Managing Your Company Finances: Think Like An Acquirer!

2015, 17 Sep | In Build Company Value, Exit Planning, Grow Fast & Exit Profitably!™, Managing Risk

 You’ve owned and managed your company for years. It’s part of you, and many of the habits you have built in your personal life have also become expected in your business. Many of these are great habits to have: cash flow management, not over-leveraging your business, and constantly trying to keep a clean desk. Others can be not so good, like eating out all the time and spending so much time at work that your family is neglected.

Another bad habit – and typically a simple oversight – is continuing to maintain mediocre accounting records. You’ve been told over and over again by your employees that something needs to change, but it’s too much money and too much of a hassle. Besides, no one will ever care about your company because it’s yours, right?

This mentality boils down to a low expectation of future success, as well as a garden-variety failure to plan. The incredible thing about this market is that many business owners who used to have trouble making ends meet are now finding themselves with a growing sales pipeline, and some are starting to make pretty good money. However, this growth overwhelms many business owners and they don’t make changes in the record-keeping habits that would show a much clearer picture of that growth. When an acquirer approaches you and requests to see your financials, they may pass on the deal simply because the financials haven’t been kept up to date or are inconsistent in their entry techniques.

Sometimes it isn’t the records that are there, but rather that the owner couldn’t provide a clear report. Below are a few areas that we see are usually lacking in the average business’ accounting records, but have seen many acquirers ask about:

  • Capital Expenditures (CapEx) reports that clearly show how much has been spent on Fixed Assets and Capital Improvements.
  • Expenses that are personal from the business owner or other shareholders, not part of normal operations.
  • Revenue by customer and a breakdown of percentages of total revenue.
  • Labor that is a necessary cost of providing a service; this is usually allocated as an expense, but really should be a Cost of Goods Sold.

These are just a few that I have seen that really speed up the process of taking a company to market if the company has these squared away.

As an Analyst at Merit Harbor, I get really excited when I see audited financial statements. It tells me – and more importantly, the other M&A investment bankers – that the client made the investment to have a CPA do a deep-dive on their books to verify that they take their financials seriously. As I work through the financials and compile them to be pitch-ready, I have the highest degree of confidence that what I’m putting together is what our bankers can sell. We’ve actually seen percentage points added to deal multiples simply because financial statements were audited. If you are doing a deal with $3mm in EBITDA, and an acquirer gave you a 4x multiple at first, they could add another 0.5x on top of that valuation ($1.5mm value) just because you spent $80K on an audit! We also see it go the other way, where a multiple is given early in the process and then lowered during Due Diligence because errors were found in the financials.

The clearer the financial statements, the prettier the picture is of your company through an acquirer’s eyes. Make the investment in having your records reviewed prior to starting the sell-side or capital raise process. This will give us more peace in selling you, and you more peace as you wait for that big pay-day!