Experts offer advice on buying into a turnaround

Short of breaking out a crystal ball, there’s no real way to tell if it’s a wise move to buy a company with the goal of turning it around. However, the experts do offer some tips to guide the would-be buyer through the decision.

When discussing factors that would green-light a deal, it’s easy to talk financial indicators, such as low debt levels, strong free cash flow and high profit margins. But potential buyers also should be aware of other, perhaps less-concrete, signals, according to William Velekei, a financial adviser with Corbenic Partners in Bethlehem.

“Culture and reputation are intangibles that potential buyers put too little emphasis on when looking to purchase a company,” he said. “If you have an energized and motivated workforce behind you, I believe that can be the catalyst to success.”

Conversely, he adds, people’s actions – particularly the behavior of a company’s owners and managers – can be a clear sign telling you to steer clear of a deal.

“If they seem withdrawn from the company before even selling, that would be a red flag,” he said.

The things a potential buyer needs to look into during the due diligence phase will vary by company and by industry, Velekei said “Do not be afraid to ask tough questions to the owner and other key personnel. The last thing you want is to find yourself in a situation where you thought something was clearly disclosed but it turns out not to be.”

Matt Searles, managing partner of Allentown-based MillerSearles LLC, doesn’t pull any punches in terms of his advice when it comes to due diligence.

“Forget trust,” he said. “Verify.”

And that maxim applies to everything.

“All information provided by a target company must be verified,” he explained. “Supporting documentation can include such records as tax returns, regulatory authorities’ reports and notices, the company’s human resource department’s files, public records (including any information available on-line) including matters related to recent and threatened litigation, regulatory complaints, bankruptcy filings.”

Look ahead, behind

Velekei said that buyers should be sure to focus not just on the current time period when it comes to the financial records, but to look at the company from a historical point of view and consider its future.

Searles, too, impresses on buyers that past performance does not dictate future results.

“When reviewing financial statements and tax returns,” he said, “include a hands-on review of supplier and customer lists, considering customer concentration and supplier relationships and what the risk of losing any of them would mean to the business. Also, consider the company’s place within its industry, including the need to upgrade technology, as well as the industry itself.”
In addition, be sure to request anything resembling a strategic plan, Searles said.

“Whether it be related to projections of future income, market expansion, product development or other efforts to improve the business, it’s important to inquire of the business’ management as to their data and opinions so that the buyer can review how their plans differ from the target company’s plans,” he said. “Remember that a company’s management can have the best-laid plans, but the industry in which the company operates may be experiencing change that overrides the ability of management to implement its plans.”

Taxes due?

According to Andrew Johnson, a CPA and co-founder, of Peisner Johnson in Dallas, a buyer’s due diligence doesn’t stop once he or she has determined that a business is worth purchasing. At that point, Johnson said, it’s time to do what he calls tax due diligence.

“You’re looking for potential areas of tax exposure,” Johnson said. “Maybe the tax returns haven’t been filed or they contain some risky provisions, or maybe payroll taxes haven’t been paid. Those are potentially serious risks you might inherit when you buy a business and you at least need to be aware of what you’re buying. But I can also tell you that, at least from a tax standpoint, sales taxes could be the biggest tax risk you need to review as a major part of your tax due diligence.

“And the fact is, an acquiring company, no matter if the purchase is structured as an asset or stock acquisition, inherits sales-tax risk from the acquired company. So as an acquirer, you need to identify and quantify those risks up front, so you can factor them into your offer price,” he said.

In the end, the answer to whether it’s wise to buy a company with the goal of turning it around sounds less crystal ball and more Magic 8 Ball.

Velekei said: “Buying a company could be a good investment, but buying the right company and having the correct mindsight with a plan going into purchasing it could be a great investment. If you go into a business with the idea of selling it, then how can you really focus on improving a company when that truly is not the end goal? Businesses are not like homes, they cannot be flipped in two to three months. If a company is struggling, there is most likely a reason or reasons why. Those issues not only require money but also an investment of time.”

What’s more, Velekei said, it simply may not be possible to tell from the outside whether buying a particular company is worth the effort.

“Purchasing a company is a significant investment and often a business owner’s largest asset is the business itself, so it takes significant due diligence and digging into the details of a company before taking that leap,” he said. “It’s similar to a car – it could be a very nice model car, but if you look under the hood and it needs significant work or parts, it would make you reconsider.”