You made it. You’ve paid back your business loans and can run your company with just a line of credit. You’re profitable. You’re comfortable. And you don’t have to pay such rigorous attention to things like accounts receivable turnover and your particular accounting methods.
Many of the business owners I work with have reached this stage. Once they no longer have to prove themselves to a lender, they get relaxed with their financial reporting. At this stage, they’ve built a “lifestyle business” that’s providing a good quality life, and they stop worrying about optimizing profits.
This is absolutely normal and OK, but realize that an “I’m making money, it’s no big deal” attitude will cost you money when it’s time to sell. We recently represented a business owner who had been in business over 40 years with just this kind of relaxed approach to accounting.
His company manufactured large, custom machinery. In looking at his monthly financials, I saw giant yo-yos of profit and loss. On a $1 million project, he’d drop the customer’s first $500,000 deposit onto the books, with little expenses attached.
At the end of a job, everything washed, but at any given time you really couldn’t get your arms around the numbers. Even his year-end financials were questionable, as many jobs fell across two different years.
He was showing $2.5 million EBITDA with around $9 million in sales. I didn’t know if that was low or high, and I did not have 100% faith in the numbers. It’s hard to negotiate when you don’t know if the numbers are accurate.
We brought in a CPA who advised that a percentage-of-completion accounting method would be more accurate for his business. It took about a month of untangling, but the results were well worth it. One key discovery: our seller wasn’t billing soon enough. By the time he sent a bill for his 50 percent progress payment, the work was actually closer to 80 percent done.
The second big revelation: EBITDA was actually about double what he’d been reporting. As a result, his offers went up by $4 million to $6 million in value. He now has two $10 million-plus offers on the table because buyers better understand the company’s true performance.
Buyers like clean numbers. Be consistent in how you record work. Be able to show margins by job and by division. Identify three key performance indicators (KPIs) that you can track from year-to-year. Most sellers don’t do that, and buyers have to dissect the numbers as best they can.
Finally, invest in audited statements, at least the last few years before you sell. Buyers tear into financial reports, but you can stand behind an audited statement with confidence and credibility.
Keep your eye on the numbers and your “lifestyle business” might be able to fund your “dream lifestyle retirement” sooner than you think.