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Don’t Let Fraud Derail Your Deal
By Peter C. King, CEO VR Business Brokers/Mergers & Acquisitions
You're days away from finalizing an acquisition that's expected to fuel significant growth for your company. But an anonymous tip and follow-up research reveal that your target's CFO was investigated and indicted for financial statement fraud while working. The case never went to trial, but the charges - and lack of disclosure about them - naturally lead you to question what the business you plan to buy may be hiding. The deal, subsequently, is brought to a grinding halt.
A thorough investigation performed by forensic accounting and other financial experts during the due diligence stage could have helped prevent this unpleasant - and costly – end to the transaction. Before you waste valuable time and resources negotiating a deal, do your homework.
Do You Know Your Seller?
The majority of occupational fraud is perpetrated by rank-and-file workers and lower-level managers. But, as the Association of Certified Fraud Examiners has found, fraud committed by owners and executives is the most financially damaging and can, by extension, harm the value of your deal. Even if a company has fraud policies and internal controls in place, owners and executives can override them. These individuals also have access to financial statements, as well as incentives - such as bonuses for exceeding certain growth targets.
So, it's essential to perform background checks on, at the very least, your target's owners, CEO, and CFO. A thorough check can uncover an executive's criminal past involving embezzlement, theft, forgery, and other types of fraud, as well as involvement in civil litigation. It could also reveal that an individual has falsified items on his or her resumé and other pertinent personal claims.
What Are Some Common Schemes?
Management has a myriad of ways to artificially inflate its company's value, including:
  • Write-Off Techniques: The company might take large write-offs when profits are lower to make them appear even worse. This allows the company to reduce expenses and boost future earnings.
  • Numbers Games: Companies might record sales early - and expenses late - to create the illusion of increased profits.
  • Vendor Antics: A business might provide loans to major customers so that they can make large product purchases and give the appearance that the company's sales are booming.
  • Benefits Roulette:A company could declare its pension plan overfunded by juggling proceeds and modifying items such as the interest rates and expected return on assets. The company can't legally remove money from the pension fund, but these tactics can reduce or eliminate its mandatory plan contributions. Other schemes might involve hiding liabilities, misappropriating assets, overvaluing receivables and securities, and overstating inventories. 
The Journey Ahead: Map Out Succession, Retirement, and Estate Plans Before You Exit Your Business 
By JoAnn Lombardi, PresidentVR Business Brokers/Mergers & Acquisitions
You’ve worked for many years to build a successful business, and now you’re starting to think about retirement. To ensure a smooth exit from the workplace, establish your retirement and estate plans now — well before you’re ready to sell or transfer.
Early planning will help ensure that you adequately provide for your retirement needs and the financial security of your heirs. It will also foster the continued success of your company and its employees.
Assess Where You Are
Before determining where you want to be when you’re ready to retire, assess where you —- and your business — are financially today. It sounds like a large undertaking, but you can start by preparing a detailed financial analysis of your business with the help of a valuation professional at VR. This expert will review historical data to determine your company’s current value. You will also need to examine all contracts and agreements to make sure your business is transferable. Transfer restrictions, such as professional license restrictions, franchise agreements, lending agreements, shareholder agreements or other types of contracts, can slow down the process significantly.
Plan for Success (ion)
Next, develop a succession plan that outlines how your business will be sold or transferred. If you have business partners, they will most likely be able to buy your ownership interests according to the terms of your company’s shareholder agreement or other agreements established among you. Or you might choose to groom one of your children to eventually take the helm. To ensure a smooth transition, however, your successor should assume significant management duties and at least partial ownership before you retire.
If you have no qualified family members or partners, consider selling the business to a key employee or group of employees. Employee buyers may have several financing options, including private equity partners, bank loans, and Employee Stock Ownership Plans (ESOPs). ESOPs are fairly complex structures and will require valuation and tax planning — as well as employees who are committed to the company for the long haul.
Think Retirement
The first considerations for retirement planning are your health, lifestyle, and any financial obligations. You will use these to determine your required revenue stream.
In addition to qualifying for Social Security benefits, you likely have retirement accounts such as IRAs or 401(k), Keogh, or Simplified Employee Pension (SEP) plans. When tapping these accounts, be sure to avoid actions that could have negative tax consequences. Also bear in mind that minimum distribution rules govern many tax-deferred retirement accounts. Traditional IRAs, for example, compel you to begin taking distributions after age 70 ½ or face significant penalties. 
COVID-19 Was NOT Mentioned in My Crystal Ball!
By Shawn Hyde, Executive Director ISBA 
Today, I want to spend some time discussing an aspect of the business valuation industry that is near and dear to all our hearts but is also subject to quite a bit of controversy amongst ourselves. To begin, I want to share a small quote from the Internal Revenue Service’s Revenue Ruling 59-60, just to make sure we are all on the same page.
“Valuation of securities is, in essence, a prophecy as to the future and must be based on facts available at the required date of the appraisal.” RR 59-60, Sec. 3.03
Said another way, the value of a business is based on its expected future earnings. This means that every business appraisal includes a projection of the future, regardless of whether or not one is using a discounted cash flow method or a capitalization of earnings method. Business appraisers are deriving our opinions as to the value of a business based on what we think the future of the subject business will look like. Unfortunately, when I began in this industry over 20 years ago, I was not issued a crystal ball to assist with my determination of the future.
I had to add some emphasis on the word, ‘Projection’ in that previous paragraph because that word is part of the controversy I mentioned earlier. I am one of those appraisers who use the two terms, ‘Forecast’ and ‘Projection’ interchangeably, as I do not see a difference between the two phrases. However, there are other differences of opinion on the matter and after you have spent some time in the Business Valuation (BV) industry, you will see that differences of opinion are common, but what is important is an appraiser’s ability to explain and defend their individual position. 
So here goes my explanation of my position:
According to the American Institute of Certified Public Accountants, the definitions of ‘Forecast’ and ‘Projection’ have different meanings.
  • Financial Forecast – Prospective financial statements that present, to the best of the responsible party’s knowledge and belief, an entity’s expected financial position, results of operations, and cash flows. A Financial Forecast is based on the responsible party’s assumptions reflecting the conditions it expects to exist and the course of action it expects to take.
  • Financial Projection – Prospective financial statements that present, to the best of the responsible party’s knowledge and belief, given one or more hypothetical assumptions, an entity’s expected financial position, results of operations, and cash flows. A Financial Projection is sometimes prepared to present one or more hypothetical courses of action for evaluation, as in response to a question such as, “What would happen if…?”
Why 2021 is Poised for a Comeback for Home Health M&A
The past year has been unusual — to say the least — and the home health and hospice M&A landscape is no exception. While the hospice industry has continued to count strong deal numbers over the course of 2020, home health and home care have fallen far behind in their year-over-year deal tallies. The coming year, however, is poised for a comeback of deal flow for several reasons, including Medicare reimbursement changes and pent-up demand.
The Year 2020 and COVID-19
In some ways, 2020 should have been a blockbuster year for home health deal-making. The transition to the Patient-Driven Groupings Model (PDGM) on January 1, initially set the stage for mass consolidation within the space.
However, that expected M&A activity was curtailed significantly by the COVID-19 emergency beginning in Q1. Many of the small and mid-size agencies that were expected to hit the market never did. Agencies that were expected to struggle under the new payment model were suddenly given a lifeline through Medicare loans, the Paycheck Protection Program (PPP) and Provider Relief Fund grants.
Additionally, travel restrictions and social distancing measures curbed buyers’ ability to conduct due diligence on possible acquisition targets, further slowing deal flow. So far, there have been 75 transactions across home health, home care, and hospice in 2020, Mertz Taggart data shows. In comparison, there were 79 deals just in the first three quarters of 2019, and 99 deals over the same period of time in 2018.
Profitable Italian 3 Restaurant Chain for Sale in Beaumont, Texas
Profitable, Absentee Owner Full-Service Italian restaurant chain (with signature Pizza , pasta dishes & full menu) with Beer & Wine license and an excellent reputation. The business consists of three fully-managed restaurants complete with management and staff. With over three years of track record showing around $500,000 in positive cash flow, these restaurants are all within an hour drive of each other. This would be a great enhancement to an existing portfolio or a new business opportunity for a family.
For more information contact: Myke Howard at myke@vrtown.com.
VR in Miami, FL Facilitates Sale of HVAC Company
Turn-key well established HVAC Company with long time and high-end residential and commercial customers - great reputation. Main lines of business include: Air Conditioning Contractors, Heating Contractors, M.W.B.E.--H.V.A.C. Contractors and Ventilating Equipment. Highly skilled service technicians in place, use the newest technology. The Company offers same day appointments and 24-hour emergency service.
This Company was considered an essential business and had not been impacted by the coronavirus.
Congratulations to Raquel Afriatfor your successful closing.
For more information contact: raquel@vrmiamicenter.com.
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