We were requested to help two clients sell their businesses this year. While we did succeed in one case, neither of our clients was thrilled with the results. (Of course, you should not be surprised that the client whose business did NOT sell was disappointed [perhaps]).
What was the problem? In the case of the sold business, the offers were much lower than the client expected. In reality, though, the offers were higher than he deserved. Why would we say that?
Just because your firm is profitable and is providing you a reasonable income do not mean that your firm is worth a million dollars- even with a strong balance sheet (receivables seem to have exceeded payables by some 42%; the premises could be included in the business sale). Why not?
For starters, our client’s salary was on the low side (to minimize his employment taxes). In addition, except for the COO (who would stay, given the right chemistry), most of the (40+) staff required (or expected) supervision. Our client played his business operations very close to his chest.
In addition, this client was one of our “favorites”. He did use QuickBooks, but really only to invoice his clients. Client receipts were via credit card payments; only at the end of the month did he reconcile receipts with invoices (with about a 95% certainty). That other 5% was reconciled. when he sent dunning letters and determined who really paid him. (No, I am NOT making this up.) Expenses were clumped together (“marketing”, “travel”, “meals”) once each month, when the credit card bills were paid.
Moreover, this client (and the one whose business did not sell) had no true database that detailed what products each customer bought. (The product offerings for one company exceeded 2000 pieces and no inventory data was maintained. The other company has some 3000 product offerings- but we knew the total was closer to 125 items that repeatedly sold.)
Both firms exhibited at trade shows, collecting business cards and scraps of paper for the potential leads. Neither even used Excel or Outlook (insufficient, we might add) to track down whether they converted or not. It was virtually impossible to determine if a trade show provided a financial return.
These firms should have begun preparations two years earlier for the eventual sale of the business. The customer and prospect database(s) could have been developed, since buyers demand such intangible assets. (This affords them a gauge to monitor future business operations.) Salaries and business expenses would have been formalized, so the potential owner could determine the potential profitability under their supervision.
And, even if you think you are not planning to sell your business, ask yourself this question: If you are providing the bulk of the income to your family, what will they have to do, should something preclude you from continuing on (death or disability)? Get your house in order- now.