PPB July 2016

MANAGE

MENT

potential sale is imminent or not.

That said, many company own-

ers are not following through on

all the necessary actions—and

they should be.

What do buyers look for in a

company they want to acquire?

The answer is short and to the

point. They are looking for evi-

dence and assurance of contin-

ued future profit in the form of

positive cash flow. While sales

for the past decade may be

impressive, they are not necessar-

ily indicative of future profitabil-

ity. There are a number of factors

that contribute to the satisfaction

of a potential buyer.

ACCURATE AND TIMELY MONTHLY

FINANCIAL STATEMENTS:

Nothing

kills the enthusiasm of buyers

more than error-filled financial

statements. How can a potential

buyer possibly project future

profit from bad historical state-

ments? I know potential deals

that have been terminated

because the financial statements

were junk.

Monthly financial state-

ments are important because

they help buyers understand sea-

sonality. They also serve as the

basis for trailing 12-month

financial results. If negotiations

are taking place in June, buyers

want to know what current

trends look like for the past 12

months. Sales and profit may

have been good for 2015, but

what are current trends? Trailing

12-month financial results pro-

vide that information and an

accountant can easily compute

this. It is also important to final-

ize last month’s financial state-

ments before the current month

is over. We have had several

clients who only run financial

statements once per year. It takes

others two to three months to

complete monthly statements.

Any delay in financial reporting

puts transactions at risk.

Buyers will use the financial

statements to analyze trends:

sales, gross margin percentage,

changes in individual expense

levels, etc. Owners should be

knowledgeable enough and pre-

pared to answer these questions.

Buyers wonder if the owners

don’t have the discipline to com-

plete accurate and timely finan-

cial statements, what other

shortfalls might there be in the

operation?

OWNER INVOLVEMENT:

How

dependent is the company on the

owner’s involvement. If a company

can’t operate without the owner,

that is a risk to future profits.

Owners should transition their

companies so they can operate

substantially without them, lower-

ing the risk to buyers.

CUSTOMER AND SALESPERSON

DIVERSIFICATION:

Another risk

to continued earnings that buy-

ers evaluate is how much the

company depends on the sales

from individual customers or

salespeople. Sales to one cus-

tomer representing 10 percent

or more of a company’s total

sales raises the risk to the com-

pany should that customer be

lost for whatever reason. The

same principle applies to a

salesperson with 20 percent or

more of the sales, especially if

the salespeople are independent

contractors. Effort should be

SIX THINGS

THAT

DON’T

HELP SELL A COMPANY

New investments that will take time to increase

profit and cash flow.

Buyers won’t pay for

unproven future benefits.

Long-term leases.

Buyers base the value of an

acquisition partially on reductions in expenses

that they can implement, like facility costs. Long-

term leases can tie their hands, reducing the amount

they will offer for a company.

Excess commissions.

If commissions paid are in

excess of industry standards, buyers will balk at

buying such companies because the rates are not

sustainable.

Owners paying themselves less than what their

efforts are worth.

By all means, owners should

pay themselves at least market value. Buyers are

not going to be fooled into thinking the company is

more profitable if owners don’t pay themselves appro-

priately.

Reducing expenses below sustainable levels,

especially sales and marketing expenses. This

may result in short-term increased profit, but buy-

ers will sniff out this strategy in a heartbeat and instead

become concerned that future sales will suffer from lack

of marketing.

Minority Ownership Certification.

Certifications

can be valuable door openers, but if substantial

revenue is dependent upon certifications, it will

require that a buyer has that certification. This creates a

very restricted buyer list.

70 •

PPB

• JULY 2016

THINK