I had lunch yesterday with a business broker – those are the outside advisors that help small business owners sell their companies when it’s time to retire or do something different. While our average client is typically on the high end of the business broker target market, I found many similarities in the experiences we had in the business of preparing business owners for exit.
She was working with a company for nearly two years because their financial reports – and supporting accounting records – were so unreliable that she could not in good conscience present the company to a potential buyer and feel secure about the information she was sharing with the prospective buyer. Her thought was to ask if my CFO team had the bandwidth and interest in helping in that situation.
I said it all depends.
It depends first and foremost on the selling CEO/owner’s willingness to enhance their internal infrastructure, clean up the books and be able to defend the numbers in their financial reports. That willingness is often restrained by three things:
- The CEO’s unwillingness to spend more money on financial recordkeeping when they don’t see it as contributing to their bottom line, and
- The CEO’s unwillingness to make adjustments that often will remove personal expenses paid for by the company, resulting in higher reported profits and – guess what – higher income taxes to pay next time around, with some risk of retroactive taxes as well, and
- The CEO’s belief that there is no need to engage assistance in preparing the company for sale until he/she is in fact ready to sell. Doing it earlier than that is more unnecessary expense and likely interference in the way they like to do things.
So let’s just address the CEO’s resistance on those three points for this post, ignoring all the actions that likely must take place after the go-ahead signal. Let’s take the three restraints in order.
- Financial recordkeeping is critical to the bottom line because it gives the CEO the information needed to spot good trends and bad ones, so they can reinforce the good ones and stop the bad ones. Month-to-month comparisons, budget comparisons, financial analysis, are just some of the tools to identify those keys to sustained profitability, and you can’t get to them without reliable financial reports, which come – not surprisingly – from good accounting.
- The tax fear – this is a funny one to me, and let me demonstrate why. Suppose a company reports $1 million a year in pretax profits, after shrinking those profits by loading in $200K in personal expenses that were paid by the company each year. If they add back those expenses from their reported income, profit goes up by $200K and the tax bill could be $40-50K higher as a result. But if the company is sold for a 5X multiple of EBITDA, a not uncommon situation these days, that extra $200K in profit could yield an increase in the gross selling price of $1 million. Am I missing something here?
- Finally, why not wait until you’re ready? As my lunch guest noted, she’s been trying to get a prospective seller to clean up his books for a couple years. We have been telling clients for years a few simple realities:
- Once you make the decision to go to market, it will invariably take at least a year for evaluation packaging, publicizing, interviewing, due diligence, negotiating and closing the sale.
- if your company is in great shape, then, you should give yourself a year to polish the apple to enhance the likelihood that you’ll get the best possible price when you sell.
- If your company is in less than great shape – which is most of them – you should add another 2-3 years to fix what is broken and be able to demonstrate a couple of years of non-broken performance before you go to market, because buyers want some assurance that your wonderful performance last year wasn’t a one trick pony.
So, do you know someone who is ready to retire or change direction next year and they’re wondering when to call for help? Tell them they’re already late and they should plan on sticking around for awhile.
Do you know someone who thinks they might want to exit a few years down the road, and they’re wondering if they’re ready to get ready? Tell them it all depends.
We can help.
We are Your CFO for Rent.