Top 3 Financial Considerations for Acquisition

The goal for most startups is acquisition. Being acquired shows that your company has a successful product and your hard work and long hours have paid off. But there’s a lot of work to be done for the acquisition to be successfully executed. As you’ll know from funding rounds, investors do their due diligence to see if there are any deal breakers in your books. With acquisitions, that due diligence is more extensive because the investor is buying 100% of your company. Ultimately, they require information to show that your company is profitable and therefore worth acquiring. 

Getting through the acquisition process requires financial statements, realistic projections and compliance with tax and other regulations. Without these, your acquisition could fall through or the prospective buyer might offer a lower valuation. To avoid these problems, you need experienced accountants to help you through the process. Ultimately, accountants provide the information to backup the viability and profitability of your business. Here are three key areas that an accounting firm can help with during the acquisition process.

1. Providing Accurate Financial Statements

As investors did during funding rounds, potential buyers want a full financial accounting of your business. Accountants provide financial statements with this information, including: 

• Assets
• Recurring monthly and annual revenue
• Your tax status, including compliance and any liabilities owing
• Historical growth
• Cash flow
• Potential cash injections
• Growth projections for the future 

Beyond this, accountants create reports for the board on any performance indicators that they require. What’s important here is that you have experienced accountants to provide accurate statements and attainable financial projections. Failing to account for cash shortfalls or providing unrealistic projections can undercut your sale.

2. Determining Your Valuation

Financial statements are important in and of themselves – they show whether or not your company is profitable and, therefore, whether it’s worth acquiring. But they’re also necessary for valuation purposes. Figuring out your valuation involves assessing a number of factors:

KPIs

You need to know your key performance indicators, including historical and projected growth and sales, and the basic financial status of your company, including cash flow. Again, these numbers need to be accurate and realistic. If you want to value your company at $100 million, you need to be able to show figures that can back this up, including growth over your company’s lifetime, increases in annual and monthly recurring revenues, and the prospects for continued growth into the future.

Competition

You need to know the market for competitors and how you stack up in terms of growth and other performance indicators.

Historical Financial Information

You need to know your valuation during previous funding rounds as well as growth since that time.

Buyer’s Background

You need to know your buyer’s background and why they are looking to acquire you. If they are an equity firm investing for financial reasons, the valuation process may be more formulaic based on assets, debts, and other financial figures. If they are acquiring you for strategic purposes, the valuation may be higher and more negotiable, as the company is interested in your product or technologies because they have a synergy with the acquirer’s existing business.

During acquisition, accountants are constantly guiding CEOs and founders on when and where they should be positioning themselves in terms of valuation, including supplying them with the financial statements and projections to back up their position during negotiations. Particularly if this is the first time you’ve gone through an acquisition, it’s necessary to have experienced professionals helping you through the valuation and negotiation process.

3. Staying Compliant

Tax Compliance is the main arena of accountants during the acquisition process. First and foremost, you want to be able to show prospective buyers that you have stayed compliant and they won’t be liable for any tax issues. Beyond this, because share structures and ownership change, compliance issues become more complicated. 

While things are more streamlined if you are an entirely Canadian company being acquired by another Canadian company, more complications arise if the company acquiring you is based in the US or elsewhere. In the former case, the company retains its Canadian Controlled Private Corporation (CCPC) status. But in the latter case, that status changes. With the different statuses come different tax rates and considerations. Similarly, different rules apply to different statuses for claiming the Scientific Research and Experimental Development Tax Incentive (SR&ED). 

Finally, you’ll need to complete “deemed year end” taxes. Even if your acquisition closes on March 31^st, you’ll need to file a tax return for the 3 months of the year you owned the company. Executing these aspects of the acquisition and remaining compliant through the process involves utilizing accounting experts who know the ins and outs of the tax regulations you are under.

Acquisitions with NOVAA

More often than not, acquisition is the outcome that companies are looking for – a realization of the dream that your company started with. Given the complexity of acquisition, realizing this dream requires the help of experienced professionals who have been through the process and can help you navigate it, avoiding any deal breakers or disappointments in valuation.

NOVAA is a technology-forward accounting company that uses advanced financial tools to help you realize your company’s goals. We have years of accounting experience and an established record with acquisitions, including for technology companies. We view ourselves as part of your team and can answer the due diligence potential buyers will demand of your company during acquisition, whether it’s financial statements, valuation, or compliance.

For more information on how NOVAA can use its experience and track record to help you realize your acquisition goals, book a consultation.