Accounting, Edition 39

Paella’s Saffron

By: M.C. Benito Revah

Valencian paella is without a doubt a dish worthy of a feast. In order to taste its richness, it must have the exact amount of ingredients of the best quality. Since its preparation takes time, care must be taken in integrating all the ingredients at the exact moment, because it is vital in order to achieve the desired result.

In a recent talk I had with Jacques Rogozinsky, Ph.D. in Economics, he explained that in order to achieve sustained growth in uncertain economic times, all the “ingredients” must be present in precise portions in order to achieve our desired outcome, and that one special ingredient “makes all the difference” between a common and ordinary rice recipe and a “delicious paella.”

Upon reflection on his economic theory, I immediately visualized the whole process involved in mergers and acquisitions, from its components in the beginning to the professional care, which is required in all its aspects, to a successful closing.

There are a lot of rice recipes and anyone with a basic knowledge of cooking can handle them; likewise in business, when closing a deal, we think we are capable and know how to do it, however when faced with a business deal requiring more than simple negotiation, we must seek the help of experts in the field.

In mergers and acquisitions, once the decision to acquire a business is made, it is important to supervise carefully the various stages and have the exact ingredients to achieve a successful process.

One such ingredient is the financial expert, who is charge of the business’ initial valuation; he must have access to updated financial information, expected cash flows, the growth projections of each business unit, appropriate rates to discount the cash flows, and must perform calculations requiring professional judgment as in the case of the Weighted Average Cost of Capital.

Another essential ingredient is the auditor’s job, which is external and independent from the parties involved since he is in charge of analyzing the acquired assets and the company’s assumed liabilities. His professional opinion and our belief in his capabilities give us a degree of certainty regarding the acquisition’s figures.

An additional ingredient is the banker, responsible for providing financing at the right amount and time and at an affordable cost. He is involved with all the interested parties in the transaction and will be charging the agreed amount.

Another necessary ingredient in this process is the tax expert. He is in charge of implementing the best strategy to finalize the negotiations minimizing the tax burden, but always in compliance with the law. He is responsible for suggesting the best way of closing the negotiation, namely through a merger, a demerger or the exchange of shares between the interested parties. Furthermore, he is responsible for doing the complex capital allocation calculations and the tax net income accounts in order to optimize tax reimbursements.

This recipe is not whole without its “legal-corporate” ingredient. This team of professionals is in charge of drawing up the contracts, writing the clauses, setting the penalties in case of breaching, and providing assurance to all parties.

However, the main ingredient, which brings “color” and a “savory” taste to the paella is without doubt, the saffron, i.e. the Public Accountant. This professional incorporates perfectly all the abovementioned ingredients thereby resulting in a delicious dish and successful business transaction. That is to say, he possesses a vast knowledge of corporate finances, has independent external auditing experience, coordinates the cash flows between the seller and the buyer, has expertise in the tax regulations regarding acquisitions, implements the tax strategies with the least burden, and finally analyzes every clause in the agreements.

Being a leader in merger and acquisition teams, he possesses a strong work ethic regarding confidentiality in business negotiations, establishes the terms of these negotiations in a fair and just manner for both parties involved, and does not disclose any relevant information knowing that in doing so the rice becomes “clumpy” thus ruining the paella for clients.

Saffron is the most important ingredient in our paella, and without it we are left with “common and ordinary rice.” ?

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