’s going to happen in the future and usually the seller is going with the buyer in the transaction, so the seller has the ability to execute, to accomplish that earn out scenario. But it is something we often see in many transactions in all industries of all sizes, and there’s risks on both sides. There’s certainly opportunities if properly structured.

Yelena:            It’s definitely one of the ways for the buyer to make a seller stay on and be as engaged as possible because obviously money is still on the table. From the tax perspective normally, you would just pay tax on money when it’s received. Normally it would be capital gain because, whether it’s a stock sale or asset sale, that’s going to be considered a capital gain  portion of transaction. There are some cases though where you can determine earn out at the time of sale. Sometimes it’s a little bit easier to determine when you know, okay, I’m definitely going to earn this much with this new company and at least I will get this amount of money through earn out. If that’s the case, sometimes you may have to treat it as an installment sale and  the detriment of that is that you have to apportion your basis. So, you may not be able to deduct all of your basis in year one, but you may have to apportion it for future years as well.

Evelyn:             That’s basically in a situation where I have an earn out, but I have maybe a contract for years, where I have committed revenue coming in?

Yelena:            Right. When it’s more determinable. When it’s almost not a contingency. But more guaranteed that at least you will get this much.

Evelyn:             Right.

Yelena:            And unless, I don’t know-

Evelyn:             Everything goes upside down-

Yelena:            Something really bad happens-

Evelyn:             Right.

Yelena:            You will get this money.

Evelyn:             Right.

Yelena:            Normally we see more situations when it’s not determinable, it’s definitely full contingency so you can take advantage of the basis deduction in the first year but it’s a deal by deal basis.

Evelyn:             So, what about a situation where there is an earn out and the founder is required to stay in order to get the earn out?

Yelena:            Yes, you can still defer it, not treat as installment sale, you can still apply your basis deduction in the first year because even if the founder is required to stay, there’s no guarantee, right? He may stay, the company may go upside down, they may not reach the target.



CPAs role in Due Diligence

John:                Michael, can you take us a little bit through what the CPA’s role is in the due diligence process?

Michael:          At Aprio, we work with numerous clients on their sale transactions. How do we best prepare them for the sale? How do they get ready to execute on a transaction? It involves various areas of our firm, whether it is valuation, if we’re not doing valuation work, we potentially would be doing the assurance work, the audit work as well as the tax work. And I come in to really help with the due diligence and structuring of the transaction. From a due diligence perspective, we want to ensure that you, as the seller, know your financial statements, know what your revenue is, know your normalized EBITDA, know your working capital and then think about how we can go about getting the most value in a transaction and that very much involves normalized EBITDA. So, we help our sellers look at their financial statements on a monthly basis, over a period of time, which is usually a 24 to 36 month period of time, to identify any one time, non-recurring, non-cash, unusual items that you as seller, may want to consider for presentation to buyer as a normalized EBITDA.

Normalized EBITDA is earnings before interest, taxes, depreciation, and amortization and the normalized piece is the add back of those one-time non-recurring items. And that’s important. You want to get to a number that is supportable in the diligence process because deals typically are priced based on that normalized level of EBITDA times a deal multiple. So, every adjustment that you find, times that multiple could be additional transaction consideration being paid to a seller. We help our clients make sure they understand what their historical cash flows of the business are when representing that to a buyer. We try to make it bullet proof so, in order that the buyer, when the buyer comes in with their due diligence providers or themselves or both, that the process is that much more efficient. That buyer can get through the transaction that much faster, that we know that you as a seller know of any skeletons in the closet, issues that a buyer may identify through their due diligence and, you as seller, will be better prepared to describe and talk about what those issues are and how they’re being resolved, how they’re being addressed.

So, that’s on the financial due diligence side of the world. As we previously indicated, my partner Yelena Epova, talked about the stock, the tax implications of a transaction and making sure you’re appropriately structured and going into the transaction, that you as a seller, think about what’s going to  give you the greatest amount of net cash proceeds while mitigating any future risk that the buyer does not ultimately want to acquire.

John:                A lot of buyers can be placated with a sufficient explanation. A lot of a deal is about allocating risk and I think it’s scary to them if someone doesn’t have an explanation for something that they find during that process.

Michael:          What I’ve described is more on the historical financials perspective. And the historical financial statements are very important to a buyer because they definitely serve as a baseline for the financial model of what the future could look like. It’s very important for you as a seller to make sure you have financial statements that are in accordance with GAAP. Also, that you know the story behind those financial statements in order to build rapport with the seller so that the seller can put together a financial model that drives value accretion into the future.


Levels of Financial Statements

John:                Can you take us through the different levels of financial statements that someone might be required to give in a transaction?

Michael:          Sure. One is just the internal financial statements of the business. They haven’t been audited, they haven’t been compiled nor have they been reviewed by a third-party accountant in the form of a financial statement review. The second would be compiled, which really is just an auditor or an accountant taking financial statements at face value from internal financial statements and putting them on a CPA’s letterhead. Reviewed financial statements give a little bit more assurance, but is not as high a level of assurance as an audit. The financial statement review gives a reader of those financial statements, a little bit more comfort that the financial statements may be in accordance with GAAP, and that the third-party accountant did perform certain analytical review procedures, but there’s no audit comfort, there’s no substantiation of account balances. And then an audit gives you the highest level of assurance that the financial statements are free of material misstatement and in accordance with GAAP.

Evelyn:             Often, clients do not necessarily know what GAAP is, generally accepted accounting principles. If they have a CPA that is actually internal to their company, they assume that they are GAAP compliant and I think it’s very important that private companies that have not done external investment know that they are unlikely to be GAAP compliant. You know, it doesn’t mean that their financials are manipulated but they are run in a completely different manner.

Michael:          Right. And so the output of our sell-side due diligence, which is customary these days, is that that seller is getting a report from us as a diligence provider that shows the normalized EBITDA of the business while considering the U.S. GAAP accounting that is required or suggested right? And so that report can ultimately be shared with an investment banker going out to market your business. But it also can be shared with co-investors and lenders. That report can be shared with lenders or co-investors and certainly the ultimate buyer. And what does that report do for the seller? It really discloses the information that a buyer would ultimately be looking for. It creates a more efficient process and a lot of credibility throughout the process.

John:                Are there certain rules of thumbs for the different levels of financial statements in a transaction where it’s, you should have known, this is a big enough transaction, you were going to have to provide audited financials or at this level, you can probably get away with not having anything?

Michael:          It definitely varies from transaction to transaction. We certainly see on the larger transactions that audited financial statements are required, and then when you get into some of the middle market transactions, they are certainly highly requested and certainly recommended, but the diligence reports that are put out from a sell-side perspective, are put out by CPAs who know U.S. GAAP. It’s not an attestation report, but it is a report that’s used by buyer and seller for information purposes to really say, this is what the financial statements look like, or would look like on a normalized basis while considering U.S. GAAP.

Yelena:            There are circumstances when there is a really large company buying a very small company and, in that case, maybe an audit is not as important to them and sometimes also when they’re just interested in the product itself. If they know the product really well, they don’t care about the audit as much.

Michael:          That’s a very good point and every buyer is a different size, industry, what their strategic direction ultimately is. And so, the buyer has a multitude of diligence streams from the financial due diligence to the tax due diligence to legal, to commercial operations, HR, environmental, etc. There are lots of different streams that the buyer uses to make their transaction decision. Maybe no one more important than the other, but collectively, buyers take all that information, package it up, in order to make their final decision of whether or not to execute on a transaction.

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