When you think of finance and its place in your small business, what comes to mind? Like many of your fellow entrepreneurs, you probably think of it strictly as a means of short-term purchasing and collection. At the office of Ann Irons, CPA, we believe that your company’s financial statements have strategic value. If your strategic vision includes the possibility of a merger or acquisition, you’ll need someone who understands your position, appreciates the value of financial reporting, and shares your passion for success.
Due Diligence and Risks of “Going It Alone”
In our experience, even business owners who are knowledgeable about GAAP struggle to fully understand the implications of M & A accounting, especially given the unique requirements that differ radically from GAAP for general compliance and reporting. Four areas in particular are important in matters of due diligence.
Gross Margin and Inventory Focus
Mergers and acquisitions almost always fall through if one party cannot provide adequate information about its ability to manage inventory and margins. You should be able to answer questions such as:
- How often, if at all, do we physically reconcile inventory?
- What is our inventory turnover rate?
- Do I know how to segment our gross margin by product a
nd customer type?
Accrued Liabilities Focus
An acquiring company must evaluate your ability to record and manage various types of liability. Ask yourself:
- Do we record accruals on all expenses related to payroll, such as bonuses, paid time off, and sales commissions?
- Are we using deferrals, straight-line, and amortization of expenses, such as rent?
Recognizing Revenue Focus
Before investing in your company, an acquiring firm will analyze the means by which you recognize all revenue. You should be able to answer such questions as:
- Do we have any unique revenue sources, such as royalties or licensing?
- Do we use percentage-of-completion accounting? Why or why not?
Reserve Focus
Investors seek opportunities with companies that have solid reserves, which mitigates risk in both the short and long term. Reserve-related questions to answer include:
- Do we have sufficient reserves to cover us in case of excess inventory levels, chargebacks, and obsolescence?
- If we are unable to collect payment from customer accounts, will we still be able to meet our own financial obligations?
How Does Financial Reporting Answer These Questions?
The majority of investors will not consider negotiations with a company that does not or cannot provide quarterly financial reports. Although you could use historical data and records to piece together this information at a later date, most business owners would agree that it’s best to maintain them all along. Because doing so is a time-consuming process, many choose to enlist the services of a CPA for help preparing and analyzing financial reports.
Is your small business considering a merger or acquisition? To learn more about financial reporting and its role in negotiations, or to request a meeting with Ann Irons, CPA, LLC, contact our Bellingham, MA office at 508-966-0700. Irons, a graduate of the University of Massachusetts Boston, offers personalized bookkeeping and financial services to individuals and businesses in and around Boston, Bellingham, Woonsocket, Medway, and the surrounding areas.
Ann spent over 25 years in the financial service industry, gaining knowledge and experience that allows her to provide an array of tax, bookkeeping, and accounting services for her clients. Relying on a stringent code of ethics and a dedication to maintaining the highest industry standards, Ann works hard to ensure her clients receive the quality service they’ve come to expect. A member of AICPA and MSCPA, Ann has also had an article featured in the renowned publication, Banker and Tradesman. 
