What You See is Not What You Get

**What You See is Not What You Get**

--A Seller’s Fairy Tale Gone South

By
Glenn Baldwin

It Looks So Good from Where I’m Sitting

Sales are up, Clients are thrilled, and vendors love you. It’s taken years, and now your business is seriously profitable. It’s the perfect time to sell. You figure you can easily fetch about $8M for your hard work. Offers will be plentiful.

Well, Not So Fast…

Following is a tale about what one business owner thought his business was worth, and why potential buyers--one after another--washed their hands of the opportunity to buy the business, and why the owner was shocked, confused and left vulnerable in the marketplace.

The Mirror Cracks

FabooCo starting putting out feelers for buyers last Spring. Financial statements were solid: sales and profitability were up for five consecutive years. Multi-year contacts with large, government-related institutions had been inked, with more on the way. Customers were recession-proof. An experienced sales team was in place.

A business valuation professional was brought in to help Management determine a fair selling price. Almost immediately, cracks in both the financial picture--and Management’s abilities—began to appear. We arrived to get the valuation process back on track. After spending over 10 hours with Faboo management, two facts became achingly apparent:

Management didn’t have a full understanding of how to build accurate financial statements.
Management wasn’t motivated to build accurate financial statements. Check-mate.

But if You Just Look at it THIS Way…

After protracted discussions with Faboo’s self-styled CFO, we learned that sales commissions were recorded not when earned but when paid…with as much as a year’s gap between the two! Further, payments due to subcontractors weren’t often recorded for weeks after work was completed. Finally, revenue was recorded in a hap-hazard manner, sometimes on a percentage-of completion basis and sometimes on an oh-we-should-invoice-it-now basis.

These unique accounting practices rendered the financial statements, well, useless to anyone who wasn’t willing to sit through a seven-hour explanation of how to interpret them. The statements showed a distorted story of revenue and profitability and made calculation of a value impossible. NO POTENIAL BUYER WOULD GO NEAR THIS MINEFIELD. Why should they? Faboo management was speechless, and in denial.

Don’t Call MY Baby Ugly

Faboo had prepared financial statements the same way for years and they were proud of them. Shucks, the bank accounts reconciled to the penny! That’s nice, but it hardly gets a buyer to write a check for $8M.

Management took some hard knocks from us about the financial statement needs of a buyer. Specifically:

Buyers want accurate financial statements, and don’t want an explanation as to what IS and what ISN’T recorded on statements. All known information should be recorded. Period. Discard the “we’ve-always-done-it-this-way-so-it-must-be-right” belief. It ain’t necessarily so.
When a buyer requests additional information, any delay in providing information signals that Management isn’t serious about a sale. Frankly, a delay spells death.

No Room for Ego’s Here

Faboo’s Happy Ending has yet to occur. However, Management did acknowledge that they had to get help to prepare for a sale. Finally.

We’re working with Faboo to educate them about the process of selling a business. We’re scrubbing up the financial statements, helping Management record policies and procedures and pulling Management out of its ineffective micro-management role. There’s more work to do, but we see greater potential for a full-priced sale than ever before.

Faboo is still learning that the single most-important part of a successful selling process is: SELLING THE ORGANIZATION IS THE ORGANIZATION’S PRIORITY!

So if you need help with creating a more accurate picture of your business with top drawer record-keeping, call us today at 214-692-9192.

Glenn Baldwin is a principal of ForesterBaldwin, a business coaching firm that focuses on performance improvement for lower mid-market businesses. He provides CFO and COO services and is a team member of Business Wealth Solutions. Please call 214-692-9192 for a complimentary meeting with us. Visit our website at www.bwsllc.net.