Business owners need valuations for many reasons--a divorce distribution, shareholder actions, financial and tax planning, estate and gift tax calculations and mergers and acquisitions (M&A), for example. Although companies that merge with or buy another business hope to make more money as a couple than each would have alone, useful M&A business valuations depend on more than just finding your client a price. M&A differs from the other reasons for valuations in that an actual arm's-length negotiation (not just a written report) takes place. This article describes differences between merging and acquiring for CPAs advising a client that will buy or merge with another business. (For more information on M&A and BV training, see "Signed, Sealed, Delivered," page 30.)
The differences between merging and acquiring are important to valuing, negotiating and structuring a client's transaction. Acquiring another business lets owners
* Establish a base. Obtain a going concern in a particular location.
* Establish a niche. Bring in more business of a certain type.
* Increase productivity and profitability. Increase output with unchanged fixed costs, yielding higher profit.
* Expand geographic coverage. Obtain entry into adjacent market areas.
* Increase prestige. Drive company value up.
Merging offers the above advantages and additional ones, such as
* Succession planning. A way to secure retirement though new ownership.
* Reduced work level. A way to share responsibility among more people.
* Security of a larger organization. A way to cope with larger competitors.
A CPA/valuator should know a client's industry well and have training in procedures for conducting an economic analysis of a business. It's also important to avoid bias, says New York-based Stanley Person, CPA: "Be objective. Don't put yourself in the position of it even being implied that you're too close for objectivity."
The AICPA Code of Professional Conduct requires that members provide only services they can complete with professional competence. In business valuation they also must comply with the professional and technical standards under the Statement on Standards for Consulting Services. Even experienced CPA/valuators may need an outsider to conduct valuations for clients they have grown close to, especially if they have helped build value for a longtime client. (See "A Nice Niche--If You Minimize Liability Risk," JofA, Feb. 01, page 49.)
Caveat: In mergers, a target often allows the acquiring company to pay for the valuation, but some CPA/valuators caution that it makes the acquirer dependent on information owned by the party on the other side of the table. Others say a valuator that is jointly hired by merging parties can be fair to both of them.
In general, CPA/valuators will need the target's business history, projected and historical financial data, ownership records, information on products and services, sales and marketing data, and supplementary information on banking, legal and contractual relationships, says Philip Hamilton, CPA/ABV, in Austin, Texas. In an acquisition, each company hires a valuator, and the acquirer's valuator reviews the target's business history; in a merger, one valuator may work with both parties.
Before the valuator begins work, the client(s) must compile company data that include financial statements and tax returns for three to five years; an accounting of all outstanding receivables and payables; the actual value of inventories; identification of suppliers, vendors and key customers and the percentage of business tied to each relationship; equipment, including its age; industry, geographic and market comparisons; sales and other projections; resumes of key personnel; the most recent business plan; published corporate literature and press articles; and the percentage of revenues dependent on each product line or service. …