Why Sarbanes-Oxley is Important to Private Companies
For many private companies, Sarbanes-Oxley represents a cumbersome burden that is the province of publicly-traded companies and not relevant to the needs or goals of private enterprise. There are, however, a few provisions of Sarbanes-Oxley that pertain to private companies, including certain requirements regarding retirement plan, employment, and document retention policies and procedures. Of greater interest may be the fact that a private company’s relative compliance with and awareness of Sarbanes-Oxley best practices can strongly influence valuation and viability of a potential transaction with a public company.
Public companies have no choice but to comply with applicable provisions of Sarbanes-Oxley. Sophisticated businesses that occupy a large share of the market or are determined to grow through acquisition will rely on well-crafted best practices to ensure compliance. The implication for potential target companies is that the public company will place great value on the target’s practices with regard to Sarbanes-Oxley, scrutinizing the relative risk level that corresponds to the target’s degree of compliance.
An interested acquirer may devalue the deal or even walk away if the apparent risk is too high as a result of substantial non-compliance or non-compliance that would be too challenging to remediate. Because of this, private companies with aspirations of being acquired can make the company more desirable, or at the very least remove unnecessary deal killers, by reviewing current practices and making key adjustments to align with general best practices seen in public organizations in the industry.
These adjustments often include adopting at least some of the corporate governance reforms required of public companies under Sarbanes-Oxley. Even in the absence of external factors, private companies can benefit from some of the concepts underlying Sarbanes-Oxley. These concepts promote better management in a number of ways. Improved corporate governance practices can facilitate better strategic decision making by causing directors to more carefully explore important decisions. Improved accounting controls can create more timely information to support this decision making and create more reliable financial information. Fraud will also be deterred or, at the very least, caught much earlier.
As a compound effect, all of the above benefits also create a more desirable target company during the M&A due diligence stage as well. The enhanced decision making and attention to best practices shows interested acquirers that the company is well-coordinated, giving the target more leverage to help maximize the deal value.
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