Avoid Deal Delay With An Experienced Accounting Firm
Now that the Rehab M&A window of opportunity has reopened, you need to make sure you don't miss out due to deal delay. This week Paul explains how choosing the right accounting firm plays a crucial role in this process.
Full transcript
Generated from the episode audio and lightly edited for readability.
Good afternoon and welcome to another episode of the Martin Rehab M&A Advisory. I'm Paul Martin, founder and president of Martin Healthcare Advisors, and I'm excited to have you back with us today as we continue to navigate through this opportunity that we all see, which is the rehab industry and the M&A rehab industry window of opportunity has reopened. And we want any of you that are interested in potentially pursuing this market out there to be ready. Now, this series that we're currently in is designed to help you understand and master each step of this M&A process.
Why? Because we want you to stand out to the potential acquirers out there. Each acquirer out there has multiple companies that they are working with, working towards an acquisition of their business, partnership of their business. And again for you guys, we want to make sure that you are prepared so that you go to the top of that list because they do have a list. It's it's a draft board and we want you to go to the top of that list. So today, what we're going to be diving into is another essential component of building your team, and it's the role of your accountant and your accountant's firm to ensure that your financials are not just in order, but they're exceptional because that will move you to the top of that draft board.
So, let's get started. How do we ensure a smooth and efficient process and making sure that we're using the right accountant? Well, again, your accountant should be another piece of that puzzle ensuring what we call as a delayfree process. Absolutely important. When there are delays, you get pushed to the bottom of the list. You really want to make sure that your current accountant has resources within their firm to do a number of different things through this process. First and foremost is to ensure that your financial records, profit and loss, balance sheet are in tip-top shape, very clean.
We also want to make sure that at some time during this process, an accountant working on your side of the deal will have to participate in what's called the allocation of purchase price. Again, another important piece because that also will have an impact on the taxes that you will pay and it will have to match what the acquirers allocation is as well. You want to make sure that your accountant and accounting firm will have accountants available through due diligence that can quickly go to aspects within your financials and provide discussion items, provide responses to questions that the acquirer may have.
We certainly run that due diligence process, but we didn't create your financials, your profit, loss, and balance sheet. So, we want to be able to get to your accountant to answer some of those questions. And you also want to have within your accountant's resources an accountant that will be able to provide tax advice and strategies. Really, really important. So, why are proper financial matters in a deal? What why is that so absolutely crucial in a deal? Well, first and foremost, acquirers want to have confidence that your financials are 100% accurate.
Some people that we're finding now that especially with medium and larger size companies in order to make sure that your financials are ready for a due diligence process before you start a process having those financials either reviewed or potentially audited. You know, companies that are in that 1.5 million to two million plus range in terms of an EBITDA really should consider an audit because again, it will create a delayfree process. So again, these reviews will absolutely elevate your position on that acquirer list. Remember, it's your earnings, it's that IDA that they're buying.
So getting to that has to be very clear and simple and your accountant can be a big help with that. The other area that we want to talk about is how we can align your financials with the way in which acquirers align their financials. Again we have many different expense items. If we can kind of match up with your profit and loss statement and make sure that your expense categories are somewhat in line with those used by acquirers, that will absolutely get you to the top of the list because they're used to looking at certain line items as a percentage of revenues and whether or not that's in market or out of market.
When they get a financial statement that has been built by a fi by an accountant that does not have experience in the rehab industry. Many times the line items are very different. So there certainly is a way to consolidate those and to make them better. Again that's something that would really be best done before you go into a process so they're ready. The other thing you can do you know we know what those profit and loss statements look like from the large acquirers. You can also look at publicly traded profit and loss statements you know via internet etc to see how they have put together their profit and loss statements.
Again, this alignment makes your financials stand out during evaluation and during their valuation, which would put you a step ahead of competitors who are also in the same process. You know, as we talked to our M&A team, you know, I asked them, what are some of the words that should be describing your financial records before you go into a process? And the words they gave me were accurate, concise, clear, and we'll talk about this more, timely, and responsive. And I think timeliness is really crucial as it relates to a deal process.
You want to make sure that you're on a cadence of monthly financial statements. Acquirers once you get into a process will want those financials updated every month with your EPIDA earnings before interest, taxes, depreciation, and amateurizations updated monthly showing what's the most recent well 12-month trail, nine-month trail, six-month trail, three-month trail. All up to date and all very accurate. We usually recommend that you would talk to your accountant and we can do this as well to make sure that they can have those financials prepared by the 10th of the following month.
So for example, February's profit and loss and balance sheet would be done and ready for an acquirer to review by March 10th. So by the 10th of the next month. So what would be the role of your accountant through due diligence? Well, I mean first of all you know our CPA, we have a CPA analyst. He manages the due diligence, but your accountant very well might need to step in at times again because they were the creator of your books and your records. And we want to make sure that we have a commitment from your accountant or your accounting firm that they'll be able to get back to us with questions that they may have through due diligence within 24 to 48 hours.
Once it goes more really than 24 hours without a response on a, you know, basic question about a line item or whatever it might be or an expense, acquirers will get a little squirly about where is this time going and why can't they respond quicker. Now in many cases typical CPAs and accountants they're not used to you know responding that quickly. You want to make sure that yours who's going to be part of a deal process can and will respond in that time frame. The other thing that I mentioned earlier was the whole idea of a purchase price allocation and your accountant or accounting firm will play a role in once you have a purchase price we then need to allocate that purchase price to the all the assets that they are buying.
It doesn't change the overall purchase price, but what does change is what your tax implications will be based on that allocation based on some of those items being taxed as ordinary income versus as a capital gain. And so we will then need to prepare those with your accountant. And then the acquirers's accountant will need to agree and that will need to match up by the end of that document period. So we want to make sure there's accuracy and agreement between both parties and we want to make sure that the tax implications are as much in your favor as we actually absolutely can make them.
This is another area that when we talk about tax that I think you want to make sure that your current accountant has within their firm or your current attorney has within their firm a tax specialist potentially a tax attorney because the tax specialist can reduce your tax burden. And again, that's either comes in the form of a tax attorney or a CPA who has lots of tax background. Again, your accountant may have that specialist in their firm or your attorney may have that specialist. So, we've gone over a lot today and I think in summary, you really want to, you know, if this is something you're considering doing is to talk to your accountant and look at their current kind of qualifications as well as what their resources are.
We want to start this as early as we can so that when you're ready, we can have those financials put together. We can review them and we can get into the market as efficiently and as accurately as we can. I can guarantee you that better financial management leads to better M&A outcomes. If any of you out there have any more questions about the topic we discussed today or any other topic that we discussed in the past, just click below. Let's talk. Thanks. I look forward to talking to you in the very near future.
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