In the time since SiVal Advisors was founded in 2002, we have encountered many different companies across a wide range of industries and sizes. Given our focus on mid-market companies, we have dealt with numerous businesses that are family-owned or owned by a small number of people. Not surprisingly, these businesses have their own set of challenges. In this first of a series of three articles, I’ll discuss several of such challenges, with the remainder coming in part 2 and part 3.
As you read this and the following articles, if you see yourself or your company, the time to take action is now. Many of these issues take time to develop and will need time to be resolved if you are considering an outside investment, sale, merger, or other exit for your business. The examples we discuss are based on situations from actual client work we have done at SiVal. If your business is reflected here, knowing you aren’t alone shouldn’t be a comfort. You are always welcome to contact us at SiVal to learn more.
Challenge 1 – Poor Quality Financials
This first challenge is one that we see often. Business owners without a board or external stockholders often don’t see the need to have a CPA audit or at least review of the financials of the business. Balance sheets, profit and loss, and cash flow statements may not be prepared and ready for detailed perusal by outsiders. Since financials will be among the first items a potential buyer will ask for, it is essential to get this critical first impression right. A prospective buyer will understandably be looking very closely at all aspects of the financials to identify opportunities and risks, and will infer quality of management accordingly. In addition to affecting perceptions of value, we have seen transactions get delayed or almost fall apart because of this one issue.
This challenge is both fixable and avoidable, but addressing it takes time. Ensure you have a good controller to start to get your books in order. You may not need a full-time CFO but you can engage one for this purpose on a project basis. If you need a referral, ask us at SiVal.
Side note: Wondering about the difference between an audit and a review? In both, a CPA with some knowledge of your industry and business, seeks to provide outside parties with assurance that your financials reflect reality. A review is narrower in scope than an audit. A review doesn’t dig into items such as internal controls, fraud risk, inspection, and so on. A review is typically faster and less expensive than a full audit.
Challenge 2 – Forecasting – What’s That?
Some businesses don’t do forecasts. It’s not unusual for us to hear comments like “our customers fly by the seat of their pants and so do we.” Some may do forecasts but don’t do the next step of tracking performance against forecasts. Perhaps you have been around for a while so you know the ups, downs, and cycles of your business. The issue here is that people who may want to buy your business don’t have the same insight. You need to help them.
You need to build credible forecasts; a potential acquirer is really buying the future! What increases the value of your company is the picture of a future where sales, customers, and EBITDA are increasing. Remember that forecasting is more than numbers in a spreadsheet or lines on a graph. What a buyer wants to see are the assumptions that went into the forecast and how realistic those assumptions are. At this point, you can also craft scenarios that show how resources that the buyer brings to the acquisition can make that forecast scale even more.
Challenge 3 – Lack of Commitment to Sale Process
This challenge is surprising. A CEO or business owner engages an M&A advisory firm like SiVal and then fails to make working with the firm a priority. The advisors need information, access to people, and quick turn-around on critical issues. The need increases as potential buyers become involved in the process. Things become critical, yet the difficulty of working with the CEO increases at exactly the wrong time.
This lack of commitment sometimes stems from a prior deal that failed. The CEO may also have a reluctance to involve key management in the M&A process. We also see reluctance to consider competitors as potential buyers. While all this is understandable, it limits the effectiveness in getting the most value from the M&A process and transaction. It is important to get the management team on board. If they see a brighter future, the team can become strong supporters. Similarly, you have been a big pain to your competitors by taking business away from them. They may cherish the opportunity to ease that pain by writing you a big check.
More Challenges To Come….
The next two parts of The Top 10 Challenges in Selling a Family or Closely-Held Business will be available soon. If you can’t wait, contact SiVal Advisors to learn about those challenges and how we can help you address them.