Value Drivers: Clean and Accurate Financial Information

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messy deskOne of the biggest struggles we have with our entrepreneur clients is that they have lousy financial statements. Many times it’s from lack of caring and know-how, but sometimes it’s done intentionally.

How does a professional advisor, such as a banker, lawyer, accountant, or business broker advise their client when the business financials consist of a check book and a box of receipts? Or the situation where the business owner has one cash register that isn’t connected to the accounting system (because that one is for unrecorded cash), or the owner runs all personal shopping through the business, or takes a family of 15 on a European vacation on the business, or doesn’t use an accountant or bookkeeper at all? The company’s tax return doesn’t resemble (in the slightest) the profit and loss statements and balance sheets. The examples of poor record keeping and tax dodges that we see go on and on.

Let’s focus on the value of the business based on quality of financial statements for this blog. As mentioned above, advisors are hard pressed to advise a client that has poor financials. We need to see revenue and margin trends, the relevant expenses, cash flow, sales by customer, liquidity, and much more. We need to know the true picture to know how the business compares to similar businesses in the industry, to recognize trouble spots, to find opportunities, to budget, and to plan an eventual exit.

The Exit: When a business is entertaining a potential buyer, will the buyer see a true picture of the business immediately or will they have to dig for the truth? The more they have to dig, the less trust they will have in the management (and the value of the business just went down). Will the buyer see a concerted effort to avoid paying taxes? What else might the seller be hiding? Can the buyer trust the seller (and the value of the business just went down)?

In most situations the buyer needs a bank to fund an acquisition. Banks don’t trust anything other than the tax return (and for good reason). You can see where this is going, can’t you? The bank doesn’t like the financials because they don’t match the tax returns, the tax returns don’t show enough cash flow so they tell the buyer that he is paying too much for the business (and the value of the business just got reduced again!).

Having accurate financial statements is not difficult, but it does take some focus and action. If you need help with getting your books in order, Apex Business Advisors can direct you to a local professional. It’s ok to ask for help!

Value Drivers: Business Owner Who Works in the Business

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workinginthebusinessOver the next several weeks you will read about keys to business value.  These are some basic drivers that will make your business or the business you are pursuing, more (or less) valuable. We are talking about the attractiveness to a potential buyer in an open market.  Disclaimer: There are lots of different things that can impact the value of a business – and we won’t cover them all.

Sure there are times when some of these drivers don’t impact the value of the business – like if you find a gullible buyer, family member that will be taking it over, a strategic buyer that may focus on only one driver, etc. However, a business owner can’t rely on these buyers to be there when it’s time to sell the business, so it’s better to make the business more appealing to a broad market.

This week the focus is on a Business Owner Who Works in the Business. The alternative is the owner that is working on the business.  If the owner is working in the business, i.e., driving the truck, running the machinery, or making the sales calls, then the potential buyer pool has been shrunk to those who can fill those shoes, and fill them well. A potential buyer would have to possess the same technical expertise of the current owner.

You’ve probably heard the adage “Work on the business, not in the business.” There are good reasons why consultants and professional advisors repeat this. First of all, if you are working in the business, you will get really tired and not be able to put energy into growing and enhancing the business. (The E-Myth, by Michael E. Gerber, has some good examples of how working in the business can bring it down.) The impact on business value is dramatic. Is a buyer of the business buying a job – or buying a system, a brand, a process, etc.? We do have buyers that are interested in “buying a job”, but they are a small population and are also very selective.

Call your Apex Business Advisor for more information.

Interest Rates are Low and Banks Are More Aggressive

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BankerThrowingMoneyWe spent the better part of 2009 and 2010 trying to chase bankers who were not returning phone calls. There were many banks changing hands and were not able to pursue loans for business acquisitions. Over the last year, we have witnessed banks being more “aggressive” in seeking business clients. They have money that they need to loan and they are looking to Apex for deals to fund. Bankers are not throwing money around, and they are still conservative. However, they need to make loans to be profitable.

The interest rate for a 10 year, business acquisition loan is as low as 5.5%. This is about the lowest rate that we have ever seen. We have done quite a bit of business with Wells Fargo and there is a lot of good information about SBA loans here.

These two factors, aggressive banks and low interest rates, are creating an environment where deals are getting done. The people that will gain the most are business owners needing working capital and equipment loans, and for buyers of businesses that need to borrow money to fund an acquisition.

An important part of our job as advisor is to help you find funding for your deal and working with the banks to get them the information they need to make good decisions. Call one of our brokers today to learn more.