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nutmeg grouser

buying an existing company HELP

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Jacksdad

CPA here as well.  Been involved in plenty of buy and sell situations including one for myself.  My feeling (as might be expected) is the process starts with a good CPA reviewing the deal.  

 

The tax aspects for small businesses are honestly pretty simple.  Valuing the business and looking for gotchas is where the pros earn their money.  Where i've seen attorneys earn their fee is protecting the parties if things don't go as planned after the sale.  They are also excellent at turning a simple process into an expensive and overly complex one.  

 

Hartmans advice about avoiding business brokers is dead on.  Avoid them like the plague.  

 

As an aside i'm surprised to see several CPA's on this forum.  Most i've met are soulless greedy bastards that get excited about money and sometimes golf and that's about it.  Encouraging to see there are some with a passion for such a beautiful pastime!

 

 

 

 

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Dave in Maine

Buying and selling businesses is the place "due diligence" got its name.

 

Once your attorney and CPA say it's ok to proceed toward an acquisition, you'll have to look at every contract, option, you name it, that the acquiree is involved in.  Every piece of real estate owned, leased, under contract.  Environmental claims?  Asbestos?  Insurance overage of the acquiree - what kind of policy, how much, limitations.  Are the books real, or are they a piece of fiction?  Do the valuations have some relation to reality, or not?  Does the property - real, personal or intellectual - actually exist?  Quality of title?  Liens?  Article 9?  And so on.

 

I was involved as a grunt attorney on an M&A during the late 80s summer of medical-waste garbage washing up on the beach.  One of the other grunt attorneys found a whole mess of medical waste on the acquiree's premises, stuff they hadn't gotten to the barge or dumped into the ocean just yet.  Instead of disposing of it properly.  You can imagine the sh*tstorm.  About 5-6 years ago I worked on a case where the board had fired the president/founder, who didn't take it well and sued to get control back.  We found (among other things) he'd had a personal jewelry-maker on retainer with company money to keep his wife and daughters in baubles.  Another case, 30 years ago, where an acquirer of a successor company was suing the estate of the founder, who'd sold out years before, over alleged environmental contamination.  A careful piece of drafting in the indemnity clause of the founder's selling-out deal documents from 20 years before resulted in not only dismissing out the founder's estate, but also the acquirer having to pay the estate's attorneys (me and my boss).  We'd told them about the language, pointed it out to them in an attempt to dissuade them from suing, but they didn't think it would hold up, went ahead and sued.  Ran up bills for us and them.  And lost.  Appealed.  "Affirmed mem." (In other words their appeal was so meritless it didn't need an opinion.)

 

The variety, depth and sheer audacity of chicanery that can go on in closely held businesses should shock anyone.  I like it because it keeps me employed.

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Chief Paduke

When choosing a CPA for this endeavor, look for one with an ABV specialization. 

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munsterlander

Great advice above.  There may be more good advice if you can offer some specifics, realizing you may not be able to... but general industry, or type of organization, or size, etc.  

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garyRI
On 3/14/2020 at 7:32 AM, SelbyLowndes said:

and a non-compete from former owners

Lots of great advice here. The above is one of my favorites.

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Speaks
On 3/13/2020 at 10:26 PM, nutmeg grouser said:

Anyone ever buy an existing  company and have favorable and or bad experiences? I would love your help about the process.

Thanks 

Three times this year, will put together some thoughts to post. Number one though doing it three times right before this Sh** hit the fan scenario will make life interesting for a bit.

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nutmeg grouser

OK - So here is some info. The company is in a mostly residential construction facet industry.3 generations old.The deal is through a broker. I am a little concerned about this. I am working towards finding a CPA to help with the offer process. The broker has said they will only give me some rudimentary financials, quickbook monthly comparisons for the past 3 years and a few p+l sheets, with  the confidentiality agreement signed and the hard core financials will be provided after an offer is submitted and agreed on. This seems backwards to me. 

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ARKBRDHUNTER
2 minutes ago, nutmeg grouser said:

OK - So here is some info. The company is in a mostly residential construction facet industry.3 generations old.The deal is through a broker. I am a little concerned about this. I am working towards finding a CPA to help with the offer process. The broker has said they will only give me some rudimentary financials, quickbook monthly comparisons for the past 3 years and a few p+l sheets, with  the confidentiality agreement signed and the hard core financials will be provided after an offer is submitted and agreed on. This seems backwards to me. 

 

Don't know if backward or not but would be a deal breaker for me. 

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nutmeg grouser

Should have stated that I have signed the confidentiality agreement and received the quickbook info. It looks great of course! But I know those numbers are 100% factual. But even if the are 30 - 40 % accurate it looks good. May be being optimistic.

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Dave in Maine
13 minutes ago, nutmeg grouser said:

OK - So here is some info. The company is in a mostly residential construction facet industry.3 generations old.The deal is through a broker. I am a little concerned about this. I am working towards finding a CPA to help with the offer process. The broker has said they will only give me some rudimentary financials, quickbook monthly comparisons for the past 3 years and a few p+l sheets, with  the confidentiality agreement signed and the hard core financials will be provided after an offer is submitted and agreed on. This seems backwards to me. 

This is definitely ass-backwards.  The broker (See Hartman's "run like Hell" advice) wants you to make an offer that they will agree to (i.e., that forms a binding contract) and only after that do you get to see the actual numbers.  You would be bound to buy the company at the offering price you'd give based on the "rudimentary" numbers, which could (and, given the way this is structured, almost certainly will) be widely at variance from the real numbers.  Moreover, you'd be stuck with all the liabilities of the company.  

 

Behind that, ask yourself:  "if it's a family company that's gone through three generations of owner/operators, why are they selling?"   Besides the family drama that likely lies behind, you are almost certain to find both (1) bad business/governance practices that came to be because the owners/operators had to accommodate family drama, and (2) longtime (key) employees who will leave because they find the cushy spots they'd wormed into over the years of ratifying the family drama (or being family members themselves, the teat they'd sucked not because of competence but rather family relation) have disappeared or turned into real jobs when the new sheriff came to town.

 

I can't tell you to tell the broker to go f*ck himself, but you should.  You're buying a pig in a poke under this structure.  

 

Hartman and other who do M&A regularly can fill out the details and I'll welcome their correction, but here's how it usually goes. 

1.  You and the seller sign a confidentiality/non-disclosure agreement which encompasses both you and your professionals - attorneys and CPAs - for the purpose of evaluating the company for the purpose of your evaluation.  The NDA also contains an escape clause that lets you say "no" and go away with no need to pay. 

2.  You've done your homework beforehand on what this company is worth and what it does - both businesswise and dollars-and-cents-wise - and you have an idea of what it is worth, both in terms of actual value and what you're willing to pay for it. 

3.  Under the terms of the NDA, the company provides you with the actual books - all of them - and limits knowledge of what's going on to a very few, select employees (so as to prevent freakouts, departures and so on that would affect both the business of the company, its reputation in the business world, and the composition of the employees.  You don't want key employees jumping ship when they figure out the company might be sold.) 

4.  Your professionals go through the books with the proverbial fine-toothed comb and tell you whether the company is real or a house of cards and what they think it's worth.

5.  If you decide to go forward, you place a good-faith offer on the table and haggle about price for the assets, etc., but not the liabilities.  if you reach a deal, then you own it.  If not, go away.

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co_setter
49 minutes ago, nutmeg grouser said:

OK - So here is some info. The company is in a mostly residential construction facet industry.3 generations old.The deal is through a broker. I am a little concerned about this. I am working towards finding a CPA to help with the offer process. The broker has said they will only give me some rudimentary financials, quickbook monthly comparisons for the past 3 years and a few p+l sheets, with  the confidentiality agreement signed and the hard core financials will be provided after an offer is submitted and agreed on. This seems backwards to me. 

There seems to be a lot red flags with this as they are being way too coy.  Most owners overvalue their businesses, wanting a lot of "blue sky" over the value of assets and I have seen those "assets" evaporate in a hurry.  I would look a the option of building a company from scratch as you don't have as many hidden gotchas.  I expect the construction industry as a whole to be heavily disrupted and I would be very careful at this time.

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Zoli 16ga.

I might go to their past clients and ask how the build went, warranty repairs, payments, etc. See if you can get in touch with their subcontractors, see how they were treated, payments, leans etc. I'm not a financial guy, but have been in construction for a few decades. It can be a difficult business, where debt can be pushed forward to the next project, and the next...till it comes home to roost.

 

For what it's worth.

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Jacksdad
1 hour ago, nutmeg grouser said:

OK - So here is some info. The company is in a mostly residential construction facet industry.3 generations old.The deal is through a broker. I am a little concerned about this. I am working towards finding a CPA to help with the offer process. The broker has said they will only give me some rudimentary financials, quickbook monthly comparisons for the past 3 years and a few p+l sheets, with  the confidentiality agreement signed and the hard core financials will be provided after an offer is submitted and agreed on. This seems backwards to me. 

 pass.  

 

qbks is useless for large construction projects as you have no way of knowing if costs are allocated to the correct projects and when those projects are substantially complete.  not sure what exactly you'd be getting for your money anyway.  the builders name is all you'd likely be getting for the money and any real value he provides would be his relationship with his subs.  that is to say just because the existing guy can get abc electric to charge him $xx to fit out a house doesn't mean you can.

 

tax returns and audited financials are useful.  everything else, and i mean this, is worthless.  

 

you wanna build houses then go do it.   

 

ps, all signs point to recession on the horizon.  

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FlyChamps
2 hours ago, Jacksdad said:

 pass.  

 

qbks is useless for large construction projects as you have no way of knowing if costs are allocated to the correct projects and when those projects are substantially complete.  not sure what exactly you'd be getting for your money anyway.  the builders name is all you'd likely be getting for the money and any real value he provides would be his relationship with his subs.  that is to say just because the existing guy can get abc electric to charge him $xx to fit out a house doesn't mean you can.

 

tax returns and audited financials are useful.  everything else, and i mean this, is worthless.  

 

you wanna build houses then go do it.   

 

ps, all signs point to recession on the horizon.  

 

I'm also a CPA.  QuickBooks works for small businesses but I'd bet that 90% need the oversight of a qualified bookkeeper or accountant to be worth anything.  Also, Jacksdad is correct that QuickBooks is is useless for large construction projects - I've been able to make it work to generate correct tax returns on the completed contract basis for very small sub-contractors and home builders but it is not the accounting system for any larger business.  It's used by many who just because it is cheap compared to real contractors job costing software.

 

Even more concerning is the "hold-back" of detailed financial information until after an offer is made and agreed on.  I would never advise a client to make an offer until after they received all financial information available.  After you sign a confidentiality agreement (no one will give you any information without this) you should receive EVERYTHING you request - if not don't walk away from the deal - run like hell.

 

I'm 71 and will be starting the process of marketing my accounting practice this summer (if Covid-19 doesn't screw it up).  Once I have a candidate sign the non-disclosure agreement they will have access to all of my financial and anonymized client information with no hold back.  

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Big Al

The broker probably doesn't have an exclusive listing and they are on a fishing expedition. 

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