James E. Bateman, B2B CFO®
Providing CFO services in Long Beach, CA and surrounding areas

While we normally talk about barriers to entry when looking at the value of business, we also need to recognize that there can be critical barriers to exit for the seller of a small business. These barriers to exit fall into two groups, external non-controllable and internal controllable. This purpose of this article is to help you recognize some of the major challenges to selling your business and help you focus on those controllable matters that can greatly affect the outcome of your sale.

External (non-controllable) Barriers to Exit

The External barriers refer to the economic conditions and competition from other businesses that are for sale. Without a doubt, we are in and will continue to be in a buyers market when it comes to selling your business.

Some interesting demographics about small business:

• Baby boomers (born between 1946-1964) in the US will turn age 50 and 60 every six seconds for the next 15 years.

 

• 50% of business owners are aged 50

 

• The average age of business owners is 56

 

• One out of every two company owners plans to sell their businesses during the next ten years.

 

• About 80% of owners who approach an investment bankers and business brokers to sell to an outsider pull back due to unrealistic business value perception by the owner or lack of planning.

 

• Only about 25% of businesses that are listed for sale between $750,000 and $5,000,000 actually sell.

 

The above demographics alone point to a huge number of businesses for sale over the next 15 years with most of them sold for a fraction of what their owners expected.

The other major external barriers are all the economic, environmental, regulatory, tax, technology and other external forces that impact you sales and profits. Clearly, you have little input and control over these factors. You can only compete harder, perform better and adapt quicker but you are better served by focusing on what you can change.          

Internal (Controllable) Barriers to Exit

The good news is that there are a number of factors you can control that have a huge impact on whether you can sell your business and how much you get for it. The even better news is that by focusing on these factors you will be doing something that most of your business-selling-baby-boomers are not doing thus giving you a distinct advantage.

Business brokers are very clear that the primary reasons small business either do not sell or sell for much less than expected are:

• The value in the business is way too dependent on the owner. The management team is weak or not in place to successfully run the business in the absence of the owner.

 

• Bad books and records – i.e. the inability to properly present accurate and complete financial information to potential buyers in a timely manner.

 

• Systems, processes and controls are inadequate or missing. Tribal knowledge is a poor substitute for documented and tested controls. The company is perceived to be unstable.  This is the inevitable conclusion reached if the above three issues exist.

 

• The seller’s expectation of the value is unrealistic. The buyer needs to see a clear path to a solid return on their investment.

 

Having been involved in the purchase of many businesses and the attempted purchase of many more, I know the frustration of wanting badly to do a deal but being unable to agree on a value because of the above factors. I have seen month after month go by with deals where you simply cannot get past square one because of the above deal killers.

 The sad thing is that these are all matters that can be addressed. Here are some suggestions:

Dependency on the owner

 

This is a hard one. It’s your company. You built it and it is a direct reflection of who you are. You don’t need to abdicate the thrown but you need to work on effective delegation of authority.

Trust your competent mid management tor run more of the operations and administration. If you can’t trust them, then you should start replacing them with people you do trust.

Ensure that your key customers know your organization not just you.

Make sure your organization knows and understands your customers.

Teach your employees the business. Empower them to make decisions and to be accountable for keeping the company performing.

Bookkeeping

If your idea of keeping books is filing your tax returns once a year, expect to receive a fraction of your perceived value for your company.

If you’ve run your whole life through your company’s tax return, expect to do a lot of explaining to support that your “real” income is higher than shown on the tax returns.  

If you think books can be cooked to support a higher price, you can expect the deal to blow up or to spend several times what you get paid for the company on legal fees defending yourself.

If you believe the real value of your company is off book expect to have a buyer either severely discount or ignore this value – whether real or not. Intangible assets and goodwill only have value when you can demonstrate that they produce tangible results.

Clean up your books and act like a real company. The standard is that you should have a complete and accurate income statement and balance sheet issued every month within ten days of month end. This should be supported with AR, AP and Inventory details that agree to the general ledger. If you cannot do this, it indicates to buyers that you don’t value financial information and therefore, your financial information is likely incomplete and incorrect.

 Don’t just hire a bookkeeper and expect that your accounting will all be correct and don’t just hire your CPA or a CFO and expect them to do all the bookkeeping. You need a part-time CFO

Systems, processes and controls

+ Basic system are the minimum requirement but too often the core systems of a company are a hodgepodge of Excel spreadsheets and databases that have never been reconciled to each other much less the financial reporting systems. Buyers don’t want to buy a company only to find that they have to invest huge amounts of time, energy and money just to get their hands around the operations.

There is a false economy perceived by some business owners that scrimping on systems developments will improve their EBITDA and EBIT and therefore fetch a higher value for the company. Why should I spend money on a system they the buyer will get all the value from?  Because a smart buyer knows the cost of implementing new systems and they will factor that into their offer.

Good systems are a major selling point for a company. Most buyers assume that, given the right information, they will run the company better than you. If they are uncomfortable with the data provided, they lose this confidence and this leads to lower offers.

Good systems help you run your company better. Develop good systems producing useful reliable information and you will not only get a better valuation for your company for its systems, your EBITDA will probably be higher than if you continued to run your company with systems from the 1900’s.

How do you know how much to invest and what systems to use? A good CFO will know how to approach this issue with realism – i.e. what you can afford, what you will get out of it and what it will really cost.

Stable organization:

The expression that “People are our most important asset” is most clearly demonstrated when you are selling your business. Buyers will pay for a stable organization with good management and a hardworking and happy staff. If buyers perceive that he will have to recruit, train and build a new organization after you leave, they will significantly discount their offer. 

Note that this is a perception issue. It is critical that you know how to convincingly present your company well so that buyers perceive the underlying stability and strength of your company.

Unrealistic Expectations

Last but not least is aligning your expectations with reality. Some business owner just cannot accept the reality that the value of their business is not calculated like a civil servants pension plan, i.e. based on your three highest earning years. Buyers need to be able to clearly see how they will recover their investment and make a good return. Good cash flow, clean books, sound systems, systems and controls, and a stable organization that can run without you are the basics that buyers need in order to make you a profit.

 It also helps to have well informed, experienced and objective advisors that will give you honest opinions and input rather than gratuitous praise.

Jim Bateman is a partner with B2B CFO^® the USA’s largest CFO firm focusing on small and mid-market companies. Jim can be reached  by phone at 562.370.0125 or by email at jbateman@b2bcfo.com

Why you should never use the words “give” and “equity” in the same sentence.

 

Structured properly, sharing equity can be a valuable tool in attracting and retaining your management team and providing a powerful incentive for performance. It can also be an unnecessary complication with unintended consequences. Before you decide to give part of your company to someone, even if you think they have earned it, consider the following.

• Employees, even your senior management, seldom understand the rights and responsibilities of owning a piece of the company, particularly a closely held, illiquid private company.

 

• Owning part of an LLC or an S Corporation usually involves a flow through of income to the owners’ personal tax return, whether or not cash is distributed. Nobody likes or intends there to be phantom income, but it happens and when it does, the owners are not happy.

 

• Do you know how your personal tax plans may align with your prospective fellow owners? There may be issues such as timing of earnings and capital gains or losses where your position may differ from your other shareholders. Resolving these differences does not always result in a win-win situation.

 

Read the rest of Issues with Equity Sharing

How the recession has impacted the value of your real and personal property and why you may be overpaying property taxes.

There’s cost, there’s book value, there’s income tax value and there’s GAAP value.  These are all values that accountants use. You might think that property taxes are based on one of these and that accountants know how to determine the correct value for purposes of filing your property tax forms. You’d be wrong.

 If you think that just because you haven’t had a property tax audit problem that you don’t have a property tax savings opportunity you may also be wrong. Your taxes may be based on inflated values, inappropriate breakouts or a misapplied methodology.

 Property taxes are a breed apart. While the GAAP and tax experts focus on how an asset expires – i.e. how much depreciation expense to show on the financial or the tax return, the property tax consultant and the property tax authorities are looking at what the asset is worth.

Want to know more? See this article by property tax expert Larry Mandell of  Independent Tax Group  

Read the rest of Overpaying Property Taxes?

Long Beach has the best sailing conditions in Southern California and I am lucky enough to live near the beach and take full advantage of this great resource.

As a active racer in Southern California I’ve enjoyed the hospitality and camaraderie of Long Beach Yacht Club for many years. In fact my very first So Cal regatta was Long Beach Race Week in 1985 which we won class honors with a great crew on a great boat  Wall Street Duck. When I moved to Southern California in 1996 I sailed dinghies and one-design keel boats. I joined Alamitos Bay Yacht Club that year and worked my way through the committees, board and flag offices to be Commodore in 2007. I remain very active at ABYC. See www.abyc.org .   LBYC is my neighborhood club and provides me with a great opportunity to get to know another whole group of Long Beach people. As I continue to build my consulting practice and attempt to make it more Long Beach centric, I believe LBYC will be a great resource for me to get better connected to my community. See www.lbyc.org

Since getting actively involved is the best way to meet new people and get them to know who you are, I am  co-chairing Ulmann Sails presents Long Beach Race Week 2011. This is the West Coasts largest big boat regatta and it is co-hosted by my two favorite clubs – ABYC and LBYC. See www.lbwr.org.

I am a partner with B2B CFO® the nation’s largest part-time CFO firm recently recognized by Inc. magazine as one of the fastest growing companies in the United States. Email me at jbateman@b2bcfo.com and we can arrange a meeting to discusss your company’s needs.

I am pleased to announce that I have joined ProVisors Long Beach II group. This is a new group of a great institution in California.    A key role as a B2B CFO® is to help my clients find high quality professional services from attornies, banker, CPA’s, brokers, insurance, benefits, HR and systems professionals. It’s an honor to be affiliated with the members and this adds a very valuable source of  professionals that I can rely on to provide the best service to my clients.

ProVisors is a community of professionals who serve their clients as trusted advisors and share the highest standards of integrity, performance and accountability. ProVisors promotes and enables relationship building, information sharing and collaboration among its members for the benefit of their clients and one another.

ProVisors, founded in 1988 as Professionals Network Group, Inc. (PNG), was established to provide a community for professionals who believe success flows from a commitment to high ethical standards, devotion to the best interests of clients, and sharing resources and knowledge with fellow senior professionals. Two decades later, ProVisors is the community of choice for over 1,300 of Los Angeles, Orange County, San Diego and San Francisco’s preeminent professionals. ProVisors was incorporated in 1991.

I am a partner with B2B CFO®, the nations largest part-time CFO firm, recently recognized by Inc. Magazine as one of the fastest growing companies in the United States.  Email me at jbateman@b2bcfo.com and we can set up a meeting to discuss how a part-time CFO may be the solution to your company’s needs.

B2B CFO NAMED IN PRESTIGIOUS INC. 5000 LIST

184% Growth Earns B2B CFO Spot in the 2010 List of Fastest
Growing Companies in America

Phoenix, Ariz. August 24, 2010 – B2B CFO, nation’s largest
provider of CFO services to small businesses, has been named to the
prestigious Inc. 5000 list of fastest growing companies in America.



Now in its 29th year, Inc. Magazine’s annual ranking judges US-based
and privately held companies by their revenue growth. This year’s
list was ranked on the percentage in revenue increase from
2006-2009. B2B CFO’s growth earned 84th place in its industry.

“There are approximately 27 million small businesses in the U.S.
today,” said Jerry L. Mills, founder and chief executive officer of
B2B CFO, “It is a huge honor to be among the fastest growing and the
most successful businesses in the country. Our firm has experienced
tremendous growth over the past few years and we are on track to
continue expanding. I am especially grateful to all of the firm’s
dedicated Partners who continue to advocate our services around the
nation.”

In a personalized letter congratulating B2B CFO on this
accomplishment, Jane Berenston, editor-in-chief of Inc. Magazine’s
wrote “Congratulations: your company, B2B CFO, has made the 2010
list of the fastest growing private companies in America. This
achievement puts you in rarefied company, especially if you consider
that over 27 million businesses are registered in the USA. The elite
group you’ve now joined has, over the years, included companies such
as Microsoft, Timberland, Visa, Intuit, Jamba Juice, Oracle, and
Zappos.com. I look forward to congratulating you in person in
Washington, D.C.”

B2B CFO’s growth is reflected in numerous awards this year. The
company was also recently named in ACE Corporate Growth Awards,
which recognized the most successful and fastest growing companies
in Arizona.
In August 2010, B2B CFO has grown to 170 Partners across 39 states,
representing 5,000 years of cumulative experience. Each Partner is a
seasoned financial executive who serves as CFO to growing businesses
on as-needed basis. Approximately 80% of the Partners have a
background that includes senior executive positions at the Big Four,
and all of the Partners have held high level executive finance
positions in various industries in corporate America. Together, B2B
CFO Partners work with more than 500 businesses in the nation with
combined annual sales of more than $3 Billion.

Jerry L. Mills and many of the B2B CFO Partners regularly dedicate
time to educate business owners on financial matters. Mills is a
frequent speaker and contributor and has been featured on many
national media networks including FOX Business, Fortune Small
Business, Smart Money and many others. Mills is also the author of
The Danger Zone – Lost in the Growth Transition, and Avoiding The
Danger Zone – Business Illusions, both business non-fiction books
that help entrepreneurs understand and build a strong financial
strategy.

“We look forward to participating in the Inc. 500|5000 conference in
Washington, DC this fall,” added Mills. “Along with my colleagues, I
look forward to the October 2nd awards ceremony and to meeting the
entrepreneurs that created the other 5000 fastest growing companies
in America.”

About Inc. Magazine

Founded in 1979 and acquired in 2005 by Mansueto Ventures LLC, Inc.
is the only major business magazine dedicated exclusively to owners
and managers of growing private companies that delivers real
solutions for todays innovative company builders. Inc. provides
hands-on tools and market-tested strategies for managing people,
finances, sales, marketing, and technology.

Inc. Magazine’s 29th annual Inc. 5000 ranking of the fastest-growing
private companies in the country is available online at
www.inc.com/inc5000/list

About B2B CFO

Headquartered in Phoenix, Ariz., the firm was founded in 1987 by
Jerry L. Mills. B2B CFO is the nation’s largest CFO firm serving
entrepreneurial, growth and mid-market companies with revenue under
$75 million. The firm’s partners have an average of 25 years of
experience and each individual partner is a senior level executive
with a broad range of expertise. Please visit online at
http://www.b2bcfo.com/

B2B CFO NAMED IN PRESTIGIOUS INC. 5000 LIST
184% Growth Earns B2B CFO Spot in the 2010 List of Fastest Growing Companies in America

Phoenix, Ariz. August 24, 2010 — B2B CFO, nation’s largest provider of CFO services to small businesses, has been named to the prestigious Inc. 5000 list of fastest growing companies in America.

Now in its 29th year, Inc. Magazine’s annual ranking judges US-based and privately held companies by their revenue growth. This year’s list was ranked on the percentage in revenue increase from 2006-2009. B2B CFO’s growth earned 84th place in its industry.

“There are approximately 27 million small businesses in the U.S. today,” said Jerry L. Mills, founder and chief executive officer of B2B CFO, “It is a huge honor to be among the fastest growing and the most successful businesses in the country. Our firm has experienced tremendous growth over the past few years and we are on track to continue expanding. I am especially grateful to all of the firm’s dedicated Partners who continue to advocate our services around the nation.”

In a personalized letter congratulating B2B CFO on this accomplishment, Jane Berenston, editor-in-chief of Inc. Magazine’s wrote “Congratulations: your company, B2B CFO, has made the 2010 list of the fastest growing private companies in America. This achievement puts you in rarefied company, especially if you consider that over 27 million businesses are registered in the USA. The elite group you’ve now joined has, over the years, included companies such as Microsoft, Timberland, Visa, Intuit, Jamba Juice, Oracle, and Zappos.com. I look forward to congratulating you in person in Washington, D.C.”

B2B CFO’s growth is reflected in numerous awards this year. The company was also recently named in ACE Corporate Growth Awards, which recognized the most successful and fastest growing companies in Arizona.
In August 2010, B2B CFO has grown to 170 Partners across 39 states, representing 5,000 years of cumulative experience. Each Partner is a seasoned financial executive who serves as CFO to growing businesses on as-needed basis. Approximately 80% of the Partners have a background that includes senior executive positions at the Big Four, and all of the Partners have held high level executive finance positions in various industries in corporate America. Together, B2B CFO Partners work with more than 500 businesses in the nation with combined annual sales of more than $3 Billion.

Jerry L. Mills and many of the B2B CFO Partners regularly dedicate time to educate business owners on financial matters. Mills is a frequent speaker and contributor and has been featured on many national media networks including FOX Business, Fortune Small Business, Smart Money and many others. Mills is also the author of The Danger Zone – Lost in the Growth Transition, and Avoiding The Danger Zone – Business Illusions, both business non-fiction books that help entrepreneurs understand and build a strong financial strategy.

“We look forward to participating in the Inc. 500|5000 conference in Washington, DC this fall,” added Mills. “Along with my colleagues, I look forward to the October 2nd awards ceremony and to meeting the entrepreneurs that created the other 5000 fastest growing companies in America.”

About Inc. Magazine

Founded in 1979 and acquired in 2005 by Mansueto Ventures LLC, Inc. is the only major business magazine dedicated exclusively to owners and managers of growing private companies that delivers real solutions for todays innovative company builders. Inc. provides hands-on tools and market-tested strategies for managing people, finances, sales, marketing, and technology.

Inc. Magazine’s 29th annual Inc. 5000 ranking of the fastest-growing private companies in the country is available online at www.inc.com/inc5000/list

ABOUT B2B CFO
Headquartered in Phoenix, Ariz., the firm was founded in 1987 by Jerry L. Mills. B2B CFO is the nation’s largest CFO firm serving entrepreneurial, growth and mid-market companies with revenue under $75 million. The firm’s partners have an average of 25 years of experience and each individual partner is a senior level executive with a broad range of expertise. Please visit online at www.b2bcfo.com