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Selecting the Right Advisors when Selling or Buying a Business

Professional advisors play a critical role in assisting buyers and sellers complete successful transactions.  Building a transaction team including legal, accounting, and financial resources that have the credentials, experience, and an expertise specific to the business size, type, and geography can be the difference between success and failure. With well over 1 million accountants and attorneys in the United States, selecting the right advisor can be a challenge.  The legal and accounting industries are broad making it impossible for any one professional to become an expert in all areas. As a result field specialization has become standard.  The purpose of this article is not to discuss “if” you should consult an attorney, accountant, lender and business broker when considering buying or selling a business.  This article is about selecting the “right” attorney, accountant, lender and business broker in forming your transaction team.  The expense is minimal when compared to the cost of a failed transaction, delays, a transaction with less than ideal terms and/or post transaction litigation.

Business Broker

Business brokers, also called business intermediaries, assist both buyers and sellers of privately held businesses navigate the complex process of buying and selling closely held businesses.  Similar to accountants and attorneys, brokers often specialize in certain size transactions (commonly referred to as either ‘main street’ or ‘middle market’). Occasionally, a broker or firm will also focus on certain industries. In most cases brokers represent the owner (i.e. seller) in the transaction. When selecting a business intermediary, you want to insure that they have specialized training and experience in managing business transactions. Also, it is important that the broker’s primary competency is in business sales, not a real estate agent that also sometimes sell businesses or an individual that does business brokerage “on the side”. There are a number of associations, certifications and credentials available to legitimate practitioners. The largest association is the International Business Brokers Association (IBBA) which facilitates the Certified Business Intermediary (CBI) designation program.   The CBI credential is awarded following rigorous education, experience, testing and demonstration of superior working knowledge of business brokerage skills. In states where there is no licensure of business brokers, it is even more important that business owners and buyers look for the credentials of the individuals and firms being considered to represent them.  Many business brokers have previously owned and operated a small business themselves. This experience is extremely valuable in understanding the complex issues associated with business transactions.

CPA

While most individuals will use the term “CPA” and accountant interchangeably, there is a significant difference.  CPAs are licensed by the state and the credential requires a rigorous qualification process involving education, experience and ethics, in addition to passing the comprehensive Uniform CPA Exam.  All CPAs are accountants but not all accountants are CPAs.  While the CPA credential carries enormous weight in business and financial circles it is important to recognize that, like attorney’s,  CPA’s specialize in a number of areas, some of which include:  tax, audit, forensic accounting, personal financial planning, business valuation, and business transactions with some CPA’s concentrating in either publicly traded companies or private companies. For prospective buyers of a business or owners interested in selling a company, the selection of the right CPA for the transaction team will have a major impact on the ultimate success of the deal.  It will be critical to retain a CPA who has an expertise in business transactions and preferably companies of the size you are looking to buy or sell.    As the size and/or complexity of a transaction increases, the need for innovative structuring options also increases.  Deal structure, financing, and tax management must be a proactive process addressed at an early stage.  By working with a CPA and carefully negotiating the terms and structure of the transaction, a business seller could walk away with a deal that provides a significantly larger economic benefit than a transaction that provides 100% of the proceeds at closing.  “There are countless tax strategies available to small business owners or business purchasers.  Regardless of how complex a tax strategy is, the optimal approach will be based upon a synthesis of both the seller’s and buyer’s personal tax situation along with the business itself,” stated David DeMarco, Partner of Byrd Proctor & Mills CPA’s.  For asset sale transactions, the ‘allocation of purchase price’ is a negotiated point in addition to the terms and conditions of the transaction.  Each type of structure carries with it different tax consequences for the buyer and seller, having a material impact on the overall value of the transaction. The type of business entity owned by the seller (C-corporation, S-Corporation, LLC, Partnership, or Sole Proprietorship) in addition to whether the transaction becomes an asset sale or stock sale will have significant bearing on the decisions made in structuring the transaction to afford maximum economic benefit.  Most successful transactions are achieved through the buyer and seller and their respective CPA’s working collectively to accomplish some level of tax parity creating a win-win deal.

Attorney

Lawyers typically specialize in a few of the typical practice areas, such as family law, personal injury, estate planning, environmental law, real estate, criminal defense, bankruptcy, and business law.   Although overlap exists within the business law category there are basically two types of attorneys:  litigation attorneys who handle lawsuits and transaction attorneys who deal with corporate matters, contracts, and business formations.   Selecting an attorney who works in the area of ‘business law’ is a starting point in the selection process and should not be viewed as an automatic qualification as an appropriate resource. Buyers and sellers of privately held businesses should select a business attorney with a core competency in business transactions specific to the size/price of the subject business who can provide recent examples of representation of buyers or sellers in similar transactions. Aside from providing advice on and the legal consequences related to the particular acquisition/sale, an experienced transaction attorney will easily spot deal irregularities and will be instrumental in eliminating the risk of future litigation between the parties.  Retaining counsel with significant experience in the drafting, execution, and administration of all deal related documents (non-compete agreements, promissory notes, consulting contracts, definitive purchase agreements, etc.) as well as the experience and skills to complete the legal due diligence, and payment & title transfer will be important aspects of the selection process.  “Engaging an attorney with significant experience in buying and selling businesses is a key part of the process and getting the attorney involved early, at the term sheet phase, can often result in significant cost savings in the long run”, advised Mike Roberts, a member of Sherrard & Roe, PLC.  The procedure in buying or selling a publicly traded company is significantly different than a main street business being sold as an ‘asset sale’. Retaining counsel who understands the regulatory and legal environment in which your business will operate and is able to knowledgably and efficiently navigate this process will be immeasurable.  Proper legal representation, whether buying or selling a business, is critical, because without it, potential deals may collapse and the participants may expose themselves to unnecessary litigation and liability.

Finance Company

Finance companies play an instrumental role in business transactions as most buyers utilize 3^rd party financing.  Lender involvement at an early stage prevents delays and provides the framework for structuring terms.  “Owners seeking to sell who consult 3^rd party lenders benefit from becoming well educated on the type of financing and terms that are available, the likely buyer down payment required for the loan and any seller financing commitments that might be required,” commented Steve Mariani, President of Diamond Financial Services. Those businesses that are distinguished as being ‘lender pre-qualified’ will increase their marketability, receive a greater response, and potentially decrease the time to closing. The credit market has tightened considerably over the last several years and from a buyer standpoint, securing financial capital is one of the most challenging components in completing a business acquisition.  Buyer pre-qualification for funding is highly recommended and provides immeasurable benefits.  Knowing ahead of time about the size of business that you can qualify for makes the buyer a much more attractive candidate to both Broker intermediaries and sellers. A buyer pre-qual letter, while typically free, can prove to be priceless in perceived buyer qualification.  An advisor knowledgeable on business finance will be able to give expert guidance to both the buyer and seller as to the type of financing that would be available based upon the size of the company, type and quantity of assets, amount of required funding, personal credit scores, industry experience, and business cash flow history. 

Valuation Company

In most business transactions, the company will be listed for sale at a specific price accompanied with either an ‘Opinion of Value’ or Business Valuation.  In addition to business sales, there are variety of situations where business valuations are needed such as:  creating an exit plan, obtaining additional financing, recapitalizing the business,  creating buy/sell agreements, ensuring appropriate insurance coverage, dissolving a marriage/partnership, determining a value for estate planning or estate probate purposes, and establishing an employee stock ownership plan (ESOP).  Business Valuation (BV) is a specialized field and there are a variety of credentials available, each requiring a different set of experience, testing, and related credentials.

  Detailed below is a listing of the BV Credentials:

• Certified Business Appraiser (CBA) – Institute of Business Appraisers


• Accredited Member (AM) / Accredited Senior Appraiser (ASA) – American Society of Appraisers


• Certified Valuation Analyst (CVA) – National Association of Certified Valuation Analysts


• Accredited in Business Valuation (ABV) – American Institute of Certified Public Accountants


• Chartered Financial Analyst (CFA) – Association for Investment Management and Research

Related designations held by professionals performing business valuation services:

• Certified Public Accountant (CPA) – American Institute of Certified Public Accountants


• Certified Business Intermediary (CBI) – International Business Brokers Association

The Uniform Standards of Professional Appraisal Practice, commonly referred to by the acronym USPAP, is often regarded as an “umbrella” set of quality control standards for business valuation and real property appraisal analysis.  USPAP is promulgated by the Appraisal Standards Board (ASB) of The Appraisal Foundation, whose standards were initially drafted by real estate appraisers. It is important to note that not all USPAP standards have been entirely embraced by the business valuation community, nor are they a mandatory requirement with all valuation accreditations. Additionally, each organization has its own set of standards that must be followed. 

 While business valuations typically involve a combination of three approaches – income, market, & cost (aka “asset”) - they can be performed in a variety of formats, with some much more extensive than others.  For a majority of small business ‘asset sales’, a business’s value is based on the market’s perception of the company’s ability to generate future economic benefits.  Even though historical results may be the basis for the value of the Company, they are used as an indicator or prediction of future benefits that can be realized by the business.  “There is often a disconnect between the different valuation approaches, and while all will be potentially subject to some sort of contrarian challenge, an experienced valuation analyst will be able to reconcile the differences based upon the unique characteristics of the subject business and the industry in which it operates.  Holding companies or asset intensive businesses may rely more on an asset approach to determine the value, while service-related businesses with few tangible assets are more likely to rely on the income or market approaches to determine the value,” stated Kurt Myers, owner of Myers Valuation Associates, PLLC.

When considering a business valuation, it will be important to identify the purpose, including whether it is being performed for court or IRS purposes, to ensure that the appropriate resource is consulted and that the proper valuation report is obtained.  It is also important to identify the proper valuation date.  Most business appraisers can prepare a Calculation Report, a Summary Valuation Report, or a Detailed Valuation Report.  The circumstances surrounding the need for the appraisal will usually dictate the type of report necessary for the purpose.  For business transactions involving 3^rd party financing, most lenders, prior to closing, are required to obtain both a real estate appraisal (when real property is involved) in addition to an accredited business valuation.

Summary

Business transactions involve a complex set of issues and many moving parts which require a complete array of advisors who understand their role and respect that the individual (buyer/seller) is the ultimate decision maker.  Owning a small business, without exception, includes accepting some elements of risk.  Each member of the transaction team fulfills a specific role and performs a variety of functions, most importantly providing guidance and advice allowing the parties to fully understand and quantify risks so that the appropriate terms and conditions are structured. While there will be instances that one or more advisor will provide complimentary or overlapping services, most experts agree that the maximum value is received when a transaction team is formed with independent professionals who possess a core competency within their respective fields (business brokerage, accounting, legal, finance).  “Anyone that can effectively and appropriately serve in all four capacities is either brilliant or more likely self delusional. A business intermediary cannot replace an accountant, lawyer, or financier any more than an accountant or lawyer can take the place of a business intermediary,” commented Jeff Snell founder of ENLIGN Business Brokers.  All four professionals are critical members of the team and it is in all party’s interest to have experienced advisors involved in the transaction as hiring the wrong advisor will, more often than not, cause the deal to fall apart or subsequently fail. It is important to recognize that while these experienced professionals can be a phenomenal resource, offering sage council and recommendations to help the buyer/seller in objectively assessing the opportunity, in many cases, conflicting advice can be received and the ultimate decision can only be made by one person – the buyer or seller. 

About the Author:

Michael Fekkes is a Senior Broker at ENLIGN Business Brokers in Nashville, TN.  Michael is a Certified Business Intermediary CBI®, a member of the International Business Brokers Association IBBA®, as well as a former business owner.  He can be reached at 615.535.1150 or mfekkes@enlign.com.  ENLIGN Business Brokers (www.enlign.com) is a Professional Services Firm serving the Southeast that is headquartered in Raleigh, NC with regional offices in Nashville, TN and Atlanta, GA. providing business intermediary services ranging from valuation and sale to exit & succession planning strategies.