If opportunity knocks – is your business ready to be sold? Could you pass inspection?
The market for M&A activity is very high in a number of industries. Opportunities to sell may present themselves when you least expect it. Our advice is that you should be ready to be ready. With that intention in mind, here is a list that will get your business prepared for due diligence.
- Make sure your bank accounts and credit cards are reconciled up to the date of your last month-end.
I am often told by business owners that their books are up to date. But yet we commonly discover that bank accounts and credit cards haven’t been reconciled in a long time. What’s the big deal? If you don’t reconcile the bank accounts with your accounting software you don’t know if you are missing transactions or potentially double counting others. Ask your bookkeeper to confirm that all bank accounts and credit cards are fully reconciled.
- Use your business banks and credit cards for business purchases only.
Not for personal purchases – keep them separate. It will cut down on confusion for establishing a valuation, simplify reporting and reduce bookkeeping time. If you are thinking – “I know I know but sometimes it is just more convenient” then consider the cost. Transactions have to be recorded and then reconciled. Your bookkeeper has to request receipts. This can mean up to 10 minutes of bookkeeping time spent recording personal transactions. At $60/hr this could mean the equivalent of a $10 service charge for a single transaction. Would you run it through the business if it meant paying $10 more?
- Get on top of your A/R.
Do you have client invoices that are outstanding more than 60 days? Run, or ask your bookkeeper to run an Aging Receivables report and then make a focused effort to collect on anything outstanding more than 60 days unless you have great confidence that they will be paying up in the next week or two. Get this report cleaned up now. Make a conscious decision about any amounts to be written off and ask your bookkeeper to make sure the entries are completed now. You don’t want to be highlighting write offs during due diligence so get this spring cleaning done now.
- Make sure your T2 and Industry Canada filings are up to date.
Any acquirer will ask for your last year end statements. When is your fiscal year end? Did you file your T2? And did your Accountant provide your year end financials? Make sure those are done. And also make sure your Industry Canada filings are up to date – they are often forgotten in the day to day.
- Is your HST filing up to date and any amounts in arrears paid?
My lawyer told me that HST is one of the sneakiest killers of M&A. A common closing condition is attesting that HST has been paid up to date. If it hasn’t, you need to have enough time for CRA to receive and register a payment. Believe me the last thing you want to have standing between you and the sale of your business is a government employee struggling in a work from home situation in a pandemic.
- Clean up your balance sheet.
Business owners do a pretty good job understanding Income Statements (aka P&L). But how often do you even look at your balance sheet? Year end adjustments are generally a result of ‘spring cleaning’ the balance sheet at year end. Go through each line item with your bookkeeper and make sure you agree with the ending balances.
- Make sure you can show 3 years of monthly revenue by client.
If you are SaaS, you’ll want to make sure you have 3 years of MRR by client. If you only have basic bookkeeping in place this may take some time to compile as basic bookkeepers love to default to journal entries that bulk expenses and revenues instead of recording each transaction independently. You may need to reconstruct the information from either a CRM or in excel.
- A buyer will be interested in understanding your spend by vendor.
Again, weak bookkeeping is going to be a problem because the old school ways group transactions and only mention vendors in memo notes. A memo note is a description but is not a taggable variable so reporting becomes very tedious and time consuming.
- Payroll is a key area of focus in M&A.
There are things you can do today that will put you in good shape for acquisition. Make sure you have signed copies of all employment agreements on file. Create a master employee worksheet that lists employee names, titles, birth dates, start dates, current salary, most recent salary increase, any commissions or bonuses, the number of weeks vacation they are entitled to and the amount of their vacation and commission balances that are owing as of today. Don’t forget to include any staff that are on leave (long-term disability included).
Make sure you have copies of any client agreements as well as any leases or loans.