From Kison Patel, CEO of DealRoom and host of M&A Science:
Just finished a great interview with Neal McNamara, Co-founder of Virtas Partners, which is an advisory firm specializing in preparing companies financially and operationally for M&A. Our topic of discussion is how to plan divestiture from an accounting perspective. Here are some of the highlights:
“The cardinal sin in a sell side process is taking something to market with numbers that haven’t been vetted by somebody like me.” – Neal McNamara
Kison’s Personal Takeaways:
Planning a divestiture
First thing that you should do is set up your deal perimeter. Clearly define what you’re selling so that you can create the structure of the financial data needed to get the deal done. The complexity of the financial data varies depending on what type of exit you are doing.
Carve outs can be very difficult because most of the time, you are selling something that has never been looked at as a standalone entity. Therefore, you will have to build a standalone financial statement without any financial historical information.
Spinoffs
Spinoffs is another kind of divestiture where it gets more complicated and more expensive. It’s basically an IPO where you take a piece of the publicly traded company, carve it out, and issue existing shareholders new shares of the new entity in exchange for their shares in the old parent company.
There are public disclosure requirements when doing a spinoff. You have to file this with the SEC and continuously update them until you become a publicly traded company.
Oversight
One of the things that has been consistent is how the set of audit and financial statements of private companies are always wrong for divestiture. It’s done for a different purpose, and when it comes to divestiture, it has to be prepared to make sure that whoever buys the company understands their true value. If you are on the buy side, you cannot rely on the audits done by the seller because it’s done for a different purpose.
Q of E
Quality of Earnings are usually done to reduce surprises that you will encounter when the buyer comes in and performs their due diligence. Also, It will open the sellers eyes on what to expect in terms of pricing when the buyer’s offer comes in. This is also a huge part of vendor due diligence which is almost a requirement nowadays.
The biggest challenge
The biggest challenge is working backwards or backtracking because the financial data has already been released before management consultants have a chance to review it. It’s more difficult work compared to when they are called at the very beginning of the divestiture.
You can listen to the full episode on Apple Podcasts, Google Podcasts, and all other major streaming platforms.