The definition of ‘affiliate’ can be complex and can depend on the perspective taken (e.g. legal, regulatory, financial).
From a financial perspective, there are specific auditing rules, standards, and procedures that accountants use to determine when an affiliate should be included in a company’s annual financial statements. However, even with audited statements, buyers often have difficulty understanding the operating cash flows of companies with affiliates. The problem is exacerbated when companies with affiliates do not have audited financial statements.
Over the past 22 years, we have sold numerous companies that have had affiliates. Types of affiliates have included:
– Real Estate
– Machinery and Equipment
– Vehicles (trucks, cars, and aircraft)
– Maintenance & Repair
It is critically important to potential buyers that they have clear visibility into the financial performance of the company and all affiliated entities, as they operate collectively. It is even more important to buyers that its business dealings with those affiliates do not change, post acquisition. For example, if your company leases its real estate from an affiliate at a rate that is below market, buyers will want to secure long-term leases at those same rates, to ensure the earnings of the company do not decline post-sale, due to higher lease payments.
Accordingly, one of our first steps, in preparing a company for sale, is to work with our client (and their accountants and lawyers) to ensure that the client can clearly communicate both the legal structure and the aggregate operating cash flows of the company, including all of its affiliates.
Have a great day everyone.