I am a M&A advisor, not accountant, so would like to get expert opinion on whether my planned counsel to a client is appropriate advice, please. Situation: Client is contemplating complete sale of the small (under $15 million revenue) privately-held, C-Corporation. This California company also has
Best practice for consolidating and closing fincl. stmts. for private company operating in 3 nations/3 currencies in prep for M&A activity?
Answers
Dick,
I'll answer your specific questions and then provide some additional observations:
1 & 2. I don't think it's critical to use one firm with offices in each country. Depending on where the two foreign subs are, this may limit you to the Big 4 and one or two other firms. Most regional accounting firms belong to an organization that will have affiliates or member firms in most countries who could assist with this work. Depending on the size and complexity of the foreign subs, it's also possible the US accounting firm could audit the books remotely. The more complex and/or material the foreign subs are, the more likely a local firm would need to be engaged for either certain procedures, such as observing inventory, or for the entire audit.
3. The US firm will need to decide how comfortable it is with a local firm doing the audit of the foreign subs and then relying on their work when auditing the consolidated financials. If the local firm is somehow affiliated with the US firm, this shouldn't be a problem. If there's no connection between the firms, it can become more problematic and costly to complete the audit, as the US firm has to get comfortable with the quality of work performed by the foreign firm and that their audit is performed consistently with US auditing standards. The further off the beaten path the foreign subs and the local accounting firms are, the more difficult this process will become if the firms aren't connected.
I would consider who the potential buyers are before deciding whether to prepare US GAAP or IFRS financial statements. If a US company is the likely acquirer, I would prepare US GAAP financials rather than IFRS. In my recent experience, even when a foreign company that has already adopted IFRS or is using another accounting standard is acquiring a US company, they usually look for US GAAP financials or are comfortable with US GAAP financials.
In general, when preparing for an acquisition, it is useful to have audited or reviewed financial statements to share with potential acquirers, as it conveys the image of a company with sophisticated operations and will help the acquirer become more comfortable with the financial information. That being said, an audit is not a requirement and I see some acquisitions where audited financial statements are not required as part of the acquisition. If you're already talking to potential buyers, I'd ask them if an audit would be required, or if reviewed financials would be sufficient. The acquirer may instead choose to have their own auditors or due diligence team perform specific tasks to verify the information they'e been provided.
Also, this wasn't the main point of your question, but on the translation and consolidation, the income statement is generally translated on a monthly or at least quarterly basis using the average exchange rate for the period, as over the course of a year, foreign currences can change dramatically and using a rate for the entire year might produce misleading results. This is especially true for developing countries. Most balance sheet items would be translated using the exchange rate as of the balance sheet date. For the purposes you noted, the method you used may well have been sufficient, but for the audit of the consolidated financial statements, a more in-depth approach would be required.
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Dick
I did not realize you are part of this wonderful group.
You are posing an interesting question that I have not thought of before.
Two comments; one for valuation, second for M&A.
Valuation: Consider valuing each business unit separately and then add them together. This would reduce currency issues. This approach assumes that inter-company policies are relatively stable. I know the valuation tool you are using. It should be easy to do 3 valuations. This approach is similar to valuing 3 independent subsidiaries of a parent. I would even question if one should value this business based on consolidation.
M&A: From M&A perspective, buyer may have to buy each entity separately. Seller may also need to know value of each entity for tax purposes. Also, reps and warranties for each entity will be different. I doubt consolidation will significantly enhances value or the type of buyer you can attract for business of this size. Most large buyers are sophisticated enough to look at unaudited numbers and have systems and policies in place for post-acquisition financial reporting.
Again, as discussed we privately, thank you, Nathan for such an in-depth, considered reply.
Any potential acquirer will likely focus not only on the financial statements, but also on the local country, U.S. and global tax position and any related contingencies. It sounds like there may be concern about operations in 3 countries with potentially 3+ service providers. I highly recommend you ensure the seller has performed its own global tax due diligence so it identifies any potential weak issues before the potential acquirer does. It is important you have a global tax advisor that can understand and integrate the advice from these different sources.
Often local country service providers will focus simply on local country issues and not on the "big" picture: the integration of the global tax issues.
The broad areas I would examine:
1. Local country taxation (income, payroll, VAT/Sales, etc.).
2. Repatriation of earnings/other cash flows such as interest. Are there F/X registration requirements? Was there proper withholding?
3. Transfer pricing.
4. U.S. tax issues (such as the anti-deferral rules, foreign tax credit, etc.)
I hope this is useful.
Thanks for the great input! Much appreciated.
A few follow-on comments to the last post:
Since you are unidentified as the poster, I am wondering whether I know you. The comments you make seem so. However, you cannot "know the valuation tool I am using," as you suggest, and I assure you that the valuation work I do for clients is not simply the use of a software tool. While I do license BVX software, that's a supplemental tool. This valuation was a Uniform Standards of Appraisal Practices (USPAP) compliant Letter Form report, that I subcontracted to a firm that does nothing but valuation work for M&A and litigation.
The appraisal firm suggested consolidating the financial statements. Since the subs only provide a labor input to the finished product sold by the parent, and do not operate independently, it seemed like a reasonable request. The subs themselves would have almost no stand-alone value (just some fixed assets and a bunch of engineers sitting on them).
Thank you for posing an alternate way to look at this situation. I will take this under advisement as we move ahead.
Hi Dick Bransford
That was my first time replying on Proformative. I presumed my name would be automatically displayed with my reply.
I understand the USPAP point. If the subs are not a profit center, consolidation may not add to value. So consolidation should be considered only if USPAP requires it, though it brings up interesting question on "how" as you are asking. Have a good day.
Mike Adhikari
Illinois Corporate Investments, Inc. (M&A)
Business ValueXpress (Valuation and Deal Structure Software)
847-438-1657