Difference between buying & selling companies
Do you want to know about the difference between buying a company and selling a company? Both tasks are proven to be cumbersome. Minor mistakes can lead to possible disputes. And the main difference between these two terms is ‘what you paid and what you sold it for’, of course, is your profit. Are you ready to embark into this new journey of buying and selling companies?
If so, then it is strongly advised that you need to review and rectify all the CPA Forensic Accounting issues of the enterprises so that you can operate your business legally. Let me explain how I have applied my knowledge to make our first acquisition and how you can also grow your business through an acquisition.
Well, having been involved with buying over a dozen companies, and selling 5, I have done a lot of work in M&A. But while the acquisitions came before the sales and were spread out over a longer period, both types of transactions are equally impressive.
In most of the early acquisitions, from 2008 to around 2014, I did mainly accounting for the companies. I handled purchase accounting, integration of the finances, reporting and related matters. Sometimes, these tasks proved to be complicated, as goodwill and intangibles had to be valued. Over time, I did it so often that I became certified in valuations.
It started to become somewhat routine, at least as far as the post-closing side of things. That’s why with my experience, I believe that all the business owner need to go beyond their own guess of the company’s value and take help of a valuation expert in order to satisfy section 409a Valuation.
Valuation determines the fair market value (FMV) of the company and is set by a third party valuation services. In order to do it completely, business people should take the help of professional firms. In fact, with the advent of technology, now there are a plethora of valuation methods which you can choose as per the requirements of your business.
However, as for the due diligence, this process too started to form a pattern. Selling a company can be harder than buying a company. It’s up to the buyer how much due diligence they want to do. For sellers, they have to respond to the buyer’s due diligence questions, so the control is more with the buyer.
Let’s go through the pros and cons of each.
Buying a Company
Instead of starting up a business from scratch you can just gather up all the money and resources and buy an existing one. However, there are going to be risks involved, but you already know that. Let’s start with the advantages of buying products before going through the disadvantages of that-
The pros of buying a business are as follows.
1.CPA Forensic Accounting-
Buying an existing business gives you a good idea on the value of products or services, as the market has already tested them. You have a sense of the reaction of the market to the products, which helps you to either improve or maintain its standard. Moreover, while doing CPA forensic accounting for your business, you don’t need to worry about the documents and other requirements for use in a court of law.
2.Time-Saving
You’ll reduce startup time significantly. The hardest part about any new franchise is the startup. By buying an established business, you bypass that as well as gain more benefits, such as; trained staff, prior relationship with market and suppliers, technical know-how, and much more.
3.Customer Access
You’ll have access to the customer base. You don’t need to go and build a network of new customers, with buying an existing business you have access to the previous and existing customers to sell your products too.
Unfortunately, it is not all rosy. There are some demerits also-
The cons of buying a business are:
1.Documentation and Finances
You might be scammed. Most times people don’t sell a business that is thriving. You may not have a completely clear picture of what you’re buying due to misrepresentation of data and finances. In this case, you need to hire CPA Expert Witness that can at least help you in preparing all your budgets and other requirements.
2.Staff Rearrangement
You could end up dealing with more than what you bargained for. You may have serious staff issues or you might need to change some existing policies.
All in all, it may be overwhelming. Overwhelming in the sense that you’re stepping into another person’s dream and trying to change it into yours. The transition of ideas, policies and goals could just be too cumbersome. Taking time to think about things before making that final decision of buying a business is the key to its success, as it is filled with pros and cons.
Selling a Company
Well, selling a business is not as simple as most people think. In fact it is more complicated than buying a company. A single wrong footing and the lasting damages could prove to fatal for the entrepreneur and the buyer, but if you know the pros and cons, it’ll help you make a learned choice.
Unlike buying a business where the pros and cons are clearly stated, the pros and cons of selling a business are not written in stone.
It all boils down to which pays you most.
An Outright Sale
This is where you sell the business when you have reached a point where you can’t take it any further. There are two types of outright sale. The asset sale and the stock sale.
But before highlighting the information about these processes, it is better to have a CFO expert witness that will help you in contributing sound strategic financial leadership.
The asset sale means selling the assets (equipment, facilities, customers, intangibles, etc.) of the business except for the business itself. This benefits the buyers more than the sellers.
On the other hand, stock sales mean the sale of the business itself and all its assets. This also exposes the buyer to all of the existing problems of the business.
What I Learned Buying 12 Companies and Selling 5: Due
Diligence Checklist
In my early acquisitions (2008-2014), I handled purchase
accounting and integration after close — goodwill, intangibles, 409A
valuations. Over time I became certified because I kept seeing the same
expensive mistakes.
Here’s what I actually request before I value or advise on
any deal:
For Buyers — Quality of Earnings (QoE) Checklist:
- QuickBooks file — not PDF, the actual .QBW — plus 3 years P&L and Balance Sheet
- 3 years bank statements in CSV, credit card, Bill.com, Amex
- Tax returns (business and owner), sales tax filings, POS reports
- Cap table, operating agreement, all debt schedules, leases
- Customer concentration: top 10 customers % of revenue last 3 years
- Working capital peg calculation — average AR + Inventory – AP last 12 months. This
is where most disputes happen post-close.
Recent case: Seller claimed $300k revenue, showed P&L.
Bank, POS, and sales tax showed $72k. Three-way match caught it. That’s a
$500k+ valuation swing.
For Sellers — What Will Kill Your Valuation:
- Owner add-backs not documented: Tesla, Four Seasons Maui coded as “office
supplies” — buyers will disallow it - Revenue recognition: booking before cash collected, or deferred revenue not on
balance sheet - Related party vendors: Company paying your spouse’s marketing firm $400k — needs
to be normalized - No 409A valuation: If you issued options without a qualified 409A, buyer will
discount for IRS risk. A qualified 409A by a CVA/CPA is $2k-$5k and saves
you 6 figures in negotiation.
Asset Sale vs Stock Sale — Tax and Liability (Why It
Matters in California):
Asset Sale: Buyer buys equipment, customers, IP, but
not the entity. Buyer gets step-up in basis — better for buyer. Seller pays
ordinary income on inventory/recapture, capital gains on goodwill. Seller
retains liabilities. Most small business deals under $10M in California are
asset sales.
Stock Sale: Buyer buys the entity itself. Seller gets
capital gains treatment on everything — better for seller. Buyer inherits all
liabilities — lawsuits, taxes, HR issues. Buyers will demand 10-20% escrow and
reps & warranties insurance.
In my deals, 80% were asset sales. If you’re selling, expect
buyer to push asset sale. If you’re buying, never do stock sale without full
forensic exam of payroll taxes, sales tax, and pending litigation under CCP.
Cost: M&A valuation and QoE for small business
$3k+. Compared to
Big 4 forensic at $600-$800/hr, I do single-expert work with manual verification of
100% flagged transactions.
If you’re buying or selling in Bay Area and need a second
set of eyes on QoE, working capital, or 409A, contact hpaccounting.com/contact.
I do a free 15-min conflict check.
Verdict
There is no denying the fact that every rose has a thorn, similarly, buying a business and selling a business both have some merits and demerits. However, some believe that buying a business is less stressful than selling one.
But I believe that by understanding all the options and getting good advice from expert professionals, the sale of a company could be made beneficial for everyone involved, from the buyer to the seller to the customers. If you want to have some professional help than get in touch with us at HP Accounting. We assure guaranteed solutions and optimized results.
