About
Foundational Principles In the Community Diversity, Equity & Inclusion Technical Excellence Alumni TIAG Membership
Careers
Why Cohen & Company Our Culture Total Rewards & Benefits Intern & Entry Level Opportunities Experienced Opportunities
Contact
Akron, OH Baltimore, MD Chicago, IL Cleveland, OH Detroit, MI Milwaukee, WI New York, NY Philadelphia, PA Pittsburgh, PA St. Clair Shores, MI Youngstown, OH
Client Portal
Services Industries Knowledge Center People

About Our Services

We offer tailored solutions — whether private company or owner; public or private fund, adviser or fund service provider; or Fortune 1000 enterprise. Learn how we can help you.

Learn More

Assurance Services

Employee Benefit Plan Audits Internal Controls Investment Company Audits Private Company Audits SOC Readiness & Compliance

Tax Services

Federal Tax Planning & Compliance High Net Worth & Wealth Transfer International Filings & Structuring Investment Company Tax State & Local Tax Tax Credits & Incentives Transaction Tax Planning

Advisory Services

Business Valuations Data & Insights Digital Finance Solutions IT Strategy & Implementation M&A Advisory Outsourced Accounting Solutions Risk Assurance & Advisory Transaction Services Turnaround & Restructuring

Our Industry Expertise

Our industry experience means you can find professionals who speak your language and bring earned insights to the table. Learn how we can help you.

Learn More

Key Industries

Digital Assets Investment Companies Manufacturing Private Companies Private Equity Real Estate & Construction Technology & Life Science
VIEW THE COMPLETE LIST

Knowledge Center

Our team wants to help your team stay up to date. Browse our thought leadership, events and news for insights and a point of view on business-critical topics.

Learn More

Insights

Browse valuable articles and publications our experts have written to help you and your organization answer key questions — and consider new ones.

Read Our Insights

Events

Join us in person and online for events that address timely topics and key business considerations.

Explore Our Events

News

Find out what is happening at Cohen & Company, from industry recognitions and growth updates, to where we are contributing to important media stories.

Read Our News
People
Foundational Principles In the Community Diversity, Equity & Inclusion Technical Excellence Alumni TIAG Membership
Why Cohen & Company Our Culture Total Rewards & Benefits Intern & Entry Level Opportunities Experienced Opportunities
Akron, OH Baltimore, MD Chicago, IL Cleveland, OH Detroit, MI Milwaukee, WI New York, NY Philadelphia, PA Pittsburgh, PA St. Clair Shores, MI Youngstown, OH
Client Portal
Back to Insights

Is Your Finance Organization Ready for Your Next Business Combination? 

by Jim Hessel, Phil Ryan

March 15, 2023 Private Companies, Private Equity

Selling a business can be an exciting time, but there are numerous hurdles to overcome well in advance of the finish line to ensure a smooth transaction and to enhance the ultimate market price of the business. A successful sale does not occur overnight, and careful planning and preparation will help an organization be ready for when the time is right. 

While business owners must focus on a myriad of areas, as a member of the finance and accounting team you will be a critical part of the deal process and will have a specific set of responsibilities that could greatly impact the transaction’s success. You and your team will help manage the diligence process requests, serve as an intermediary between buyer and seller, and will need to be organized and informed of key deal aspects throughout the transaction. Below offers a high-level roadmap and other details regarding what you can expect — and should be prepared for — to help your company execute a successful sale.

Ramp Up: Your Roadmap of Responsibilities

2 Years Before the Decision to Sell
  • The most important area for your finance team to address is to ensure your financial records are in order way before a sale is on the table. Two years of organized financial records are crucial for the diligence process to begin. To help with this:
    • Implement procedures that will help you consistently close the books each month; including ensuring the right employees are in the right roles; and
    • Have a system of saving key reports so they are readily available in the future.
1+ Months Prior to Close
  • Be ready to answer an onslaught of diligence requests. These could include requests for:
    • Internal financial statements;
    • Significant customer or vendor contracts;
    • Additional background on transactions that occurred during the last few years; or
    • Any other item that could impact the purchase price, including additional questions about fluctuations on specific financial statement accounts or in the overall business.
  • Review balance sheet items line by line to ensure schedules are prepared to support balances.
  • Determine line items that require additional substantiation and purchase accounting considerations (fixed assets, inventory, intangibles, etc.).
1-2 Weeks Prior to Close
  • Review the draft purchase agreement and understand:
    • Obligations of all parties on the transaction close date;
    • Post-transaction reporting requirements; and
    • Included/excluded assets and liabilities, closing cash, debt facilities, etc.
  • Understand how you will account for the new company after the transaction, and whether or not it’s best to create a new client in your accounting software.
  • You will need to prepare for a count of all physical inventory and potentially fixed assets on or near close; circulate instructions to the team and begin preparing appropriate cutoff and counting procedures.
1 Day Prior to Close
  • Review the effective date and time of transfer of control (beginning of day versus end of day).
  • Generate trial balances and all necessary subledger accounts as of the transfer-of-control date.
  • Review all sales and cash disbursements of weeks leading up to the transaction date to ensure they are all entered into accounting records in the proper period.
  • Perform a hard cut off of shipping/receiving, and ensure documentation is retained to support these items.
Day of Close and Immediately After
  • Stay close to your desk so you can ensure all wires get paid!
  • Perform a physical count of your inventory and fixed assets; third-party assurance may be required. Then reconcile counted amounts to perpetual amounts and adjust your trial balance. Note this last step is critical. Not reconciling your counts could result in detrimental downstream implications.
  • Perform an initial calculation of net working capital. 
  • Review all sales and cash disbursements of weeks post-transaction to ensure they are entered into the proper period (pre-transaction versus post-transaction).
  • Obtain final deal documents (purchase agreement, disclosures, credit agreement, etc.).
  • Begin to identify journal entries needed to account for the transaction on the new company.

The Two Types of Business Combinations — and How to Account for Them

There are two different types of business combinations, and each requires different considerations and accounting recognition. It is important to understand under which your transaction falls to determine the appropriate accounting recognition and what additional procedures you must perform to record properly under U.S. GAAP.     

Asset Purchase

An asset purchase occurs when a buyer purchases individual assets and liabilities of the existing business. Buyers “step-up” the company’s basis in its assets and liabilities to fair market value. Usually, this results in higher taxes to the seller, as assets are taxed at ordinary income rates. Buyers generally enjoy lower taxes due to the deductibility of goodwill. 

Both parties may prefer an asset purchase, as it allows them to specifically include or exclude items within the purchase agreement (business line, customer accounts, etc.). The added flexibility of asset purchase agreements can also result in increased complexities since the seller may need to transfer ownership of equipment/property to the buyer or renegotiate contracts with customers, among other things. 

Stock/Equity Purchase

A stock or equity purchase means a buyer will purchase the previous owner’s shares of the business. The buyer will retain the company’s basis on depreciable assets from a tax perspective, while proceeds are taxed as capital gains to the seller. 

A stock/equity purchase may be more advantageous due to its simplicity, as all assets and liabilities are included. However, this type of transaction can become more complex if noncontrolling interests exist. 

Analyze Your Opening Balance Sheet with Care

When converting the closing balance sheet to the opening balance sheet, in addition to fair value considerations there are several other key areas you will need to analyze and be aware of:

  • Any existing goodwill, equity, accumulated depreciation and allowances are traditionally zeroed out and updated for transaction related activity. 
  • The opening balance sheet is performed post-transaction and can be modified up to a year after the transaction (measurement period). 
  • If business combination accounting is not complete as of the end of the reporting period in which an acquisition occurs, the acquirer records provisional amounts in the financial statements. Subsequently, adjustments can be made to those provisional amounts, but only if the adjustments are related to facts and circumstances that existed at the acquisition dates. 
  • Measurement period adjustments are recorded through goodwill and not the income statement. 


While it is important for business owners to start planning for a sale years in advance of the transaction date, for their benefit and that of the business, careful preparation from the finance organization is critical to the ultimate transaction’s success as well. Your team’s understanding and treatment of the tax and accounting impacts of the business combination, before, during and after the transaction will impact the entire process.

Contact Jim Hessel at jhessel@cohencpa.com, Phil Ryan at pryan@cohencpa.com or a member of your service team to discuss this topic further.

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.

About the Authors

Jim Hessel, CPA

Manager, Assurance
jhessel@cohencpa.com
216.649.5524

Phil Ryan, CPA, MBA

Partner, Assurance
pryan@cohencpa.com
216.774.1120

Sign Up for Our Emails & Events

Receive insights from our specialists in a variety of areas and timely information on upcoming events directly to your inbox as they go live in our online Knowledge Center.

Subscribe Today
Subscribe to our newsletter
About Contact Submit RFP Privacy Policy
LinkedIn Twitter Facebook
© 2023 Cohen & Company