Sold! Navigating your client through a business' sale.

The climate for selling a business today is about as good as it gets. Low-interest capital is available through almost every conceivable source, including private equity groups, company buyers and lending institutions. Buyer expectations of returns are as low as anyone can remember; tax rates for sellers are low; foreign buyers lurk behind every corner; and the stock market is supporting earnings ratios that almost defy description. On top of all that, inflation remains in check, the economy appears to be gaining strength and the supply of seller surrounds us.

So, why not get in on a good thing? Well, there are a few reasons to be cautious.

Besides the army of competition from business valuation firms and other CPA firms, and the training and experience necessary to do the job, there are legal and financial risks. Among the risks are licensing requirements, due diligence requirements and financial responsibility for obtaining or using confidential information.

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Still, if you're confident in your abilities and want to increase your value to clients, suggest to them a valuation study, which can serve as the first step of an examination of exit strategies or business succession plans.

Be aware, however, that the process of seeing a business through its sale can take anywhere from a few days to more than a year for more complicated deals.

FIRST STEPS

Some of the more obvious services CPAs are trained to offer business sellers include comparative exit strategies; valuations; developing criteria for buyer selection; financial evaluation of potential buyers; tax structuring; tax and accounting review of transaction documents; negotiations with potential buyers and lenders; and monitoring earn-out provisions.

If your client agrees to a valuation study, the first task is to prepare an engagement letter detailing the services your firm will provide, with each service priced separately, then get the letter signed by the client.

Next, assemble a team of qualified professionals, rather than have your firm attempt to cover all the bases. At a minimum, the team ought to include an attorney and an investment banker, who can help with legal requirements such as drawing contracts or those tasks that require licensing.

Also, there is a veritable thicket of security rules and regulations related to raising capital and brokering business sales that makes a professional who specializes in these areas the only logical choice for the team member to cover this aspect of the sale.

CPAs should be aware of the profession's ethics requirements, most notably Ethics Ruling 101-3, and should also ensure that the activity is covered by their professional liability insurance.

LET THE SELLING BEGIN

From developing a business profile to identifying potential buyers to negotiating a deal, there are a number of steps involved once a client decides to sell the company.

Valuing the business--The first question your client will ask is, "What's my business worth?" The only reliable pricing model that I'm aware of is based on discounted future cash flows. Quoting "multiples" will leave you vulnerable to being embarrassed by more experienced appraisers. Call in a business valuation specialist if you are unsure how to proceed. If you don't know one, a good place to begin your search is at www.calcpa.org/LIT/business.htm.

Developing a business profile--Interview your client about the business' profit sources and how they developed their business strategies. Understand where the business fits in its industry and among its competitors. Often, it is helpful to inquire about whether or not some of the business expenses are "owner benefits" (such as baseball tickets for client entertainment) and will not be continued after a sale. If that is the case, the financial information should separate these items and add them to the previously reported profits.

Confidential business review--Turning the profile into a confidential business review requires adding historical financial data (in significantly greater detail than generally found in financial statements) as well as adding detailed forecasts of future periods. In addition, the profile must describe the company's products or services, economic base, vendors and customers, basic industry and economic future.

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As job candidates must sell themselves in their resumes, so must this review sell the business. The profile often represents the primary source of information from which prospective buyers will make an initial evaluation of their interest in buying the business. If creative writing is not your strong suit, ask someone else on the team--or hire someone--with the skills to write the profile. Be sure to obtain input from your client and every team member before the profile is finalized.

Selecting potential buyers--This is best left to the client--who may not want competitors or others to know that the company may be for sale--and the investment banker. Their experience in the market is one of the most important reasons for their presence on the team. The client and the team need to agree on whether to seek strategic or financial buyers, or a combination of both.

Financial buyers are those who generally buy businesses for their income stream and count on existing management to continue to run the show, while strategic buyers are those who may be able to eliminate substantial redundant costs when combined with the seller's entity.

Confidentiality agreements--The job of preparing these agreements should go to attorneys, and one should be obtained from any party who receives a profile. Typically, the investment banker will communicate with the potential buyers to determine interest, answer questions about the business, and, if there is a potential match, begin the selling process.

Reviewing tax structure--As bids are delivered to the investment banker, you should begin reviewing the tax structure of each potential transaction. A buyer's requests or requirements will be the determining factor in which bid to accept, although pricing adjustments can be sought if tax factors are disadvantageous to the seller.

Selecting a buyer--Sellers always want to get the most they can from their business' sale, but choosing a buyer is not as simple as picking the highest offer. Other issues to consider when selecting a buyer include:

* The ultimate after-tax benefits to your client are more important than the actual purchase price.

* The form of the transaction requested by the buyer is important because some forms take more time to document and are more difficult to negotiate than others, particularly where a publicly held company is the buyer.

* If bids are close, the question of timing of the closing becomes paramount.

Reviewing transaction documents--This is an area where you can spend a great deal of time. One of the most important sections of any transaction agreement deals with "representations and warranties." The attorney must take the lead here.

As a CPA, there are many provisions in almost all definitive agreements where your skills can be of significance in terms of the business risks inherent in these provisions. For example, often the provisions dealing with financial statements need amending to reflect best practices.

You also can help to clearly and accurately define current and long-term assets and liabilities. If the agreement includes earn-out provisions, your skills will be key to writing these provisions since they are almost completely written in accounting terms and, typically, subject to audit.

Negotiating the deal--Really good negotiators are born, not made. Accordingly, if negotiating is not your strong point, stay out of the way of those charged with the task. Emphasis and timing are the tools of a proficient negotiator and interrupting your client's negotiator may create a disservice, even if you believe that you have an urgent point to make. It's best to settle this role in advance of meeting with the buyers.

Preparing for the sale--Helping your client prepare for due diligence reviews is one area where your services are most important. Most clients, particularly those for whom this is a first time experience, are nervous about giving a potential buyer access to the company's confidential records and key employees.

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It is best for the client to approach key employees with some candor about the possible future course of the company. However, for the rest of the work force, the less attention drawn to the due diligence team, the better. If practical, pull out the company's records and set up a data room at a remote location for the due diligence review.

Closing the sale--As buyer and seller approach the closing of the transaction, certain provisions of the definitive agreement will require agreement exhibits and schedules to be prepared. As a CPA you can offer value by supervising the client's clerical and bookkeeping personnel. It helps reassure the client that the exhibits and schedules will contain the requisite information.

However, in the final analysis, the attorneys are responsible for making sure that the team preparing the exhibits and schedules are aware of the information to be included on each exhibit or schedule.

If the definitive agreement includes earn-out provisions, monitoring these provisions may require more of your time. If you are going to undertake this monitoring, obtain, in advance, a detailed, separate engagement letter.

Selling a business may seem like a daunting challenge, given the amount of time and number of tasks that are usually involved. But by assembling a strong team, playing to each other's strengths and following a detailed plan, you can help your client hear the word they're looking for: Sold!

BY LOU SAVETT, CPA

Lou Savett, CPA is chairman of Santa Monica-based Gumbiner Savett Inc. and president of the California CPA Education Foundation board of trustees. You can reach him at [e-mail].