Calvetti Ferguson

Preparing for Liquidity Events

Preparing for Liquidity Events by Joe Gubic, CPA, Partner

There is a significant amount of private equity capital waiting to be deployed into businesses. The fundamentals being sought are profitable businesses with a good model for growth. Having a market with investors seeking new ventures to deploy their capital, and competitors wishing to bypass organic growth, provides an opportunity for business owners to leverage liquidity options. Specifically, maximizing the value of your business in order to successfully execute a future liquidity event.

Audited financial statements are key for current and potential stakeholders to determine the value, credibility, and future viability of a business. Potential investors will use the audited financial statements to understand the potential effects of a business acquisition or buy in and how it will fit into their strategic plan.

A potential investor will provide an initial offering price based on a business’s “EBITDA” (earnings before income, taxes, depreciation and amortization.) The EBITDA calculation reflects a company’s financial performance and essentially adds back to net income any recorded tax, interest, depreciation, and amortization on the statement of operations. Generally, the higher the company’s profitability, the EBITDA multiples result in a higher price offering. However, the offered price is not always the final price. Once a potential investor sends a letter of intent, the financial performance of the company must stand up to the investors due diligence. The due diligence process is intended to prove or disprove the historic and anticipated future financial performance of the business.

During due diligence, the investor will analyze and verify the historic profitability presented in the financial statements. Having audited financial statements will expedite the process as they provide assurance to the investor to rely on the historical financial performance presented. Investors are looking for suitability of cash flows and revenue growth. Issues such as reliance on very few suppliers or customers, obsolete inventory, and aged receivables and payables will all affect cash flows and be uncovered during due diligence. Ultimately, this could lead to negative adjustments in the price.

While this price will accurately reflect the investor’s offer, it is prudent to realize once a letter of intent is signed, negotiation leverage can transfer to the investor. These negative adjustments would have been uncovered by audited financial statements and steps could have been taken to increase financial performance and maximize the value of the business in advance of the liquidity event. To prevent such negative adjustments from decreasing the offering price, it is a prudent decision to invest in the process of a financial statement audit each year and ready your business for a future liquidity event. After all, maximizing the value of your business and ultimately your net worth is a good deal.

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