Selling a Piece of the Family
When a company’s founders decide to sell, that’s a tough decision. When the company is a family-owned business, it’s even harder. Closely held family businesses that have never experienced a financial audit may have a hard time reconciling what they think the business is worth with what the market is willing to pay.
In the oil and gas industry, it’s common for businesses to be started as family-run enterprises. Later, these home-grown businesses reach a size where they become attractive to private equity firms or a large service company, and that’s where negotiations can get tense. What is the company truly worth, family feelings aside? What kind of financial data is available to support that valuation?
Weaver often sees this quandary arise for companies that haven’t previously been audited. For example, we worked with one business that originally had a selling price of $60 million and five interested buyers. During the due diligence process, three of those buyers backed out because the seller lacked adequate financial information.
Information, and Lots of It, Is Key
In the early stages of negotiation, the buyer typically wants an enormous amount of information as due diligence, so they can ensure they’re making the right decision. They also need to be certain they’re offering a fair price. In most cases, family-run businesses simply don’t have the necessary data, so they turn to consultants, including auditors.
Auditors may be thought of as a “necessary evil,” poking around in the books and asking unpleasant questions. The audit team audits the financials and eventually produces an audit report that provides buyers with reasonable assurance as to the accuracy of the financial statements.
Audited financial statements are usually issued during the middle phase of due diligence. The audit is performed then because its findings can change the outlook on financial trends, company performance and even the overall purchase price. Such changes are usually a result of routine audit adjustments — specifically, changes that result from converting financials prepared on a tax basis to the standardized GAAP format buyers want to see.
Most major audit adjustments are related to tax incentives: accelerated depreciation, bonus depreciation and accruals of both revenue and costs. Here’s the good news for sellers: the income statement typically improves when moving from a tax basis to a GAAP basis, because the seller is trying to show the best bottom-line results, rather than searching for tax benefits.
A Little Stress … And a Lot More Money
After having three prospective purchasers back out, the previously mentioned company eventually — reluctantly — arranged for a financial audit. When the audit started, the client wanted daily updates and a completion date. From their point of view, auditors were prolonging an already stressful transaction, and the seller couldn’t predict the result.
However, once the audited financial statements had been issued and due diligence was complete, the seller was pleasantly surprised by the final offer. Although the audit cost some time and money, it revealed a better balance sheet and earnings, due mainly to bonus depreciation on capitalized assets. And the final offer resulting from this new balance sheet? It increased to $130 million, more than double the first offer.
If you’re contemplating selling your business and have never been audited, consider that the value can far outweigh the cost. To find out more about Weaver’s experience with auditing (or valuing) energy companies, visit our oil and gas page or contact us with your questions.