Solutions You Need With Care You Deserve
Valuation/Litigation Insights - Spring 2009
Published: 3-20-09
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Ray Dunkle, ASA, CPA, ABV, CVA, CFE, CFF (330) 572-8046 |
What Message Are You Sending Wrong Tone = Wrong Outcome [This article is intended for professional advisors, business owners, members of management and board members.] A few years ago, the names associated with fraud included Enron and Worldcom. Now they include Madoff and Stanford.The names have changed, the results have not; innocent people are still losing the rewards of a life of hard work.As I write this, I am working on my umpteenth fraud case. This time an employee stole over $1 million within three years of employment. Once again, dumb luck resulted in the discovery a discovery which would have occurred much quicker had preventative measures been in place. When the reality of the risks associated with fraud finally register, the left-brainers amongst us (a fraternity to which I belong) immediately begin thinking in terms of steps and procedures, checks and balances, policies and controls. Such thinking is good those items are critical to preventing and detecting fraud. Are they all that matters Perhaps not.The remainder of this article will focus on what we left-brainers can learn from our right-brained brethren. In 2002, on the heals of Enron and the problems of the day, The American Institute of CPAs (AICPA) issued a new standard titled Consideration of Fraud in a Financial Statement Audit. It is a 37 page document jam-packed with good, sturdy, left-brained recommendations. It is followed by a 20 page appendix of antifraud programs and controls. The appendixes first area of focus It is not about the specifics of segregating duties, monitoring budgets or conducting internal audits. No, it is about having a constructive tone at the top and a positive workplace environment. The AICPA was not alone in identifying the importance of an ethical culture. In fact, its conclusions reinforce those reached 15 years earlier by the Treadway Commission, which concluded that a poor tone at the top can be a fuel for igniting fraudulent activity. So what goes into an effective and positive tone at the top
As the economy worsens, the financial pressures on our employees and vendors climb. Between starting this article and finishing it I received a call on my umpteenth + 1 fraud case. It was another trusted employee. I am certain the damage was avoidable. By setting the right tone at the top, we can help our employees live life as Sophocles recommended. His quote [Id] rather fail with honor than succeed through fraud is one of my favorites. That is a message we should all broadcast loudly.
Recent Trends in Buying and Selling a Business [
This article is intended for buyers and sellers of small businesses and their advisors.]
About a year ago, the 10-15 year forecast for the merger and acquisition market projected enormous activity. The baby boomers would need to transition their businesses and the banks were more than happy to finance these liquidity transactions.That was then, this is now. The dismal state ofthe economy is not news to anyone and much of the activity in the M&A market has changed from business transition to business survival. If you are planningto buy or sell a business in the near future, it may not be what you are expecting.
The most prevalent issue is the recent downturn in financing capacity by banks. An example of this is that effective March 1, 2009, the SBA reduced its lending capacity on goodwill financing from $2.5 million to $250,000. This downturn in financing puts sellers of small businesses at a disadvantage. As a result, sellers can expect to finance more of a transaction in the form of a seller note.
The deals are also taking longer to complete. One reason being that banks are conducting more thorough due diligence for each transaction. They are requesting more collateral value on loans than in the past and are doing more work to confirm the value and analyze the internal controls of companies.
Additionally, earnouts are becoming more popular. The multiples currently being paid for businesses have dropped and many sellers are having trouble settling on the lower transaction price. This recent drop is driven by several factors: uncertainty in the economy, difficulty in assessing future earnings of a target company, timing for recovery, specific company issues, financing, etc. The earnout can be tied to sales, gross profit, or net income and allows the seller the opportunity to receive a higher sales price if certain target objectives are met. This could prove to be a litigious matter, so proper due diligence and the use of counsel is advisable.
There are still plenty of transactions occurring and many investors are looking for acquisitions. If you are expecting to sell or buy a company in the near future, be prepared for a seller note, a longer sales cycle than a year ago and the possible need of an earnout to complete the deal. | |||
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