• +1-781-425-5095
  • info@seedtoharvestllc.com

Exit Planning

The Number 1 Reason Companies Don’t Sell

I was chatting with a business owner this week, and he told me he’d heard statistics that less than 50% of companies are ever sold.  Why is this the case?  Over the last 30 years, I’ve discovered the number 1 reason that companies fail to sell, and it boils down to one thing:  Timing.

Timing impacts your ability to sell your company in a variety of ways.  Things that you can control include trying to sell too soon or waiting until it’s too late, but there are also factors over which you have no control that can impact timing.

  • Too Soon

Have you developed a product or service, and it just needs that last little push to get to market?  It’s probably too soon to sell.  Looking at your company from the buyer’s point of view, they want to buy the business after it has developed traction.  You need to have illustrated through increasing sales, that there is a need for your product or service.  It’s not just nice to have, customers NEED to have it.  If sales are still nascent and your competitors are thriving, without being worried about a disruption to the market from your new product or service, it’s too soon.  You may be a candidate for an investment from a financial or strategic investor, but your company isn’t likely to be of much interest as an acquisition candidate.

  • Too Late

Much more common is a business owner who waits until it’s too late.  You’ve spent years running and growing your business. Now you’re getting tired; you may have been taking your foot off the pedal, so sales have slipped a bit.  Or maybe a disrupter has come into your market and is starting to steal market share.  But for one reason or another, sales and profitability are on a downward trend.

Buyers are willing to spend money to buy future opportunities for growth and profitability.  Their return on investment comes from profits from the business after closing, and if sales and profits are trending down, they may not believe they can achieve a return sufficient to reward them for the risk they’re taking when they pay you for 3, 4 or 5 years of profits in advance. (“The buyer paid me 5x EBITDA,” means that at the closing, the buyer paid the equivalent of the next 5 years of cash flow if there is no growth.)  Buyers will think that if you, who knows the business better than anyone else, can’t get the business to grow, how could they?

A business owner came to me recently with a well-known business that has been around for 25 years.  Unfortunately, in each of the last 3 years, sales have declined by about $1 million, and the owner is clearly tired and ready to sell.  The owner told me “Listen, it’s a great business; all a buyer will need to do is to invest in better marketing, and do a better job managing the sales force and sales will turn right around.”  This business owner forgot one fundamental truth:  Buyers have limited resources of time and money and want to invest those resources in opportunities, not in risks.  They only get a return on their investment through growth, so if your company isn’t growing, they can probably find a competitor to acquire that is.  (And if they give you an offer anyway, it’s likely to be a low offer that reflects the risk and hard work they’ll have to do to turn the business around.)

  • External Factors

The first two issues with timing are within your control, but external factors are not.  In the external environment, you need to keep on top of four key things:

  • Availability of Bank Financing. Buyers who “pay cash” aren’t actually using cash on hand.  In almost all cases, a big chunk of that cash you’re getting is coming from a bank.  As we saw in 2008 and 2009, when the banks stop lending money, buyers stop making acquisitions.  And even if the banks are making loans right and left, your company must be finance-able.  Some of the things that you can control that impact the buyers’ ability to get financing include:  strong, experienced management team (below the owner); low customer concentration; stability of historical financial performance; and long-term customer contracts.
  • Industry Consolidation. Most industries go through periods of consolidation.  So, if you’re starting to hear about competitors being acquired, it may be time to sit up and take notice.  You don’t want to be the last one standing during a game of musical chairs.
  • Larger Competitors Being Sold at the Same Time. As a small business, you may find that your advisor can’t get attention from the largest, most acquisitive industry buyers if there are several larger competitors in the market at the same time.  Looking at this from the buyer’s point of view, it costs them as much time (sometimes less) and money in professional fees to complete a large deal as it does to complete a small deal.  In most cases, they’d rather invest those resources in a larger deal that will move the needle for them.
  • Economic Cycle. Remember that buyers get their return on investment from future results, so if the economy in general, or your industry in particular, is heading for a downturn, you won’t find a ready stable of buyers excited about making an investment.

Several years ago, I was representing a consulting company that worked with many government agencies.  The company was growing and had a stellar reputation in its field; however, the economy was beginning to slow, and more importantly for their future, the government was tightening its belt buckle and reducing its spending.  There were no buyers interested in buying a business whose only customers were the federal government, when said government had announced significant budget cutbacks.

If you’d like to talk to me in confidence about how to time the sale of your company, please contact me.

admin

Business Owner Blind Spots: Part 2 – How Much Are You Getting Paid From Your Business?

When I ask a typical business owner how much they make from their business, they can tell me their annual salary that shows up on the W-2.  They can probably even tell me how much they took in distributions the last several years.  And that’s where the knowledge stops and the blind spot takes over.

Because almost every business owner I’ve ever met runs many expenses through their business that post-transaction will have to be paid out of their own pocket.  The most common expenses that fall into this bucket include:

  • Car Lease Payments
  • Gasoline
  • Cell Phone
  • Life Insurance
  • Health Insurance
  • “Wages” paid to the kids
  • Dining Out
  • Country Club and Golf Fees
  • Business Travel (that really isn’t)

When the expenses are paid by the company, they disappear from sight, mind and memory – until the day after closing, when all of a sudden you’re getting bills in the mail every day that you never used to have to think about.

Why should you care?  Two reasons:  valuation of the business; and understanding how much you need to sell the business for to generate enough income to support your lifestyle.

First, let’s talk valuation. When I’m recasting financial statements for presentation to a buyer, I want to pull out all of these expenses and show them as “add-backs” to the profitability of the company, since a third-party buyer won’t have those expenses, meaning your business actually generates more profits than it at first appears.  And since buyers are usually paying a multiple of earnings (4 times? 8 times? 10 times?), the value of these add-backs can be pretty significant.  I’ve seen these types of expenses add up to $25,000 or $50,000 on an annual basis for small companies, over $100,000 for larger companies.  Apply a 5x multiple to it, and that’s a lot of extra purchase price.

Which brings me to my second point – you’re going to need all the purchase price you can get!  Post-closing, you will be depending upon your investments to generate the cash flow that used to come from your business.  And that $50,000 worth of expenses that have been paid by the company in the past have also probably been deducted by the company, so you were paying them with pre-tax money.  Once you’ve sold the business and you’re paying them out of pocket – the IRS isn’t going to let you deduct them, so now you’re paying them with after-tax dollars – so instead of them creating a little tax shield, you need about $75,000 in pre-tax money to pay $50,000 in expenses.

Do you need help understanding how a buyer will view your business and how much they’re likely to pay for it?  Contact us to learn about our Business and Value Assessments.

admin

Top 5 Things to Do Now to Prepare Your Business For Sale

You’re not ready to sell the company today, so you don’t think you need to spend any time planning for that exit down the road?  Wrong – many times, the planning you do will take several years to create value, and in the meantime, anything you do today to create sustainable, transferable value tomorrow, is likely to increase your revenue and profits in the shorter term, too.

After more than 30 years of selling and buying businesses, I know how the buyer thinks, so I’ll share with you the top five things you should focus on today to build value for tomorrow.

  1. Focus on creating operational excellence.

You should have or put into place documented processes and procedures, for everything in your business – how you do what you do, or make what you manufacture; how and when you hire, fire and train employees; how you do your annual budgeting; how you track your sales pipeline.  Put key operating metrics in place, and then track actual performance against them.  This step alone will result in a company that is well-run and growing in revenue and profits.  When it’s time to sell, a buyer can clearly see the operational excellence, and this will help drive your valuation towards the high end of those paid for companies in your industry.

  1. Concentrate on customers.

There are two critical areas to focus on here.  First – look at your existing customer base:  Are you suffering from customer concentration (more than 5% of revenue from one customer/decision maker)?  If so, it’s time to look for several additional large (or a whole bunch of smaller) customers to drive that customer concentration down.  Yes, it’s great that XYZ corporation loves you so much that they keep giving you more and more of their business. However, from the buyer’s point of view, that’s a huge risk and I’ve seen them respond in each of the following ways:  a) buyers will decide they have no interest in buying your company at all; b) buyers will pay you a lower purchase price because of the risk profile you’ve created; or c) buyers will want to put a very large portion of your purchase price in the form of an earn-out, paid over time based on the retention of those large customers.

Secondly, you should maintain a pipeline of potential new customers, along with a standard system for tracking and maintaining the pipeline.  Remember that buyers are buying the FUTURE performance of your business, so your ability to show them a history of tracking and winning new business will help them to believe that the financial projections you provided to them are reasonable and achievable.

  1. Prepare consistent, GAAP financial statements.

You don’t necessarily need to have an annual audit, but it absolutely helps.  An annual audit can uncover revenue recognition problems, which can result in significantly lower revenue and profits than you thought you were producing, negatively impacting your company’s valuation.  Rules for revenue recognition are getting more complex every day, so getting professional help is a must.  If a buyer finds out during due diligence that your financial statements have not been consistently prepared according to GAAP, it opens the door to a renegotiation of the purchase price, and by the time you’re in due diligence, your negotiating leverage has been severely reduced.

  1. Build depth in your team.

As a business owner, you’ve probably done every job in the company, but building a company with sustainable, transferable value means creating a company that can run without you.  Remember, the buyer is about to put millions of dollars in your bank account – they will have a concern that once you no longer own the business, you won’t be as focused on running and growing it as you are today.  You want them to believe that if you go sit on the beach, the team left behind can ensure the continued success of the company.  The top three areas where buyers will want to see a team include:  sales/customer relationships; operations; and financial reporting.  And if you build out your team before you sell the business – you might even be able to take that two week river cruise in Europe your spouse has been begging for!

  1. Maintain complete, organized and accurate corporate records.

I once had a client who couldn’t find his corporate record book – no problem, he thought; the attorney can just recreate it.  So the attorney did.  But three days before the closing, the corporate records showed up, and it turns out the share ownership was different than the seller believed!  This caused the closing of the sale to be delayed for several weeks while the paperwork was sorted out.  Time is the killer of every deal, so be sure that you can get your hands on your corporate by-laws, shareholder records, and articles of incorporation, and that they are kept up to date.  Additionally, be ready for due diligence – be sure that you have fully executed copies of all customer contracts, leases, and vendor agreements; and that you can quickly provide prior year tax returns and payroll tax returns.

If you focus on these five areas today, you will create a business that runs more efficiently, grows faster, and is more profitable today – and worth more tomorrow.  If you would like to talk about how a buyer might view your business, contact us.

admin

It’s Going to Take HOW LONG To Sell My Business?

Business owners often have a mistaken idea of how long it will take to sell their company.  Depending on the type of process used to sell the company, it typically takes at least 3 months, and could be 12 months or longer.  According to a study completed by Pepperdine University, and reported in the 2017 Private Capital Markets Project report, only 22% of transactions closed in 6 months or less.

 

Source: Pepperdine Private Capital Markets Project, 2017

Why does it take so long?  A quick review of the steps to sell your company can be informative:

Step 1 – Prepare Marketing Materials and Develop Buyer List

There are two primary marketing documents that must be prepared – a confidential information memorandum (often called a “CIM” or “the book”) and the one-page executive summary.  It can take 4 to 6 weeks to prepare these two documents, but timing is highly dependent upon how prepared you are for the volume of information that is required to prepare them.  Occasionally, while reviewing the information that has been provided, we may unearth some issues with your financial reporting or operational issues that need to be fixed before we can present the company to buyers.  It also takes time to develop the optimal list of potential buyers for your business, which may include competitors, companies who want to enter your market, or private equity firms.

Step 2 – Buyer Outreach

During this stage, while you focus on running your business, we are using email and phone calls to reach out to the list of potential buyers we identified in Step 1.  Depending on the time of year and the number of buyers, it can take from 1 to 3 months to reach everyone and get their feedback.  During the summer and the holiday season, it takes much longer to reach the decision maker.  And unfortunately, we can’t force buyers to respond to us in a timely manner!

Step 3 – Buyer Meetings and pre-LOI Due Diligence

These activities can take from 4 to 8 weeks, as buyers review the CIM and preliminary due diligence information.  Once they’ve submitted an Indication of Interest (your first insight into how they look at valuing your business), a select number will be invited to meet with you and your management team.  Coordinating the schedule of half a dozen or more busy people can be a challenge, so it can sometimes take longer than expected to get these meetings on the calendar.

Step 4 – Receive and Negotiate Letters of Intent

By this point, you are at least 3 to 4 months into the process of selling your business.  Depending upon how many buyers have submitted Letters of Intent, it can take several weeks to negotiate these Letters of Intent.  If we’re successful in getting multiple interested buyers to the table at the same time, we will be negotiating purchase price and deal structure with multiple buyers at once, ultimately leading to a set of offers for you to consider, and hopefully one that is attractive and exciting.

Step 5 – Buyer’s Final Due Diligence and Lawyers Haggling

You decided which buyer to sell your company to and signed that Letter of Intent.  So the deal is done, right?  Not so fast…  Once the LOI has been signed, the buyer will follow up with an unbelievably long list of information requests for their confirmatory due diligence.  Your ability to provide the information they need on a timely basis has a huge impact on how long it takes to get to a closing, so you may need to bring additional employees under the tent to help you.  At the same time as the due diligence is being completed, the buyer’s attorney and your attorney will be haggling over the legal terms in the purchase agreement.  (Most of the business issues will have been ironed out in the Letter of Intent, but there are an unbelievable number of legal issues that the attorneys will argue over to decide how to allocate risk.)

Step 6 – The Deal Closes!

Today, the cash paid at closing hits your bank account.  It’s been 6 months or more since you started this process, but now the heavy weight of business ownership is off your shoulders.  Congratulations, and welcome to the rest of your life!

I hope this article has provided insightful information about why it can take longer than you anticipate to sell your company, but if you have any questions, feel free to contact me http://seedtoharvestllc.com/index.php/contact-us/.  And if you’d like to learn what you can do now to reduce the time it takes to sell your company down the road, watch this space for next month’s blog post “Top 5 Things to Do Now to Prepare Your Business For Sale”.

admin

The Number One Thing You Need to Do Before You Try to Sell Your Company

I often meet with business owners who are several years away from wanting to sell their company.  When they ask what they can do to get ready, my first answer is:  Start a relationship with a financial advisor and do some planning.  They key question you want answered is this:  “How much do I need to sell my company for in order to support my lifestyle through retirement?

Once you have that answer, meet with an M&A advisor and find out how the market is likely to value your business.  The value of privately-held companies is difficult to determine, since there are few publicly-announced deal metrics, but any M&A advisor should be able to give you a range within which they believe your company would sell.

Once you have these two key numbers, you’ll know if there is a gap between how much you “need” and how much you’re likely to receive.  Often, business owners discover that they “need” more than they can expect to sell the company for.  If that’s the case for you, here are your options:

  1. Hold onto the company for a few more years. That has several benefits:
    1. It enables you to pull more money from the earnings of the business and invest it elsewhere (retirement accounts, for instance), so that you have a larger nest egg to start with, and thus can afford to sell the company for less.
    2. At the same time, if you’re growing the business, then you’re likely increasing the value of the company so that when you go to sell it in a few years, it’s worth more.
  2. If you’re totally burnt out and can’t stand the idea of continuing to run the company for a few more years, then you also have a few options:
    1. Work with your financial advisor and your spouse to figure out where you can cut spending – both now and into the future.
    2. Or if that’s not going to fly, then you might consider hiring an interim CEO to run the business for you for the next five years and position it for a sale. Yes, it’ll reduce your company cash flows in the short term, but it may ease your stress and help you to hold on until the company’s value is sufficient to meet your retirement needs.

If you need an introduction to a financial advisor who can help you figure out how much you need, or an interim CEO to run the business for you, email me, and I’m happy to make a referral.

admin

2017 XPX New England Summit – May 4th

I hope you will plan to join me, along with almost 200 business owners and their advisers at Waltham Woods in Waltham, MA on May 4th at 8:00 am for this year’s XPX New England Summit:

FLEXIBLE & INTENTIONAL TRANSITIONS

Keeping Your Business FIT in Uncertain Times

Karyn Polito, Massachusetts’ lieutenant governor, will kick us off at 8:00 am, addressing how the current political environment can impact your business growth. Following the lieutenant governor’s presentation, we have a variety of local CEOs and experts addressing topics related to growing business value, and insights into sale and other transition options.

  • Sean Kavanagh, the CEO of The Ariel Group, will speak about “FALL RISK: How my nearly fatal bicycle accident changed the way I run my life and my business.”
  • Kathy Berardi, the Founder of Imugen will discuss the challenges faced and overcome during the various stages of Imugen’s 27-year life, with particular emphasis on the business and personal decisions and emotions experienced in the process of selling the company and life in the post-acquisition period.
  • A panel of CEOs and HR experts will discuss “The Leader-Leader Model for Fast Growth Companies” and how talent acquisition and retention works in hyper growth businesses.
  • The CEO of J&G Foods will share how they transitioned from breakeven to 5x value over two years.
  • A panel of CEOs of business services companies will discuss “Leveraging Intangible Assets to Increase Business Value.”
  • Another panel will share insights on what you can do “When Corporate Transformation and Culture Clash.”
  • Rob Waldron, the CEO of Curriculum Associates, will share the story of how he and his team transformed a traditional educational publishing company into a digital publishing powerhouse through hiring the right people, having shared values and a philanthropic culture to grow the business value and make possible one of the most unique business transitions you’ll ever hear of.
  • NEW THIS YEAR: Live CEO Case Studies.  Three participating CEOs will showcase their company and a challenge they are facing.  Each CEO will have a panel of the best experts in the field assigned to them who will have been briefed on the issues at hand and come prepared with questions and ideas.  You will be privileged to listen in on the conversation, ask questions and make suggestions of your own.  At the culmination of the three sessions, each CEO will share what actions they will take based on the dialogue they participated in.  Currently, Howard Goldman, CEO of Humboldt Storage & Moving and Wendy Foster, President and CEO of Big Brother Big Sister of Massachusetts Bay have committed to participate – but there’s still room for one more!  Let me know immediately if you’d like to take advantage of this opportunity.

This event generally sells out early, so please register today at https://exitplanningexchange.com/event-2287859/Registration.  See you at the Summit!

admin

Will Your Business Sell?

One of the first question that business owners typically ask me is “What percentage of the deals you work on close?”  Interesting question – I think I know why you ask this – what you really want to know is if I will sell YOUR business, and you think that past results indicate future trends.

The truth is, the question isn’t that simple.  I looked back over the transactions I’ve work on over the last ten years, and analyzed why certain companies didn’t sell.  Here’s what I learned:

  • 33% of the deals that didn’t close were because offers came in below the business owner’s expectations. Why is that?  Well, sometimes it’s because the market for private companies is incredibly inefficient, and as much as we try to estimate how buyers are likely to value your business, we won’t really know until offers come in the door.  But more often, the reason is that the business owner got sidetracked by the sale process (because let’s face it, it’s a lot more exciting than the same-old same-old of running your company) and took their eye off the ball, so business performance started to decline.What should you take away from this?  The best thing you, as the owner, can do to ensure you get a good price for your company is to sell on the upswing (when business is growing), and to stay focused on growing the business during the sale process.
  • 25% of the deals that didn’t close were because there were no interested buyers. “How can that be” you ask?  In one situation, it was because the industry had been disrupted by the internet and the company was on the decline.  Companies already in that sector had enough problems of their own and didn’t want to buy more.  Buyers outside the industry had no interest in acquiring a company where the industry was moving in the wrong direction.  In another case, the company’s business model was so different from that of the rest of the industry, that while the owners were making potfuls of profit every year, the buyers looked at it and said “we can’t run the business under that model, so our profits will be significantly lower” and they declined to insult the owner with an offer that they knew would be too low.What can you learn from this? First, don’t wait too long. If you start to sniff disruption coming at your industry, it may be time to cash in.  Second, talk to your competitors – how do they do what they do?  It’s great to be able to operate more efficiently and more profitably (and PLEASE – invest the money to buy industry benchmarking reports and the find out how you compare), but if you’re doing something significantly differently than everyone else, you may scare off potential acquirers.
  • In 17% of the cases, the deals fell apart because my client couldn’t get through the financial due diligence. In one case, the buyer discovered fraud; in another, the financial systems were inadequate, and the bookkeeper wasn’t capable of maintaining adequate and accurate accounting records.Lesson learned?  It pays to invest in the right accounting and finance staff, who can implement and use the financial systems correctly, so that you can provide timely, accurate financial information to the buyer during due diligence.  And can we talk about audited financials?  Yes, they come at a not-insignificant cost, but they will greatly reduce the possibility that you will fail due diligence, and speed up the buyer’s due diligence at the same time.
  • Notice that in 17% of the deals, my client changed their mind! Yes, it happens.  It wasn’t an issue of valuation, but they ultimately discovered they weren’t emotionally ready to give up control over their company.  If you’ve ever wondered why M&A advisors require an upfront fee – this is one of the reasons why.  Nine months of work – down the drain!What’s your takeaway?  Be sure you’re ready to sell.  It costs you and your management team time, costs you money, and leaves a lot of unhappy people if, at the end of the day, you’re just not ready to sell.  You need to have something that you’re excited about going TO – and golf every day isn’t it.  If you need some help figuring out what the next thing is, talk to my friend Paul Cronin at The Platinum Years.
  • And finally, in 8% of the situations, the business owner brought me in just to help them negotiate and complete a transaction with one buyer – someone who knocked on their door one day and said “Hey, I’d like to buy your company!” only to walk away months (and many hours of effort) later without submitting an offer.Five words of advice:  “One Buyer Is No Buyer.”  If someone approaches you about buying your business, there are likely other, similar companies out there that would also have an interest.  If you’re going to go through all of the effort to have me gather the information the buyer needs to submit an offer, let me use it to bring multiple buyers to the table.  Multiple buyers bidding against each other for your company results in the best outcome – at a minimum, it can help push a deal to a conclusion faster, and in the best case, it results in more money in your wallet.
admin

Business Owner Blind Spots: Part 1 – Pipeline

There are several areas where the owners of privately held smaller businesses (less than $10 million in revenue) typically have blind spots. Areas that a buyer will focus on, and yet the business owner usually spends little time thinking about. The first one we’ll discuss is the sales pipeline.

First of all, what is a sales pipeline? A sales pipeline is the process that takes you from initial contact with a prospective customer and follows through the different stages (the Sales Funnel) all the way through to the actual sale.

 

sales Pipeline

                             Sales Funnel

A pipeline report can be maintained in either a CRM system (liked Salesforce.com) or a spreadsheet, but includes the following information: the prospect’s name; what stage of the pipeline they are in; the estimated value of the opportunity; the expected time to close; and the next step.  Summing the potential revenue at each stage of the pipeline and multiplying it by the weight assigned to that stage of the sales process gives you the weighted pipeline.

So why is having a sales pipeline important? It is important because it helps you to forecast sales revenue, and an ability to forecast sales revenue with accuracy drives the value of your business.

Companies without a strong sales and marketing process cannot reliably predict sales revenue, and your lack of a pipeline may indicate to buyers that you don’t have a sales and marketing process at all, but instead, wait for the phone to ring.  If there’s too much reliance on inbound sales calls and referrals, your company presents a high risk profile to potential buyers because your sales are likely to be erratic and difficult to project, and the business likely has a high dependence on you, the owner, and your relationships and reputation to bring in business.

On the other hand, a marketing-led company, which has created a sales and marketing machine that is independent of the owner can usually show a healthy, growing pipeline because of the mechanized, multi-channel, campaign orientated and measured approach to lead generation. On a regular basis, managing your pipeline helps you to understand at what stage any deal is, whether you have enough deals on the board to achieve your revenue goals, and to identify any prospects that aren’t getting the attention they need.

So to summarize: managing your sales pipeline today will help you to grow your revenues and your business value. During the M&A process, an ability to show buyers a tightly managed sales pipeline will help to give them confidence in your financial projections and increase their willingness to pay a premium price for your business.

admin

From the Outside In – The Buyer’s Perspective on Business Value

Have you ever wondered how a buyer would look at your company? What’s important to them? What convinces them to pay more for your company than for your competitor? Now is your chance to get some insight into those very questions.

I’m the President of the Boston Chapter of the Exit Planning Exchange, and on April 28th we’re holding our flagship event, the XPX Summit, at Waltham Woods Conference Center in Waltham, MA. Our mission as an organization is that “Every owner creates a business with sustainable and transferable value.” The 2016 XPX Summit supports this mission by providing a full day of valuable education focused on building business value.

Keynotes include Christopher Oddleifson, the CEO of Rockland Trust, who will join a conversation about hands-on buyers’ experience evaluating potential acquisitions, due diligence on lessons learned, successfully integrating “new comers” to the Rockland Trust culture and how these lessons may apply to privately held businesses. Caleb White, an 8th generation family owner of Ensign-Bickford, will not only chronical EBI’s successful sale of its legacy business and its transformation to a more balanced portfolio of manufacturing companies, but will also outline three keys to survival across 180 years and 8 generations of ownership. Dr. Daniel Korschun, co-author of We Are Market Basket will share his firsthand accounts of what he and co-author Grant Welker learned from the streets and executive suites as they studied and documented the unprecedented Market Basket story while it erupted and unfolded during the summer of 2014. He will address the impact of leadership and culture on the success and resilience of an extended family business.

We also have a great selection of breakout sessions, including:

  • Are You Getting in Your Own Way?
    How to Increase Your Business’ Value by Reducing its Reliance on You, the Owner
  • When You Get to a Fork in the Road, Take it!
  • Will Unlimited Vacation Time and Allowing Dogs in the Workplace Increase the Value of Your Business?
  • Leaving My Business – On My Timetable, To My Ideal Successor, and At My Price

 

I hope you’ll decide to join us. You can find more information and register at Exit Planning Exchange 2016 Summit.

admin

What Are GAAP Financials and Why Should I Care?

“GAAP Financials” means the financial statements of a business (income statement, balance sheet and cash flow statement) prepared according to “Generally Accepted Accounting Principles”, a collection of principles, standards, and conventions used by the U.S. accounting community for reporting financial information. The major purpose of GAAP financials is to match income and expenses, which the cash-based financials used by many businesses don’t do. In order to truly match income and expenses, you may have to defer some revenue related to products or services for which you have been paid, but which you have not yet provided to the customer. On the expense side, you may have to estimate certain expenses that you have incurred, but for which you have yet to receive a bill, or alternatively, delay recognizing as an expense some stock that you already paid for.

GAAP financials are important to buyers for a number of reasons.

1. You may believe that you are selling the assets of your business or your stock in the business, but you are really selling the future income stream those assets can generate for the new owner. GAAP financials provide a buyer with confidence in your company’s historical performance, which helps them to be more comfortable with your projections for the future.

I had a software client a number of years ago that had about $6 million in revenue and $1 million in EBITDA. When they engaged me to sell the company, I discovered that they were not preparing their financial statements according to GAAP, and despite the fact that I am not a CPA, one look at how they prepared their statements made me question their accuracy. Before we took the company to market, they had an outside accounting firm convert their financial statements to GAAP, and we discovered that there were some significant mistakes in their revenue recognition. This $6 million revenue/$1 million EBITDA company turned out to be a $5 million revenue, money losing company! It did not stop us from getting a transaction closed, but if the buyer discovered this during due diligence, the deal would have died.

2. All publicly held companies are required by federal and state securities regulations to report their financial statements in accordance with GAAP standards. If the likely buyer of your company is public, they will have to consolidate your financial results with theirs, and that requires GAAP financial statements. Furthermore, their financial due diligence team will be used to analyzing GAAP financials and if your statements aren’t GAAP, it will hinder their ability to complete their due diligence, and in fact, it may give them concerns about how well the business has been managed overall.

3. Lenders generally expect to see GAAP financials. A buyer is unlikely to have enough cash in their bank account to buy your company for the price you want, so they will need financing. If you have GAAP financials you will make it easier for them to line up their financing, thus increasing the likelihood they will be able to close on the purchase of your business.

If you’re not sure if your financial statements are prepared according to GAAP, please contact me and I’ll put you in touch with the appropriate accounting resource to help you.

admin
1