Posted by John Gledhill on Mon, Jun 14, 2010 @ 08:01 PM
This should be obvious but I come across this time and time again. I guess if the small business owner is not financially savvy - and usually they are not - they focus on what has made them successful and skimp on the accounting. But this is a mistake. Take the time to set up your accounting and spend some time with your CPA so you know what you are looking at. Do this early in your business lifecycle. Like any small business owner, I'm sure you'll want to expense as much as you can so you minimize your taxes - just make sure you can identify those items that are discretionary (e.g. Not absolutely necessary to the operation of the business) so they can be segregated later.
It is amazing how some business owners are able to bury their profitability so deep in their financial statements that no one can find it. This doesn't just apply to those "cash" businesses with revenues of $200K a year either. I recently analyzed (I suppose "analyze" is what I was doing as I tried to make sense of them) a company's financial statements - it was a nice niche distributor with over $3 million in annual sales. I looked at every expense line item in Quickbooks and I couldn't find more than $80K in cash flow (discretionary earnings including the owner's salary). Granted there are plenty of companies with marginal profitability - but I know this isn't one of them. (And not just because of the vehicles the owner and his wife are driving.) I'm just having a hard time with finding the earnings. I'll take it to a deeper level and I'm sure I'll find them, but then we have to convince potential buyers that the company is worth what we say it is, which is that much harder because of the poor quality financials. SO:
- Clean up your financial statements. Set up a logical Chart of Accounts and keep it consistent year after year. Segregate discretionary expenses.
- If you are big enough, have your CPA prepare compiled, reviewed, or even audited statements. These are progressively more expensive but can be worth it during the 2-3 years leading to your planned exit.
- Contact us or another qualified Business Brokerage or M&A Advisory Firm if you have any questions.
Posted by Tom Gledhill on Mon, Dec 14, 2009 @ 02:48 PM
For every lower middle market M&A negotiation between buyer and seller the perceived value of the company and the ultimate price paid for the company travel a rocky road to deal consummation. In its initial stages value can be pulled out of thin air, especially by the seller. "I know someone who sold his company for $$ and his company is a lot like mine." Or, "companies in my industry are selling for X times revenue". Buyers usually have a more analytical approach although their perception of value can be quite different depending on whether they are a financial buyer or a strategic buyer.
From these initial perceptions, the rocky road may continue to an informal valuation. This can provide an estimate of value by using some, but not all, of the techniques that a professional valuator would use. This is typically performed by an advisor or business intermediary.
Most deals move to a formal valuation of the company prepared by a credentialed business valuation professional. A professional has the intention of providing an independent, objective opinion of value using methods and procedures accepted within the valuation industry.
The seller and the intermediary continue discussions relative to the asking price. This is influenced by the market value determined by the formal and informal valuations; what the seller would like to get; the bottom-line price that the seller would accept; and finally, an asking price that they feel comfortable with.
The buyer, on the other hand, is doing his own analysis. This is usually based on free cash flow or some other earnings metric. The deal then moves further down the road:
The buyer makes an initial offer which may or may not be accepted by the seller
The price is negotiated subject to due diligence.
Due diligence may unearth information that results in an adjusted price
The final transaction price subject to contingencies and earn-outs.
The final transaction price after all contingencies and obligations have been met.
There's usually another party involved in the process - the funding source. Prior to closing, the funding source(s) may evaluate the proposed purchase price package and compare it to their concept of value as part of their evaluation of the risk and funding terms of the financing to be provided.
Smaller transactions (under $1 million) will typically go through an abbreviated version of the process described above. Regardless of the size of the deal, the road to the consummation of the transaction is rarely smooth!