Although this does not create any issues with the IRS or for the corporation in most situations, delayed tax returns make it difficult to determine an accurate valuation. Without the most up-to-date tax return, the valuation may be based on data that does not reflect the company’s current financial position. Additionally, requests for extensions can simply look bad, as if a company can’t get its numbers together within two and a half months of year end. This perception can unfairly hurt a company’s valuation, even if the reasons for extending the deadline are truly legitimate.
• Past Audit Failure
In finance, you carry your past with you always. A minor error in your bookkeeping from 10 years ago might come back to haunt you today, even if you’re presently on solid ground. This is an important warning for CFOs and compliance officers who’ve previously been cited for a mistake. How can an acquiring company trust the balance sheet of its target if its new CFO was cited by the SEC a few years earlier? It’s an interesting question – and one you don’t want answered the hard way. Unfortunately, in the world of IPOs and mergers and acquisitions, perception can sometimes cause reality. In a nutshell, the past of the officers/management team is critical to obtaining the most for a business.
• Unverifiable Revenue
It can be difficult to find the true source of a revenue stream, and auditors often have no way of confirming certain numbers. Some information is based on manager estimates. It is clearly in managers’ best interests to improve the numbers, but even the most scrupulous of managers can be affected by inadvertent bias. With regard to valuation, if there is a problem with the reported earnings, there will inevitably be a problem with the deal. Management teams looking to get top dollar for their enterprise should be careful not to depend too highly on projections and have every penny of revenue checked and rechecked on its financial statements.
Bradford L. Hall is the managing director of Hall & Company, CPAs & Consultants in Irvine, Calif.