On several occasions during the past few years Generational Equity, part of the Generational Group (Generational.com), have examined steps you can take as a business owner to create a buyer-ready business. This is a term we coined years ago to sum up the concept of key strategies you can implement prior to marketing your business (or in some cases, while you are in the market) to improve not only the sale-ability of the company but also enhance its value.
These items are two sides of the same coin and when you think about it, both are equally important. Anything you can do strategically to lower the risk associated with your company’s acquisition in the eyes of buyers – and steps you can take to make it more attractive – will both enhance its value to buyers AND improve the time it takes to close your transaction.
One of the most important steps you can take to improve both the sale-ability and valuation of your business is to focus on two things:
Establish good, solid financial controls.
Implement accurate and timely financial reporting.
When you first established your business, it was most likely easy to do both of these. You probably approved every expense that the company incurred, since you paid them all, and you also were able to see your monthly income statement, cash flow, and balance sheet easily using Quick Books or some other financial reporting system.
That system works well for most companies with revenue under $5 million. However, it becomes apparent that once a company crosses that threshold, it becomes far harder for the owner-entrepreneur to manage the business AND closely track the accounting/financials.
Once your business reaches a point where it becomes vital to ensure that you both have financial controls in place AND the ability to see your financials accurately, we highly recommend that you hire a seasoned, experienced accountant/CFO. It may hurt your bottom line initially to do so – these types of folks do not come cheap – but it will literally pay off in the long run, especially when you begin to negotiate with buyers.
A Sad Story
It never ceases to amaze us, but far too often every year, as we walk clients through our evaluation process, we ask key questions that bring up the fact that Cousin Larry, who has been doing someone's books for years, has not only been doing them inaccurately but he has also been skimming a bit off the top for his house in Miami unbeknownst to the owner. Naturally when we uncover this, we recommend that our M&A process be put on hold and that the owner takes steps now to fix this problem and return later, usually several years later, to do another evaluation of the company.
Of course this is disheartening to the business owner who encounters this situation. Not only does the owner have to put the dream of exiting the company on hold for several years to clean up the mess, he/she has to create financial controls/reporting standards to ensure that they are being met going forward. A very painful process indeed.
In most cases this situation can be completely avoided by hiring an experienced accounting professional as your CFO. Even if you never face the dire scenario I described above, having someone on your management team whose sole responsibility is to keep your financials clean and controlled can go a long, long way inreducing perceived risk in your company on the part of buyers.
I have the good fortune of conducting all of our post close client testimonials. In every one that I have done over the past several years, when we come to the topic of deal closing and negotiations, the refrains are the same: “I cannot believe how time-consuming it was the last 2-3 months of the process to actually close my transaction” and “I was busy answering questions but my poor accountant/CFO/CPA was working round the clock to get info back to the buyers.”
Here is what a few of them have to say about due diligence (DD) and the key role of their accounting staff:
As these folks will tell you, if you don’t have a qualified CFO on staff, chances are you will be overwhelmed by due diligence. Most professional buyers use DD checklists that have between 200-300 questions on them, the majority revolving around the financials. If you want to scare a premium buyer off, be unable to answer these questions. Or, if you can answer them, most will be concerned if it takes you three weeks to get back to them.
Invest for Success
One of the key steps in building a buyer-ready business is when you hit a revenue threshold where you can no longer run the books using a basic accounting software package, be wise and invest the money in an experienced accounting/financial professional. And as you grow even further, be prudent and hire a team to help this person maintain adequate control and accountability of your financials.
Trust me, the investment will pay off. Don’t assume your Cousin Larry or Aunt Eunice, nice as they are, have the skill sets necessary to adequately manage your accounting. And chances are good, since they are family members, a buyer will be very concerned about them even staying with the organization after the close. So take care of all these hurdles before you talk to buyers and hire pros to manage your accounting department.
Carl Doerksen is the Director of Corporate Development at Generational Equity.
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