The following is from Chapter three of Exit With Style, Grace, and More Money, which is available on Amazon.com.
Don’t Forget the Balance Sheet
A client who had spent most of his career as an operator managed an equity group I worked with. In evaluating acquisition prospects, he developed a newfound appreciation for the balance sheet compared to when he ran divisions of major companies where he was more concerned with the bottom line.
Don’t ignore your balance sheet! Work with your banker and others to make it as appealing as possible. Banks tend not to like businesses where the owner has maximized personal cash flow (at the expense of the business). A buyer will worry there may be capital expenditures that will be their responsibility. High cash flow is great. Almost as high cash flow with a strong balance sheet is better.
As I write this, I’m working with a prospective client I’ve known for fifteen years. He built his latest business to a respectable position, very profitable, but he has no retained earnings. Working capital is tight because he’s taken maximum distributions. I told him doing so would cause buyers to wonder what kind of investment would be needed to maintain and grow the business.
Clean Books Rule
Obviously, if buyers will be scrutinizing your financial system, it really helps to have clean books. What this really means is don’t blend your personal and business checkbooks. I know it’s tempting to write off trips, boat gear, every meal possible, and more. I also know when the books are clean, deals move a lot faster. Emulate the following:
- On a recent deal, our client was so diligent he reimbursed the company for this kids’ cell phones on the business plan. His only adjustment to the P&L was the overfunded pension plan, which is super-easy to explain.
- Another client ensures financial statements and tax returns match.
- We asked a prospective client about any personal expenses or similar and got a quick, “Our CFO won’t let us.”
Contrast the above three examples with the following.
Never Learned (or Planned)
The seller was forced to sell due to their spouse’s terminal illness. The goal was to move from Las Vegas to the East Coast so the spouse could spend their final days with family.
The seller admitted they had the ultimate lifestyle business. Their personal overhead was minimal because everything, and I mean everything, was run through the business. Because this was a forced sale due to a catastrophic event, they didn’t have time to remedy this situation. They admitted the tax they had saved would have come back in multiples if they had the time to change from a lifestyle business to a business focused on maximizing profit.
Three final points on this subject:
- Hiding revenue and padding expenses count equally as fraud according to the IRS. The penalties may vary greatly. It could be a warning or slap on the wrist, a cash penalty, or criminal prosecution. (Criminal prosecution is primarily for not reporting revenue.)
- If you skim cash, don’t admit it. And it’s not just expenses from bars, restaurants, and similar expenditures. (Most of them are all card-based now, which also prevents theft.) A manufacturer told me they sold their titanium scrap personally, generating six figures a year. My comment on this is: What’s worse, the owner who states their profits are really 20 percent higher because they skim cash or the owner who states their profits are 20 percent higher because they skim cash, but really doesn’t?
- Don’t hire family just to give them a job, and don’t overpay them. Pay your kids the fair market salary for the job they do and give them money personally because when you sell, the buyer will pay them what they’re worth (and let’s hope their lifestyle isn’t based on an overmarket salary).
Financial People
A client treated the accounting department like a necessary evil. They didn’t know accounting, and neither did their spouse or general manager, but that didn’t stop any of them from giving the accounting department advice. Of course, they all gave different and conflicting advice.
What made it worse was their in-house “accountant” was really a mid-level bookkeeper, and their bookkeeper was really a data entry person.
Get the right people in the right jobs.
Then look for outside help. Use a CPA for taxes. As you grow, use a controller instead of a bookkeeper. Hire a CFO to do reports and look into the future. And as mentioned earlier, don’t let an unqualified person do payroll or handle HR.
Growth
All this talk about numbers leads to one conclusion—you want them to be “good” numbers. Good means your numbers are not only accurate but show revenue.
When asked what owners can do to increase value, one of my top four answers is to show growth. A flat business is perceived as a dying business, and it brings down value. FYI, the other three are 1) reduce all dependencies, especially on the owner; 2) have solid financial systems; and 3) show you can recruit and retain great people.
Growth can come from organic efforts like more marketing, more salespeople, new products, a new office in a different area, stealing customers, etc.
Growth by acquisition is what it says—you buy another company. Without getting into detail on this (see our book, Company Growth by Acquisition Makes Dollars and Sense), here are twelve reasons to consider this strategy:
- Acquire great talent
- Diversify your product offerings
- Vendor relationship strategies
- Location, location, location
- Make a competitor go away
- Same overhead, higher volume
- Assets are cheaper as a package
- Synergy
- Diamonds in the rough
- Customers
- Yes, we can! (Shows your buyer you can integrate another company.)
- Bigger is better. (Larger firms earn more.)