Cashing out at the Top: Selling a Company with a Bill of Goods

By Miller, William F. | Strategic Finance, July 2011 | Go to article overview

Cashing out at the Top: Selling a Company with a Bill of Goods


Miller, William F., Strategic Finance


The IMA [R] Committee on Ethics and Raef Lawson, CMA, CFA, CFP, CPA, Ph.D., VP of Research and Professor-in-Residence, are proud to announce that William F. Miller, CPA, Ed.D., has won the Best Case Award in the fifth annual Carl Menconi Case Writing Competition for his case, "Cashing Out at the Top: Selling a Company with a Bill of Goods." The competition is named in memory of Carl Menconi, who held leadership positions in IMA for many years and served as chair of the IMA Committee on Ethics.

The objective of the competition is to develop and distribute business ethics cases with specific application to management accounting and finance issues and that use the IMA Statement of Ethical Professional Practice as a reference or guidance tool. The winning case and teaching notes are available for use in a classroom setting. IMA academic members may obtain the teaching notes from Tara Barker at tbarker@imanet.org. Others who want to use the case and notes for additional purposes should also contact Tara.

In November 2005, Contrarian Corporation's owner and founder, Theodore Monet, realized that his company was quickly outgrowing his abilities to lead it. To help transition the seven-year-old company from a small regional firm to a nationally recognized one, Monet hired a number of new executives, including John Stuart as president and Joe Hart as the new CFO. With the help of these new managers, Contrarian grew from having $30 million in annual revenue to just under $100 million in a little over two years.

In early 2007, recognizing the success and value of the company, Monet decided to sell Contrarian. He received written offers from eight potential acquirers. Monet chose to go with the highest bidder, a publicly traded company whose bid was 5%, or $5 million, higher than the next highest bid.

Due Diligence

When one company makes an offer to purchase another, it does so based on a general review of the operations, and the offer is subject to a more in-depth review of all aspects of the company being acquired. This detailed review is known as due diligence. Depending on the size of any given deal, this process can take anywhere from a couple of weeks to a year or more to complete. Due diligence for the acquisition of Contrarian was estimated to take 90-120 days from offer acceptance to deal funding.

During due diligence, the acquiring company (suitor) looks at all aspects of the target company: It reviews historical, current, and projected future performance; interviews customers; meets with the company's senior management; and performs a detailed review of the product and or service the company produces or provides. The suitor typically hires a CPA firm and a law firm to help it complete this process. The hired professionals will have a list of documents they want to review and will identify the customers and employees with whom they want to meet. To perform this analysis, these professionals create a SWAT team of sorts that includes members from the suitor's operational departments, such as Finance, Operations, IT, and Human Resources. The depth and breadth of this review is rather fluid and will change based on the size of the deal and what the team finds during the process.

The due diligence review provides the suitor with comfort regarding the decision it has made to buy the company and the price it has offered to pay. The process also protects the target company from litigation after the deal is closed by allowing the suitor access to any document it requests and needs to make an informed decision.

[ILLUSTRATION OMITTED]

The due diligence process is unique in that the goals of the suitor aren't the same as those of the seller, and they are often at odds with each other. The seller wants due diligence to go smoothly and not have anything occur that might result in a reduction of the agreed purchase price. The suitor, however, wants to pay as little as possible for the company, and the due diligence process provides an opportunity to uncover a problem and potentially lower the price. …

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