Optimizing Value – The Importance of Basic Financial Statements
As we have discussed in past articles, buyers will pay a premium over a company’s economic value if current ownership has taken steps to “optimize” the company’s intangible assets. Intangible assets are those assets that don’t show up in your balance sheet but add value to your operation. Essentially these are the features that make you unique.
As a business owner, you need to fully understand what items buyers will find of interest in your particular company. Have you ever wondered why a buyer will look at two very similar acquisition targets and pay a premium for Company A but refuse to with Company B? Usually it is because Company A has specific intangible assets that add “value” to the buyer’s evaluation of the two opportunities. To learn more about what features buyers find attractive, please click here to download our free whitepaper on the topic of what motivates buyers to pay optimal value.
Where Do I Begin To Enhance Value?
Business owners often ask us, “What can I do today to begin augmenting or optimizing my value?” Many expect us to give them a formula that will allow them to magically transform their companies into “buyer ready businesses.” This is a business that has been developed over time by its management team and ownership to be in a position for buyers to step in and maintain and enhance the company’s current growth opportunities.
Simply put, there is no magic to this. It takes hard work and a focus on the essentials. By applying common sense and some very fundamental business skills, you can begin to make your company buyer ready beginning today – and you might be shocked at how easy these are to implement. The following is a sampling of steps that you can take to begin this process (for a more in-depth analysis of creating a buyer ready business, click here):
- Develop strong middle management. Don’t make yourself the focus of the company’s success (for more on the importance of succession planning, click here).
- Develop a brand name in your niche. Building a recognized brand, even in a small industry niche, can optimize your value.
- Develop a diverse customer base. Don’t allow your company to become overly dependent on a single customer, usually accounting for more than 10% of your revenue.
- Develop process and procedures that are unique. Many business owners are not even aware of the processes they have developed that set them apart. Focus and enhance these.
- Develop recurring revenue sources. This may be tough depending on your industry but any form of recurring revenue can enhance value.
- Develop a history of professional financial statements. Professional buyers focus on acquiring companies that can accurately demonstrate their past and document their future using qualified Generally Accepted Accounting Principles (GAAP) financial statements.
The Importance of Basic Financial Statements
Again this is just a sample of areas you can focus on to enhance your value. Although all of them are equally important, it is the last one that I’m focusing on today. Quite frankly, we continue to be amazed that in 2012 we still see some relatively large companies that do not have professional financial statements developed.
M&A experts will advise you that in order to give buyers confidence in your company it is a good idea to, at a minimum, have “reviewed” financial statements. Even better, have them audited, which adds significant confidence in the eyes of buyers. Any reputable CPA firm, even on a local level, can provide you with these services.
But we are not just suggesting that you take these steps. What we are telling you that you will not obtain maximum value for your business if you don’t have professional financials in hand when approaching buyers.
A few weeks ago one of my colleagues was approached by a business owner who was interested in obtaining our services at one of our M&A conferences. During the course of their conversation it became apparent that this business owner had done very little bookkeeping over the years. He indicated that his company was generating approximately $5 million in revenue but that he would be unable to provide any historic financials. He was even unable to produce a basic balance sheet or income statement. Of course this meant that we would be unable to work with him about exiting his company until he could hire an accountant and develop accurate financials.
This will not only delay the company’s evaluation and its eventual sale, but there are also enormous local, state and federal tax implications for operating a company in this fashion. This might be acceptable if you were operating a one-man operation out of your basement doing a couple of hundred thousand in revenue. It is completely unacceptable for a company generating $5 million in revenue to do so.
But we see this all too often. Again, if your financials are not professionally presented, buyers will not pay you an optimal value. In fact, many professional buyers will simply walk away from your deal due to the risk.
We understand that in these tough economic times, business owners are looking at every opportunity to cut costs. However, as the old saying goes, “Don’t be pennywise and pound foolish.” Trying to save money by reducing your accounting costs and managing your books on your own will, in the long run, end up costing you much, much more.
How We Can Help
Over the years Generational Equity has encountered five common mistakes that most business owners make when attempting to sell their companies. Not preparing adequate documentation is one of them. To learn about all five, click here to download our whitepaper on this topic. Spending 15 minutes reading our whitepaper could end up saving you millions.
We also hold free informational M&A workshops about how to prepare your company to be attractive to optimal buyers. If you would like to attend one, please click here and you can learn more about the topics we cover.
Bottom line: No matter what, don’t scrimp when it comes to your financials. Not only are there tax implications that could haunt you, not developing accurate, standard financial statements will make your company less valuable in the eyes of buyers. Chances are good you have spent decades growing your company. Don’t destroy your legacy by going cheap on your financials.
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