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Private matters Featured

6:15am EDT August 31, 2004
Private companies looking to sell may be fretting over what effect Sarbanes-Oxley has had on the acquisitions market, but experts say not to worry.

The law, which requires publicly traded companies to adhere to a much higher degree of disclosure and accountability than in the past, could have had a chilling effect on the acquisition of private companies as public entities look to avoid inheriting potential violations. But that hasn't turned out to be the case.

"From a private owner standpoint, if you are trying to sell the company and you have engaged a professional agent ... and you have got reasonably good professional legal and accounting professionals and you are not a big company, then I don't think Sarbanes-Oxley is a big deal," says Scott Lang, senior managing director and principal of Brown, Gibbons, Lang & Co., an investment banking firm that specializes in the middle market. "The reason is, if you are going off to sell, you don't know who the buyer will be. If, ultimately, a private company is the buyer, and many in the middle market are acquired by private equity funds, then they are not directly impacted with compliance or noncompliance with Sarbanes-Oxley.

"We've recently seen a resurgence among corporate buyers into the middle market. They may be interested in Sarbanes-Oxley issues, but typically, they are going to be on top of those issues."

A larger public company will have a staff that specializes in these issues and can take care of them. A smaller company may not have a dedicated staff, but it will still be an important part of the due diligence process.

"If you are already compliant, and in a sense have your CEO and CFO signing off on financials and taking responsibility for audits, if you have an independent board of directors and an audit committee, then it might make a deal go more smoothly. But the real question is, will it add to the value of your company?" Lang says. "The answer is, maybe a little bit. I'd like to say it would be fantastic, but it will not make a huge difference. It might add to the cost of the deal if you are not compliant or if you are not headed in a compliant direction, but I don't see a lot of stress around these issues among the middle market."

Private equity funds may eventually want to take the acquired company public, but they can set things up so they can be dealt with at the time of the stock offering.

"If I'm a private business owner and wanted to sell, I'm not going to rearrange everything to comply with Sarbanes-Oxley," says Lang. "I'm not going to get that much more value for the company."

But there are reasons why a private business executive might want to consider some Sarbanes-Oxley-type initiatives.

"If you start looking at some of the things the law is aimed at -- getting more accurate information, independent professional management, being responsible for actions of the company, independent directors as real participants for growth -- these are all good things for growth of the company," says Lang. "You should do them because they are good for business, not because you are prepping the pig for the roast. They are typically good business practices that can put you at or ahead of the competition.

"It doesn't cost a lot to have an independent advisory board. It doesn't cost a lot to have senior managers take responsibility. These are good business practices that can be instituted for low expense." HOW TO REACH: Brown, Gibbons, Lang & Co., (216) 241-2800 or www.bglco.com


The cost of SOX

The compliance costs of Sarbanes-Oxley make the idea of going private attractive to smaller public companies that don't have the cash to pay to comply.

"The fact that the company is spending money on Sarbanes-Oxley compliance, and they won't have to spend it after the acquisition, means that those dollars are essentially added back into the profitability of the company," says Scott Lang, senior managing director and principal of Brown, Gibbons, Lang & Co.

A company spending $1 million annually on compliance issues might only have to spend $200,000 of that to be a well-run private company. You never get 100 percent of the costs back, because some of the functions still have to be done.

"A lot of them are things that you won't have to spend as much money on privately," says Lang. "Your insurance, audit and legal costs will go down. There is quite a bit of savings to be realized.

"Some companies that are public aren't making that much money. The costs can make a difference, whether they are taking full advantage of their opportunities of spending money on things that are compliance-related and not getting more business in the door. That money can make the difference."