Read our insights

With rising costs, staff shortages and ageing facilities, pressure on New Zealand’s aged care operators keeps mounting. For some, consolidation could be the key to survival – and for others, now may be the ideal time to sell. Strategic mergers and acquisitions can strengthen the sector and ensure quality care for our growing elderly population.

Whether you’re a vendor or a purchaser considering consolidation as a viable option for your brokerage, there are industry-specific challenges and considerations you’ll need to overcome to deliver successful outcomes beyond the completion of the transaction.

The success of an acquisition largely hinges on the price paid relative to the value received. To ensure success, it’s crucial to gain a comprehensive view of not only the quality of earnings of a business but also the quality of the reporting itself. If you’re an investor performing due diligence, here are five key considerations about the quality of the target’s financial reporting.

Some years ago, I remember someone bemoaning New Zealand business owners’ lack of ambition. This person said when owners have grown their businesses big enough to start to look overseas they then sell, as long as the sale price would allow them to join the Triple “B” and buy a bach, a BMW and a boat. Although I hadn’t heard of this club before, the point that stuck with me was the comment about the real value of a company being unlocked globally by its new owners. I think things have moved on significantly since then with New Zealand companies such as Seequent selling for $1.46 billion, Ziwi for around $1 billion and Partners Life also for $1 billion. Certainly, a lot more that a ticket to join the Triple “B” club! Gone are the days when companies sold for 3-4 times EBITDA (earnings before interest, tax, depreciation and amortisation) or maybe 7-8 times EBITDA if the buyer had Australian pension fund money looking for a home. Deals like Seequent are not referable to EBITDA at all, with technology companies increasingly being sold at multiples of sales instead – sometimes up to 45 times sales and beyond. How to get the best bang for your buck when selling your business While you are sitting at the beach or lake over Christmas, thoughts of selling your company may cross your mind. If so, there are lots of things you might need to start thinking about. Firstly, get sale ready. When a company is sold, there will almost certainly be some level of due diligence – typically covering finance, legal and tax. A buyer doesn’t want any nasty surprises. Preparing for this will involve ensuring everything is in order – making sure all agreements, processes and procedures are documented and all information likely to be needed is collated and ready to provide. Some businesses plan for this several years ahead and look to have their annual accounts prepared and audited. These actions, though worthwhile, are generally house-keeping tasks and won’t necessarily increase the value of your business. So what can add value, or at least bump-up the multiple of earnings that a purchaser is willing to pay? When it all boils down, the value of a business is based on the demonstrable track record of sustainable earnings, or the prospect of growth in earnings in the future - or, ideally the combination of both. Therefore, being able to prove the reliability of your revenue and profits, and the strength of your position in the industry is worthwhile. It’s also important to have a well thought out set of financial projections which demonstrate the growth prospects for the business and how these can be achieved. Is growth going to come from the existing product base, new product development or bolt-on acquisitions to increase presence and market share? How much will this cost, and what are the potential returns if actioned? The other key question a purchaser will want answered is around people, and most specifically you! What does the business look like with you – are key customer and supplier relationships shared across a management team, meaning your exit from the business is not detrimental to its performance? Answers to these questions are usually presented in an Information Memorandum (IM), a short sales document used to market the business to prospective purchasers. Detailed sell side due diligence reports can also be provided to prospective buyers. While this won’t generally stop buy side due diligence being undertaken, it can help buyers get to the heads of agreement stage more quickly and ensure all the information and materials are ready for due diligence questions. Once a heads of agreement (high level terms likely to be reflected in any future sale and purchase agreement entered into) has been signed, a buyer will typically be granted a period of time where they have exclusive rights to undertake due diligence, and formalise a contract and purchase price. If they decide to proceed, the buyer will submit the first draft of a sale and purchase agreement. The buyers and seller will negotiate the terms of the sale and purchase agreement with the document going backwards and forwards between the buyer’s lawyers and the seller’s lawyers. The document may go back and forwards several times while clauses are negotiated. Will you sell shares or assets? A business sale can involve shares in the company or its assets. The advantage of a share sale for the seller is they can walk away and often the sale proceeds are a tax-free capital gain. The disadvantage for a buyer is they inherit any “skeletons” buried within the company not identified during due diligence. Often the sale and purchase agreement will seek to put some of these risks back on the seller in the form of vendor warranties and indemnities. Under warranties and indemnities, the seller will have to refund part of the purchase price if specific things are identified or occur. Where the seller still wants to draw a line in the sand and not have to worry about warranties and indemnities, it is possible to obtain warranty and indemnity insurance. This is specialist insurance, and a premium is paid to the insurer to transfer the risk arising from warranties and indemnities post sale to the insurer. Typically, the warranty and indemnity insurer will want to review all due diligence reports and may require further due diligence to be undertaken or exclude certain risks. Where business assets are sold, the company’s past stays with the vendor with the business being transferred into an existing or new company owned by the purchaser. This involves changes of ownership of assets, assignment of business contracts and the transfer of employees. It can also involve the purchaser assuming agreed liabilities, such as leases and employee entitlements like holiday and sick pay. When business assets are sold, the vendor will need to wind up the selling company to access any capital gains tax free. What about tax? Purchase price allocation Purchase price allocation is where the parties agree what portion of the overall purchase price is allocated to the various assets acquired and liabilities assumed. This is a key area for negotiation. A purchaser will want to allocate as much of the purchase price as possible to items which will be tax deductible either upfront or at some point in the future, such as plant, patents and trading stock. The seller will want to allocate as much of the purchase price as possible to non-taxable items such as goodwill and trademarks to increase the amount of non-taxable goodwill that they realise. There is generally a natural tension between the seller’s best outcome and the purchaser’s best outcome, so Inland Revenue will generally accept the purchase price allocation agreed between unrelated parties as being a fair market price. GST The purchase price will be either inclusive of GST or have GST added on top. Generally, a seller will insist on the purchase price being “plus GST if any”. The purchase price can be zero rated for GST in certain circumstances, such as where an interest in land is included in the sale (ie, a lease) or where the sale is made to a purchaser outside New Zealand. GST zero rating can also apply to a going concern, ie, where what is being purchased is able to be operated on its own immediately after the purchase is complete without adding anything to it. As most business require premises, it is generally quite hard to have a situation where there is a going concern which isn’t already zero rated for GST due to an interest in land being transferred. There are many more things to consider, and if you are considering selling your business you should get your house in order sooner rather than later. There may be significantly more at stake that membership in the Triple “B” club!

Why would a business ever choose to invest more time and money in financial reporting? You might think it’s always better to just do the minimum and stick to the usual special purpose reporting that most Kiwi company’s produce. But when your company is serious about achieving a higher profile on an international stage, there could be some unexpected upsides to stepping up to more rigorous financial reporting. Instead of special purpose reporting, a company could benefit from adopting International Financial Reporting Standards (IFRS). Put simply, it’s an international accounting language that crosses borders so investors or shareholders who have a reasonable level of financial knowledge can compare listed companies across the globe. The standards are comprehensive, consistent, transparent and universal. Different jurisdictions have their own versions of IFRS and Aotearoa is no exception. We have NZ IFRS, a local version of IFRS which includes domestic requirements for our market while ensuring we comply with IFRS. The standards are updated regularly. NZ IFRS and which companies must comply Naturally, NZ IFRS is required for publicly listed companies, whether they’re based here or internationally. For some businesses, especially household names, you’ll often see the complying information packaged up in the financial section of a glossy annual report. For other businesses, the information will be available on the Companies Office website. Privately owned New Zealand companies with assets totalling more than $66 million or revenue over $33 million must also comply with NZ IFRS. Other entities deemed ‘publicly accountable’ may also need to report under NZ IFRS, for example regulated entities such as banks or insurers. Adopting IFRS sends a clear message your company is ready for the big leagues If your company doesn’t meet the threshold for mandatory adoption of IFRS, why would you choose to opt into the standards? Attracting the right buyers at the right price The first and biggest motivator is the prospect of a sale. Reporting under IFRS makes a company more attractive in the international marketplace. If your company has the potential to be purchased by a global corporation as a subsidiary, that potential buyer will be an IFRS reporter. By stepping up to IFRS, your company can be assessed more easily and accurately by the prospective purchaser. We’ve seen many Kiwi companies sold overseas in recent years, from huge sales like Vend ($455 million) and Timely (around $100 million), through to high-performing SMEs and farms. IFRS shows you’re speaking the same language, and that your company can easily slot into their own reporting regime. It also demonstrates that your business has the capability and capacity to comply with IFRS. Because this level of reporting is more complex, and requires a higher level of sophistication, it shows a purchaser that your company has the acumen and expertise to be a major asset on the balance sheet. Stepping up your capital raising game Another important motivator of switching to NZ IFRS early is fundraising. If your business is seeking to raise money from the capital markets, adopting higher-level reporting can help investors make a more informed decision. It can give them confidence in your company and allows them to have a more in-depth understanding of precisely how the company is performing. And, if your company is dealing in complex financial instruments such as hedging, foreign exchange or derivatives, there is no information in special purpose reporting that tells you how to treat these. NZ IFRS provides clear guidance about reporting on these types of activities. IFRS produces higher-quality financial statements Financial statements produced under NZ IFRS are considerably more accurate than those produced under the special purpose financial reporting framework. A higher level of scrutiny is applied across your organisation’s financials, and the standards themselves provide guidance about how to improve the accuracy of your statements. Here’s some examples to highlight how they differ: If your company has $1m debtors owing at the end of the financial year, special purpose reporting will value that at $1m. That’s a straightforward way to account for those monies owed. In contrast, NZ IFRS demands a closer look at the outstanding invoices. If the company historically sees a 5% rate of default, your NZ IFRS financial statements will provision for that and value the accounts receivable at $950k. This is a more accurate valuation of the receivable invoices. When a business exports goods, once the goods are on a ship and on their way overseas, they are invoiced and recorded as a sale. Under NZ IFRS, those goods might not actually be sold until they land at the receiving port – the sale would be reversed back into inventory until the product arrives and ownership passes. Unlike special purpose reporting, NZ IFRS requires right-of-use values for leased assets, which needs some detailed calculations to capture. There are hundreds more rules like these that contribute to IFRS providing much more detailed and accurate accounts. If you adopt IFRS, the quality of your accounts is going to be significantly higher, and it could change your final numbers quite substantially. Making a decision about whether to adopt NZ IFRS Adopting NZ IFRS does involve extra work and higher costs. You certainly wouldn’t adopt these standards lightly. Ideally, you should consider the costs and benefits to the business – is it worthwhile? If IFRS statements could make the difference between a sale or no sale, or maximise the value of your company, it could be an investment with a very impressive return. It won’t be right for every business, but for up-and-coming companies with great acquisition prospects, NZ IFRS can show you’re ready for the big stage.

New Zealand company tax changes mean that unused tax losses, previously lost following more than a 49% change of business ownership, may now survive. This means that while any existing tax losses for a sale above that threshold could previously be ignored during M&A negotiations, buyers and sellers should now consider potential price impacts when such losses exist.

Amid the excitement of securing a deal, significant unforeseen risks can catch you off guard, become extremely expensive to mitigate and can easily derail your post-acquisition strategy. Due diligence can help you strike the right balance between risk and reward.

What is best practice if you’re seeking growth opportunities in New Zealand’s cooling market? Here’s eight key factors to bear in mind if you're considering M&A.

A thorough financial risk management plan should include protection against financial loss due to the illness, injury, disability, or death of a working owner or ‘key person’. The financial impacts of these scenarios can be instant, long-lasting and in the worst-cases, terminal for your business and potentially your personal assets.

With nearly 150,000 small to medium businesses operating in New Zealand, an ownership interest in a family business features in many relationship property settlements. The interest held in that business can represent a significant proportion of the relationship property, and in some cases it can make settlement proceedings considerably more complicated.