Too often business brokers witness business owners that don’t know and understand their financials. Sometimes it is remarkable how much the owners don’t know about the very basics of their financials, and having a conversation about business value in that situation becomes very difficult.
Once, my work as a business broker brought me to a gentleman who was in a hurry to sell his business. It was a distribution business, and he said, quite confidently, that he earned X hundreds of thousands of dollars. We had a lengthy discussion of about the value of his business, with all of our projection centered on his earnings. We set up an appointment, and in a few days I showed up at his door after many hours of travel. I had asked that he have his financials ready at that time to show me, and he did. But what I saw was entirely different from what he had said on the phone. There were no earnings at all! That made it very uncomfortable — because now I had to figure out what happened, then break the news that the value I had been discussing on the phone had evaporated. It turns out “earnings” for him was his gross profit number. All his fixed costs (warehousing, administration, etc.) still needed to be pulled out of that number, which left his true earnings around zero.
Another business owner sent his financials to the business brokers, after saying he also earned X hundreds of thousands of dollars. The income statement clearly showed differently, and it was very clean with very few adjustments that could be made. I called him and he was truly surprised. Essentially he said, “What? I hope that isn’t true because I just bought out my partner last year with the assumption between us that we were profitable.” I don’t want to be too hard on this guy, but really, it would not have been that hard to figure out the profitability for a partner buy-out. Now, placing a value on that is more difficult.
I can’t blame anyone for being too busy or too specialized to understand their financials. But if that is the case, a company must get help. It’s just too important not to understand the basics of where you stand. If you can’t afford a CFO (Chief Financial Officer) or other financial person, a good alternative is B2BCFO (www.b2bcfo.com). B2BCFO is a network of seasoned financial experts that are available to come in and help you get the “big picture” so you know where you are and where you want to go.
We represented a company last year where two buyers backed out because the financials were less than pristine, and each time they had a question on them it took two weeks to get an answer. We hope to get a B2BCFO professional in there to clean them up and get the company prepared to come back on the market to be sold.