- GET
ORGANIZED!
- By Peter Stahl
Almost as important as running your business is
having an exit strategy. Most business owners have lived and breathed their business for
years and would like to get rewarded for their hard work. This is where planning becomes
essential. Not only is it important to sell at the right time, but you need to be
organized so you are ready when the time is right.
Why sellers
sell
Unfortunately, poor or declining profitability often characteristically precedes selling a
business. Roughly 40% sell their assets to repay debt following poor performance. It might
seem difficult to sell your business when it has a good growth curve. However, as a
business owner, you need to know for how long and to what level you can grow your business
before it reaches its plateau or maturity stage. All too often owners wait too long to
sell their business, and end up getting much less for it than they would have received two
or three years earlier. This is usually because, either they missed the window of
opportunity (since the timing was not right) or their sales had leveled off or even
declined. Sometimes it is even too late, which is evidenced by the bankruptcies afflicting
highly leveraged businesses. Therefore, plan now and get organized.
What
the buyer needs to know
Once a business owner has made the decision to sell their business, they often ask us,
"what information do we need to provide the buyer?" The answer is quite simple
-- everything! You have to put yourself in the buyer’s position, and ask yourself
"what would I want to know if I was going to buy this company?" The information
provided to sellers is crucial, and it is something that could make or break the deal.
Buyers want to know about the seller’s: products, technologies, marketing,
distribution, operations and manufacturing. As information is gathered, it needs to be
screened, reviewed and condensed in a logical manner. This requires a lot of work and an
experienced acquisition consultant can be invaluable at this stage.
However, before a buyer even gets to look at all
these aspects of a possible acquisition, there are three things a buyer wants to know:
where is the money coming from, where is it going, and how much is left over. To find this
out, buyers want to look at your financial statements. They need to be able to analyze
historic (usually five years) and current financials and be able to build accurate pro
forma income statements, balance sheets and cash flow statements. The basic rule of all
acquisitions is, that financial projections are worthless unless the initial combined
financials are well prepared, accurate, and understood by the acquirer.
Sometimes a business owner just want to spin-off
a division of the company. If this is the case you need to keep separate financials for
each line or division. If financials records have been kept for this division it could be
a smooth transition. However, it is almost impossible to backtrack sales for several years
if this is not something that have been taken care of in the past.
The importance
of financial statements
Our experience shows that good financial records increase the value of your business by
20%. Without extensive knowledge of the target’s financial affairs, buyers and
lenders are likely to be in the dark when making their decision about whether or not to do
the deal. Accounting for the merger/acquisition/buyout financial statements are critical
to present and future concerns of buyers. The more reliability a buyer can put on the
statements, the quicker he will act.
One of the major reasons for business failures is
inadequate financial management. No matter of how great your business may be (or the sales
potential it may have) long term profitability is difficult to achieve without proper
financial planning. This is particularly true for middle sized businesses since they are
typically thinly capitalized, and operate in a highly competitive market. Moreover, these
companies have limited resources with respect to personnel and managerial talent. Because
of these inherent limitations, financial institutions (and buyers) are skeptical about
these companies -- which makes your record keeping even more important.
Show
your profits
Owners are often more concerned with tax savings, than with reporting earnings and
financial condition until they are financing, going public or structuring their company
for sale. Their accounting practices historically may be designed solely to minimize
income taxes. Such tax issues may include: the treatment of cash sales, personal expenses,
comingling of the owner’s personal expenditures with company expenses (such as car,
life insurance, perks and other company paid benefits).
Financial statements may not have been audited or
even prepared in accordance with generally accepted accounting principles (GAAP). If you
are in this position, you must be prepared to put your financials in order to package your
company for sale. Always strive for the most complete and accurate financials; if they are
currently reviewed, get compiled statements and if they are compiled try to get audited
statements.
Conclusion
The existence of financial and accounting problems may impair a company’s ability to
demonstrate its true earning power -- and will potentially lower the purchase price. In
order to satisfy a potential buyer, significant and precise documentation is necessary in
order to establish an accurate value of the business and reliable pro forma results of
operations. Business Marketing Consultants experience and expertise in this area and can
be of substantial assistance. In helping our clients, we have found that good financials
will not only significantly speed up the acquisition process, but fast and smooth
transactions tend to produce the highest price for the seller. |
