March 18, 2021 //
Steps to Selling your Business Part 6.
In this series, I’ve returned several times to the importance of your business’s story and how that story often brings to light vital factors in the sale process, something which an analysis of the numbers might miss.
However, your company’s numbers do matter; there is a danger when focusing on the story of a business that M&A Advisors must watch for. It usually shows up in our first conversations with a potential client when hearing their story. I call it ‘The Abraham Problem.’
In the Torah account, Abraham is an older man and part of an infertile couple when he receives a divine promise that his natural-born offspring will be the beginning of a history-changing lineage. This childless old man, full of faith and self-confidence, begins to identify himself as The Father of Many Nations, even before there is any physical evidence to back up that promise.
The truth is that every savvy business owner has had to develop skilled self-promotion to succeed, and that can often translate into spin with their M&A Advisor as well, saying, “This is who we are,” when you mean, “This is who we are going to be soon, I’m sure of it.” There’s a proper place for your growth mindset in the sale process, but it’s not now. You’re not Abraham yet.
That level of detail will allow us to drill down to get better clarity on our picture of the business as a whole.
These financial statements allow us to go exploring. We’ll find an anomaly in a month-to-month pattern and ask, “What happened here?”. Sometimes we identify why sales dropped during a particular period, what tiny adjustments caused positive bounce-back, or other essential data points visible at that level of reporting. This information becomes part of our understanding of what exactly your business is.
This solid understand sets up conversations with potential buyers so that you can tell them where you are now while also highlighting what the future holds.
We will shape the story of your company in a way that potential buyers will understand. However, your financial statements must back up what we claim exists today.
As for that Abrahamic bravado? Well, it is not all based on fantasy, and it becomes helpful in developing the growth strategy your potential buyers will be looking at, as I discussed in a previous post.
We have seen clients flip the other way, as well. Some clients get stuck in conservativism, where they only put 50% of an order in the forecast. As such, part of our M&A analysis is understanding the gap in any financial statement and its limitations.
Recently, we were engaged to sell a business that had monthly recurring revenues on annual and long-term contracts. We adjusted earnings with a run rate adjustment. This adjustment allowed prospective buyers to see the go-forward financial performance clearly—this enhanced valuations and structure.
Once we can clearly describe your business in its present state, we can fold in the value drivers that your growth strategy adds for the future. Your numbers will give us demonstrable evidence of the future growth you are headed for, which helps us map out the road we need to take to get there.
In our next installment, we will examine how we showcase your numbers to highlight the potential growth that prospective buyers seek when evaluating companies.