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Top 3 Financial Considerations for Acquisition

The goal for most startups is acquisition. Being acquired shows that your company has a successful product and your hard work and long hours have paid off. But there’s a lot of work to be done for the acquisition to be successfully executed. As you’ll know from funding rounds, investors do their due diligence to see if there are any deal breakers in your books. With acquisitions, that due diligence is more extensive because the investor is buying 100% of your company. Ultimately, they require information to show that your company is profitable and therefore worth acquiring. 

Getting through the acquisition process requires financial statements, realistic projections and compliance with tax and other regulations. Without these, your acquisition could fall through or the prospective buyer might offer a lower valuation. To avoid these problems, you need experienced accountants to help you through the process. Ultimately, accountants provide the information to backup the viability and profitability of your business. Here are three key areas that an accounting firm can help with during the acquisition process.

1. Providing Accurate Financial Statements

As investors did during funding rounds, potential buyers want a full financial accounting of your business. Accountants provide financial statements with this information, including: 

  • Assets
  • Recurring monthly and annual revenue
  • Your tax status, including compliance and any liabilities owing
  • Historical growth
  • Cash flow
  • Potential cash injections
  • Growth projections for the future 

Beyond this, accountants create reports for the board on any performance indicators that they require. What’s important here is that you have experienced accountants to provide accurate statements and attainable financial projections. Failing to account for cash shortfalls or providing unrealistic projections can undercut your sale.

2. Determining Your Valuation

Financial statements are important in and of themselves – they show whether or not your company is profitable and, therefore, whether it’s worth acquiring. But they’re also necessary for valuation purposes. Figuring out your valuation involves assessing a number of factors:

KPIs

You need to know your key performance indicators, including historical and projected growth and sales, and the basic financial status of your company, including cash flow. Again, these numbers need to be accurate and realistic. If you want to value your company at $100 million, you need to be able to show figures that can back this up, including growth over your company’s lifetime, increases in annual and monthly recurring revenues, and the prospects for continued growth into the future.

Competition

You need to know the market for competitors and how you stack up in terms of growth and other performance indicators.

Historical Financial Information

You need to know your valuation during previous funding rounds as well as growth since that time.

Buyer’s Background

You need to know your buyer’s background and why they are looking to acquire you. If they are an equity firm investing for financial reasons, the valuation process may be more formulaic based on assets, debts, and other financial figures. If they are acquiring you for strategic purposes, the valuation may be higher and more negotiable, as the company is interested in your product or technologies because they have a synergy with the acquirer’s existing business.

During acquisition, accountants are constantly guiding CEOs and founders on when and where they should be positioning themselves in terms of valuation, including supplying them with the financial statements and projections to back up their position during negotiations. Particularly if this is the first time you’ve gone through an acquisition, it’s necessary to have experienced professionals helping you through the valuation and negotiation process.

3. Staying Compliant

Tax Compliance is the main arena of accountants during the acquisition process. First and foremost, you want to be able to show prospective buyers that you have stayed compliant and they won’t be liable for any tax issues. Beyond this, because share structures and ownership change, compliance issues become more complicated. 

While things are more streamlined if you are an entirely Canadian company being acquired by another Canadian company, more complications arise if the company acquiring you is based in the US or elsewhere. In the former case, the company retains its Canadian Controlled Private Corporation (CCPC) status. But in the latter case, that status changes. With the different statuses come different tax rates and considerations. Similarly, different rules apply to different statuses for claiming the Scientific Research and Experimental Development Tax Incentive (SR&ED). 

Finally, you’ll need to complete “deemed year end” taxes. Even if your acquisition closes on March 31st, you’ll need to file a tax return for the 3 months of the year you owned the company. Executing these aspects of the acquisition and remaining compliant through the process involves utilizing accounting experts who know the ins and outs of the tax regulations you are under.

Acquisitions with NOVAA

More often than not, acquisition is the outcome that companies are looking for – a realization of the dream that your company started with. Given the complexity of acquisition, realizing this dream requires the help of experienced professionals who have been through the process and can help you navigate it, avoiding any deal breakers or disappointments in valuation.

NOVAA is a technology-forward accounting company that uses advanced financial tools to help you realize your company’s goals. We have years of accounting experience and an established record with acquisitions, including for technology companies. We view ourselves as part of your team and can answer the due diligence potential buyers will demand of your company during acquisition, whether it’s financial statements, valuation, or compliance.

For more information on how NOVAA can use its experience and track record to help you realize your acquisition goals, book a consultation.

The Tax Benefits of Section 85(1) When Incorporating

When growing your business, you may be considering incorporating to take advantage of tax savings or to avoid personal liability. Even though incorporating may not change the day-to-day operations of your business, the act of incorporating is more than just a status change. It involves changes to the structure of your business, which can create new tax costs. Luckily, there are provisions in the income tax act that can help you defer some potential taxes, including the Section 85(1) provision.

Deferring Capital Gains Taxes with Section 85(1) Rollover

To understand Section 85(1), let’s use a hypothetical scenario. You are a sole proprietor dentist. As part of your business, you own an office, which you purchased for $300,000. You also own $200,000 in equipment. Over the span of 2 years, your business grows and you decide to incorporate. Because the corporation is a separate business entity, this requires an asset transfer – that is, you have to transfer the assets from your personal ownership to the corporation. Moreover, you must transfer the assets at a fair market value. This poses a problem: despite the fact that you own the corporation, the asset transfer is tantamount to a legal sale. As a result, on your personal tax return, you would have to pay capital gains taxes on the transfer of the assets to the new corporation. Capital gains can be significant, particularly when it involves things like property, whose value can skyrocket.  

Luckily, 85(1) allows you to defer these capital gains taxes through an asset rollover. This provision of the income tax act rolls the assets over to the corporation through an exchange of assets for shares in the newly formed corporation. In our dentist scenario, you would transfer the assets to the corporation at cost base using the section 85(1) rollover in return for shares of the corporation. As a result of the rollover, there are no immediate tax consequences. Taxes will only be incurred if you sell the corporation or if the corporation decides to sell the assets at a future date.

Avoiding Complications

While an 85(1) rollover may sound straightforward, it is a complicated and multi-layered process that requires experienced professionals with knowledge of the CRA’s provisions. Beyond this, it involves accountants and lawyers working hand-in-hand. Accountants prepare an instruction letter that lays out the cost base for the transfer of assets. This can be difficult because it involves assessing the fair market value of assets, which can be tangible (e.g. properties or equipment) and intangible (e.g. goodwill). Moreover, because the rollover requires a transfer of shares in return for the assets, a lawyer has to execute the transaction.

NOVAA and Section 85(1) Rollovers

At NOVAA, we aren’t just traditional accountants who manage your books. We are a full-service firm that covers the full breadth of your tax services and accounting needs. Our experienced team have worked closely with lawyers executing 85(1) rollovers, including when incorporating or executing an asset rollover will help you achieve your business goals. Beyond this, we pride ourselves on making sure our clients understand what they’re doing, translating tax codes so that non-specialists can understand when and how such decisions can be beneficial to them.

For more information on how NOVAA can help you with incorporation or a Section 85(1) rollover, book a free consultation.

Accurate accounting is key to the success of any business. It allows you to keep track of costs and revenue in order to implement your business plan, while also giving you concrete numbers to show potential investors. While this might seem to go without saying, many in the competitive software-as-a-service (SaaS) field have failed to follow through with accurate accounting. For startups, this is a particular concern as you attempt to go from pre-revenue to bringing in profits. Agile Payments found that one of the main reasons SaaS startups failed was the failure to save financial resources because they didn’t know how much money they had or needed.

Luckily, accounting software has become a standard technology that SaaS startups can use to avoid this problem. But this poses a different problem: which accounting software should you choose? While there is no “one size fits all” choice and it will depend on your needs, two of the most used accounting software platforms in the SaaS industry are QuickBooks Online (QBO) and Xero.

The Importance of Cloud Accounting

Both QBO and Xero are cloud accounting software platforms. This means that your accounting will be 100% online rather than stored on a computer. This has a number of benefits over desktop solutions. Because desktop solutions are on a computer, they present a greater security risk both in terms of being hacked and in terms of theft. Cloud solutions are protected by state-of-the-art security systems and are not on-premises. Likewise, cloud solutions are constantly backed up and you don’t run the risk of losing your accounting data, which can happen through manual errors or system failures with desktop solutions. Finally, while desktop options are largely limited to the single computer they are on, cloud accounting software allows for easy accessibility to those who have permission. Relatedly, you can check cloud accounting software while on the go via your phone or other devices, whereas desktop solutions require direct physical access to the computer on which the accounting software is on.

Choosing Your Solution: QuickBooks Online vs. Xero

While QuickBooks Online and Xero are both cloud accounting software solutions, which of them is better for you will depend on compatibility with your needs. Here are some things to consider when making a choice.

1. Subscriptions

Xero offers three monthly subscription plans: Starter, Standard and Premium. While they all come with basic features and allow for unlimited users, Starter has usage limitations, including for quotes, invoices, and bills. Standard offers unlimited quotes, invoices, and bills. On top of these unlimited features, Premium includes foreign currency transactions and project and expense management. 

QBO also offers three monthly subscription plans: EasyStart, Essentials and Plus. While there are no limits on usage, as you move up the scale different subscriptions offer increased user capacities and more complex features, such as accelerated invoicing and enhanced reporting and tracking. 

Aside from feature sets, the biggest difference lies in the price ranges: Xero ranges from $15 to $52 per month; QBO ranges from $20 to $60 per month. But price isn’t everything. What really matters is figuring out which feature set will best suit your needs.

2. Setup 

Once you’ve selected which software and subscription you prefer, both offer easy setup and provide customizable dashboards so that you can organize it in a way that best fits your needs. However, before you sign up for a subscription you need to check whether they are supported by your bank. If they aren’t, you won’t be able to integrate your bank accounts with the software and there will be no reason to purchase a subscription.

3. Functionality 

Much like choosing a subscription, functionality will depend on your needs and your expertise. QBO is an older platform and was designed for people with accounting backgrounds. While you should obviously have accountants doing your accounting, if you take a collaborative approach and want you or your team to have some oversight with accounting software, there can be a steeper learning curve. At the same time, its advanced reporting and tracking tools are exceptional. 

Xero is a newer platform and designed in a way that is more user friendly for non-specialists. This makes the learning curve less steep and allows for easier training when it comes to things like invoicing, which may be done by members of your team other than accountants. But it can also mean limitations in terms of advanced features.

4. Integrations 

Your cloud accounting software needs to interact with the other platforms and tools you use, whether it’s payroll, payment, or any other software. Both QuickBooks Online and Xero offer a growing number of integrations, with Xero providing, at the time of publication, more integrations. Of course, raw numbers don’t matter. You need to make sure the integrations they have work with the software solutions that you depend on.

4. Scalability

You want to choose software that will grow with your business. Migrating to another platform because your accounting software can no longer handle what you need is costly and time consuming, as well as rife with the possibility for problems. QBO offers a great solution for small businesses hoping to expand to the Enterprise level. However, Xero has increasingly become the choice for startups, as it can cater to mid-market companies with up to 1000 employees. 

Live Accounting with NOVAA

Even if you’ve narrowed down your cloud accounting software choice to QBO or Xero, the choice isn’t easy given the different subscriptions and features available. This is why it’s best to consult experts so you can best assess your accounting needs and which solution suits them.

At NOVAA, we are accounting experts and are certified by Xero with Silver Partner status, and as QuickBooks Online certified ProAdvisors. Regardless of which cloud solution you choose for your business, we provide “live accounting” for our clients. Unlike many accounting firms that wait until the end of the month or year to update your books, we update them daily so that you have live access to your accounting data. That means that you can login to your account and look at accounting entries as they happen, assuring ease of use and access to all of the information you need to run a successful SaaS startup.  

For more information on NOVAA’s live accounting services for QuickBooks Online or Xero, book a free consultation.