If you’re trying to sell your business, I’m going to give you the absolute best advice I can right here. I’ve been engaged to help a potential buyer several times—only to have the deal fall apart before it got started. This is written from the perspective of buyers on what caused problems in order of importance.
#1 Accounting. I once “coached” someone who couldn’t pay me to do due diligence on buying a business. When he was done digging through bank records, he said, “I think she’s losing a couple thousand bucks a month and I’m not sure she even knows it.” “Thanks for saving me from making a really bad decision.” Now, this is a bit of an extreme example. Still a true story. I’ve seen multiple situations when all the seller has is a poorly-prepared income tax return and disastrous books or…no books. This is the major leagues. If you can’t push a button and hand me these items below, I’m going to have difficulty taking you seriously:
-> Balance Sheet that’s clean as a whistle. Not one with Accounts Receivable that has balances over 90 days past due. You won’t see that customer money so please write it off. Inventory adjusted to cost and obsolete inventory written off. Cash reconciled to the bank statement. Loans from banks and other creditors tied out to the penny. Tighten the balance sheet up and most everything else will “fall out.”
-> Income Statement with predictable and explainable trends. Generally, a clean Balance Sheet will lead to a clean Income Statement. However, an issue that will give a buyer pause is bouncing expenses. Why were utilities $10K this year and $5K last year? Likely, it was sloppiness. Any personal expenses being paid through the business? Junior’s car payment? Disney Vacation for the whole family? Hey, I’m not the IRS (and won’t turn you in), but if you’re selling let’s find that stuff, put a circle around it, and cut it out going forward. You’re only hurting yourself since a smart buyer wants to maximize…
-> Cash Flow (statement). Smart buyers want to see good cash flow—ideally growing or a belief that they can grow cash flows with different decisions. In my experience, few businesses or even CPAs prepare the Cash Flow Statement. Ironically, it’s the most important financial statement, and not preparing it is usually driven by the pain it takes to create it, not its lack of importance. The good news is a CPA can crank out a Cash Flow statement if he or she has a good Balance Sheet and Income Statement.
BTW, having a CPA provide you annual financial statements may not be enough to get your deal done. Even some CPAs are a little confused by this. If the financial statement was done in December and I’m buying today, what good is a six-month-old financial statement? Think about it from the buyer’s perspective. You need to be able to hand someone clean financials dated as of TODAY.
#2 Expectations. Real life exchange: Seller: “I think it’s worth 1X revenues.” Buyer (or Me): “Can I see the data you used to come up with that?” Seller: “I think it’s worth 1X revenues.” If the seller goes into negotiations like this, it’s doomed. Nobody cares about that beach house you want or the huge debt hanging over you or that you’re living beyond your means. Sorry, it’s true. Those things don’t determine the value of your business. After-tax cash flows and the value of comparable companies do. So, swallow your pride and get realistic about what a credentialed business appraiser (like me) tells you (see CVA, ABV, ASA). Business appraisers are in their best role if you immediately help them establish…
#3 Trust. I recommend everyone—EVERYONE—with a stake in the deal get around a table immediately if a sale is even being considered. Think about it. If you’re the seller and you call me and don’t bring your potential buyer in to meet me, is he or she going to trust me? No! They think I’m on your “side” immediately. It’s better for you if I’m either an impartial advisor to both buyer and seller or working in tandem with another business appraiser for the other side—early. Establish trust at the beginning so you don’t waste any…
#4 Time. “Time kills deals.” It’s a universal truth. If the buyer and seller are ready to get a deal done, then GET THE DEAL DONE NOW! I’m not suggesting you rush it or put anyone in a bad financial situation. You still need to strike while the iron is hot and push hard to move through it. If it drags on too long, someone will get cold feet and then the deal will rot quicker than a Wal-Mart banana.
Can I Help You? Hi, I’m Josh Horn, CPA/ABV, CVA of Horn Valuation. I help with business valuations in friendly or unfriendly situations. I also help owners build valuable companies. My clients are business owners and attorneys. If you’d like more information, check out my website hornvaluation.com, email me at firstname.lastname@example.org, or call me at 217-649-8794.
I’m a licensed Certified Public Accountant (CPA) and double-credentialed in business valuation (CVA & ABV). I’ve been a tax and business consultant in a top 100 CPA firm and a controller in a large international company. I’ve also valued and been the primary advisor to multi-million dollar and small companies in various industries.
“If you’re not working on business value, who is?” Josh Horn, CPA, Certified Valuation Analyst and Accredited in Business Valuation