Exit Planning--Structured Financial Partners: Building value for your company's tomorrow ℠

More on Financial Statements

I was across the table this morning from the managing partner of a CPA firm that has been around since the 1940's. No, she wasn't a founding partner…Let's call her Coleen.

When a client engages us to do an Exit Plan, one of the things we do, is build a team of professional advisors for that engagement. And very often, the advisors the business has worked with to that point in time do not have the band-width to help us get the client to the next level. For example, it's not uncommon for us to find sizable companies where the CPA is only doing income taxes and financial statements, such as they are, are prepared by an internal employee straight from QuickBooks.

So as we get into the Exit Planning process, it is often important to upgrade CPA firms. We often suggest a larger firm that has experience in M & A transaction as our company will be changing hands at some point in the identifiable future. We often talk about "cleaning up the company's financial statements." This means a variety of things: adding back personal items, adhering to GAAP accounting, etc. And then Coleen referred to what she calls "Reverse Due Diligence." When a buyer comes in, he is going to look at your company through a magnifying glass. By having your CPA firm start asking all the questions a buyer is going to ask, before the buyer walks in the door will make the process go more smoothly and will likely add more value to the sale price. If you are two or three years away from your exit date, it might include having audited financial statements if your company is doing more than $10 million in gross revenue.

The Four Phases: Phase Two—Building the Structure

In this phase, we must get the business owner to understand that a prospective buyer doesn't see the current owner's labor of love, his investment of sweat tears and heartache. He is looking primarily for verifiable and sustainable cash flow and value drivers that will keep that cash flow going and growing. During this phase we work on actions that can grow the business between today and the owner's departure

Among the things we look at closely here are financial statements. If the owner expects that he or she will be selling to third parties, we suggest that they start having audited financial statements. Remember, buyers won't pay top dollar for what they don't understand or don't believe.

If the transition is going to be to insiders (family members or management team) audited statements might be overkill, but having accurate financials, prepared by a credible CPA firm (not your in-house bookkeeper) will be an important step as you begin to disclose information to prospective inside buyers.

Another area we look at here is the value drivers in your business. These are the things you can control that can add value as you approach sale date. Some are accounting-based as I mentioned above, for example, does the business have systems in place to control purchasing and invoicing? Is your A/R well managed? Is your customer base too focused on a single client? This is something that will discount the value of your business. Does your place of business look like a dump? It may not affect the bottom line, but it will affect the psychological value in the mind of a buyer. Straighten it up and slap a coat of paint on it. Will cost very little and it will add value.