2020 and 2021 have been record years for mergers and acquisitions (M&A) despite COVID19. Liquidity in the marketplace, abundance of retiring baby boomers, and low interest rates continue to fuel the M&A market. This seller’s market has allowed multiples for selling businesses to remain at high levels. Investment bankers representing sellers are so busy, that I was recently told they are no longer accepting new clients for the remainder of this year. (August 2021). This got me thinking about valuation and the disservice many business owners are doing themselves. A recurring theme noticed in our practice/experience and by Investment Bankers has to do with accounting records. More importantly, the lack thereof.
My team and I continued to be amazed by the lack of understanding and importance placed on accounting records by business owners. These are not small mom & pop operations; I am talking about companies that bring in $20, $50 and even $100 million in revenue! The business owners have run these companies for as long as 30 years based on “gut feelings” and “shooting from hip”. While they have been successful, they have likely left a lot of money on the table over the years. They have not invested in their accounting department or accounting records because they consider it “overhead”. While they may have a bookkeeper and Tax CPA, they do not have a strong accounting department or in house managerial CPA. They don’t have a real controller or CFO, perhaps by title only.
Some companies fail because they do not have solid U.S. GAAP financials when times get tough, and others manage to survive with street smarts. But when you want to sell your business the first thing a potential buyer or Investment Banker will ask for is your most current financial statements. Warning to business owners, this does not mean the cash basis or tax basis financials your Tax CPA may prepare for you. Your Tax CPA is NOT the one that will prepare your U.S. GAAP based Managerial Financial Statements. In order to sell your business and obtain the highest value possible, your company must have solid accounting records and financial statements that are U.S. GAAP or IFRS based. These are most likely accrual basis financial statements. If you are a manufacturer, you need good cost accounting records. You need to have good internal controls, written process and procedures in place. You also need to have a timely set of month end, quarter end and year end financials.
You can still sell your business if you do not have any of this; I have seen it happen. Anything can be sold, the question is at what price? Companies lacking a solid accounting department and records are likely to leave millions of dollars on the table when it’s time to sell. For example, a $50 million revenue company with nice margins and 100 employees can expect to spend $75k-$150k to have a professional team come in and clean up the accounting/financial records. Doing so would yield MILLIONS in value at the closing table. Yet so many business owners do not seem to understand this or see the value. This is what I struggle to understand.
The lack of solid accounting records and timely financial statements causes questions, delays and likely a reduction in price when it’s time to sell. This is a reality I have seen in my 30 years of experience time and time again. Yet getting business owners to understand this simple cost vs benefit is a daily battle!
You’ve built a good, successful company and likely made a lot of money over the years. Whether you were running your business based on “gut feelings” or your own knowledge, you may feel at times you were “sailing blind” and didn’t have the tools to know exactly what the financial performance or health of the business was.
Now it’s time to sell. You’ll be asked to provide financial statements for the most current period and likely the last 3 years. These financial statements must be according to U.S GAAP or IFRS standards in order to maximize the value of the company. If your financial statements are not up to these standards, invest in your business and hire the team you need to correct them. Avoid the trap of having your business value discounted. Make the investment and enjoy what you deserve.
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