You Aren't Selling a Business, You're Selling a Piece of Paper

THIS WEEK IN BROKEN DEALS

Welcome to the Broken Deal Newsletter!

You may not realize it, but you’re in a special group. This is our first newsletter issue and has been a dream of ours for the last year. We have a lot of great content that will be coming out over the next few weeks, so we hope this issue is something you can say “I knew them before they were big”.

With that sentimental note, here’s what’s in store for this week:

• Announcement: Lets meet up at McGuire Woods in Dallas Oct 15-16th

• Best Link: Learn how to get acquired for a high multiple from former Google M&A lead

• The Graveyard: It’s a hard truth that many business owners only learn after its too late… the biggest sale of their life will come down to what someone sitting in an office thinks about a couple numbers on a piece of paper. Learn why it matters and what you can do about it.

• Work With Us: We just opened up a new program for small growing M&A Advisors and Brokers to get Wall Street level analyst help with their deals on a success-fee basis. Book a call with us below to learn more.

ANNOUNCEMENT

October is upon us and it’s that time of the year again…

No, it’s not the Catalina Wine Mixer.

I’m talking about the McGuire Woods Independent Sponsor Private Equity Conference on October 15-16th.

If you’re going to be in Dallas during the conference, let us know. Patrick will be there meeting with our contacts in family offices, private equity and lenders. We’re actively looking to build relationships with industry people who have a focus in lower middle market industrial / manufacturing.

If that’s you, shoot us a note at matt at rhapsodi.net. We’d love to connect.

BEST LINKS

Matt’s Favorites

• Top consultant’s secrets to massive revenue growth (Twitter)

• Ruthlessly efficient CEO mentors young COO (Twitter)

Finance & Capital

• What’s really important in valuation (Twitter)

• Where to find investors to back my search? (Twitter)

Salability

• 4 Things That Dramatically Increase the Chance of Closing (LinkedIn)

• How to know if a business is too reliant on the owner (Twitter)

• How to get acquired for a high multiple (Twitter)

THE GRAVEYARD

You Aren't Selling a Business, You're Selling a Piece of Paper

I hail from a small town in East Texas. Like many here, my bonds with friends and family run deep. So deep that, come Christmas, gifts don't just come from my parents and grandmother. My close friends' parents often pitch in too.

For 25 years now, ever since I swapped "cool toys" for "grown-up stuff," I've been getting scarves, sweaters, and button-up shirts from Danny’s mom’s Dillard’s trips. She never forgets the gift receipt, always urging me to exchange it for something I like better. You can imagine my joy standing in line on December 26th, pondering Shirley's thoughtful gift.

As the joke goes, people love buying chores for Christmas. Yet, I stand in that line every year. Once the other revelers finish their returns, I trade that scarf for thirty dollars of cold, hard store credit. 

It's obvious Shirley should just give cash. But business owners often make the same mistake when presenting their businesses to buyers. They describe buildings needing upkeep, employees needing leadership, customers needing attention, suppliers demanding payment, equipment breaking down, products needing shipping, and endless responsibilities.

The truth is, buyers don’t want to buy a business. That's a chore. They want to get rich. They want to buy cash flow. And how do they judge cash flow? In this industry, one metric rules them all—EBITDA.

You know EBITDA. It’s that number at the bottom of your income statement with some “non-cash expenses” added back in. There are debates on calculating it or using tighter metrics where EBITDA can overstate earnings, but that's beside the point. What's critical is this: EBITDA is the juicy part of the deal. It means dollars in the bank, return on investment, and your future retirement account rolled into one.

EBITDA is the only reason anyone would want to get involved with a business. Everything else—the buildings, vendors, employees—is just the work someone’s willing to put up with to get the money. So why focus on these elements when selling your company?

Here’s the thesis: 

You aren’t selling a business. You're selling a piece of paper. 

And that piece of paper has three numbers—last three years’ EBITDA. 

It looks like this:

Facing the Numbers: How Proper Financials Can Make or Break Your Sale

There it is, in black and white. 

Your life’s work, judged on three numbers at the bottom of a piece of paper on some analyst’s desk.

Believe it or not, this is reality. You have a piece of paper with three numbers to make millions, stand out, attract buyers, find competent deal professionals, secure a bank loan, and achieve every goal related to selling your company.

“But what’s the big deal?” you might ask. “Everyone has that piece of paper already. My accountant could print it off in seconds.”

Here's the big deal: My professional experience tells me that less than 10% of businesses under $1 million, 25% under $5 million, and 50% under $20 million in value have financial statements that accurately represent earnings. This is true even among those filing tax returns properly and having on-site bookkeepers.

Don’t believe me? 

Here’s the test: If I went to your office now, logged onto your bookkeeper’s computer, and pulled your last three years’ P&L, would you be ready to have your company’s valuation based on what I see? 

Most business owners we talk to wouldn’t.

In fact, when I suggest giving a quick valuation estimate based on the last three years’ EBITDA, excuses pile in:

• “I’m running a lot of personal expenses through the company.”

• “That expense is an exception. I’d never do it again.”

• “What do you mean I can’t charge all my inventory as I buy it?”

• “Why should I care about accrual accounting? I take deposits. Last year I showed a huge profit, who cares that this year I am showing a loss?”

Clients then shift the focus to a lot of similar talking points as above—what about our loyal customer base, the mountains of extra inventory, or the cutting-edge systems we've implemented?

Are these important? 

Yes. Every buy forms a Go/No Go decision about your business based on things like the quality of your team, your customer relationships. 

But a decision to move ahead is separate from the decision about what to pay. 

Business owners; especially ones who have spent blood, sweat and tears building these “assets”; very often struggle to accept the fact that these things have little impact on the ultimate price someone is willing to pay for a business.     

Paradoxically, what really matters is a piece of paper with three numbers at the bottom.

Bridging the Gap: From Running a Business to Selling It

This struggle is exacerbated by the fact that accurate financial statements aren’t necessary to operate a business but are critical to transact a business. 

Quite literally, your financial statements are your company to 99.9999% of people. Everyone who isn’t you views your company as your financial statements. This is why accurate financial statements are essential.

The good news is, accountants can prepare your books for objective judgment. Clear financial standards exist, and most business owners appreciate the process once they see the benefits. In fact, in our experience, they often wonder why they didn’t do it ten years ago.

Conclusion

So, do you think you’re selling a company or a piece of paper? If it’s a piece of paper, is it accurate enough to secure your financial future? 

If you’re unsure, seek professional help. 

Don’t let the deal be dead before it starts.

THAT’S A WRAP

Before you go: Here are 2 ways we can help

Is your deal stuck? We may be able to help. Get a free 30-minute deal assessment here — LINK TO SCHEDULE ASSESSMENT CALL

Are you an M&A Advisor or Broker looking for Wall Street-level financial analysis support for your CIMs and client financial info? If so, we offer a success fee-based program to help you close more deals with less overhead. To learn more, schedule a call here — LINK TO LEARN ABOUT SUCCESS-BASED FINANCIAL ANALYSIS