Action Items in Uncertain Times
Even for those of us who are “of a certain age” and have supposedly seen it all, these times feel like the most uncertain ever. After a terrible economic meltdown we thought we were on the road to recovery. Now we aren’t so sure. The government stimulus helped and we hoped that would free up lending as a result. We are still hoping. Unemployment statistics are one thing but now our neighbors are out of work. People we actually know! Greece and Italy, always nice places to visit, have suddenly become very important and the whole European Union seems to be tilting on their success or failure. The stock market wants to recover but a “raging bull” it isn’t. For every upswing, we see a responding fall off. What to do, what to do? The art of political compromise seems to be missing and a deal on the debt ceiling remains elusive. We could sit idly by and simply ride the waves until we find a firm course. We prefer good times to bad times but uncertain times bring disequilibrium to our lives.
My suggestion to business owners is not to sit idly by but to be proactive and to use this time wisely. You will not find the action items I am going to suggest to be strategic in nature to help you improve your business. It would be presumptuous of me to tell you that – you who have years of successful operations under your belts. My suggestions are action items to help you prepare to sell your business when the time comes or when somebody comes knocking on your door before you expect it.
Keeping Financial Records Current and Meaningful
Maintain a rolling three year history of your financial statements. At the very least you should have Income Statements, Balance Sheets and Cash Flow Statements. Also, to make your life just a little more complicated when all you are asking for is more simplicity, these statements should be recasted or normalized to reflect what they would look like if your company was publically owned, not private. Add back to Income all the salaries of family members who are paid out of the business but who don’t really work there. Remove the country club dues and the home gardeners. If there was a law suit settlement or other Non-Operating Expenses (or Income), move them below the line so as not to affect Operating Income. Buyers typically do not want to own real estate so remove it from the Balance Sheet if your company owns the real estate and substitute Rent at market rates in place of the Depreciation on the building. If you own the business real estate personally, be sure that the rent paid is also reflected in the Statements at market rates. Buyers welcome these restatements. Do them in such a way that they reveal exactly what you are doing and why. Buyers want to know the true earning power of the enterprise and this is how to do it.
Audit Your Corporate Records
I know it may be a pain but keep your Corporate Minutes Book up to date. Collect all your insurance policies and claims and keep them in one place. Your leases, your EPA file, your OSHA file, ownership records, Workmen’s Compensation, legal contracts – the longer you wait to organize these documents, the more difficult it will be when you need them. You may even want to consider going hi-tech by scanning all of these documents and organizing them on a password-protected website. There are many services available to help you with this process.
Audit Your Human Resources
What? Yes, perform a Human Resources (“HR”) Audit. It can be very important as it is a comprehensive and systematic means to review and identify any areas for improvement concerning an organization’s human resources policies, practices, procedures, systems and processes. Done well, such an audit will indicate necessary improvements in:
• Talent acquisition and integration
• Compensation and benefit programs
• Performance and talent management programs
• Succession planning
• Termination process
• Legal compliance with state and federal laws
• Files and record keeping
Many small businesses do not even have Organization Charts indicating who reports to whom and then wonder why they have trouble communicating. When Buyers evaluate real estate it’s all about location, location and location. When Buyers evaluate companies, it’s all about management, management and management. HR is an area that too often goes ignored. There are HR specialists who can help you do this kind of work and hiring one might be worthy of your consideration.
Audit Your Books
This is going to cost a few dollars but it’s worth it. If your Sales are under $10 million you may be able to get away without audited financial statements. But at $10 million or over it’s a very good idea to have your books audited. The larger auditing firms will charge more for your audit but it is nice having their name on it rather than your brother-in-law’s. There are firms of a size between your brother-in-law and the big boys that will do just fine. Many local firms will not do audits because of the associated risks the auditors take but regional and national firms will. Most small companies will not have their books audited so if you take this step it will set you apart from the rest and provide evidence to Buyers and Banks that you are a “serious contender”.
Analyze Your Financial Statements
It is one thing to have nicely prepared recasted historical financial statements as discussed above. It is another thing to actually understand what they say and what they mean. You are well advised to analyze your financial statements. You know Buyers will! Do you have “concentration” issues with your sales or customers, i.e., are sales too concentrated in a few products or in a few customers? How are they trending in these areas? Are you collecting your Accounts Receivable? What does recent history show of days of sales outstanding in your A/R? Are you paying your vendors on time? What is the trend of your profitability and liquidity measurements? These, and many more, are questions Buyers and Bankers will ask you someday. Invest the time necessary now to truly understand what is going on in your business.
With 95% Certainty
Death and taxes are both 100% certain. Selling your business someday is probably 95% certain. You may hand it down to family members or you may go public but these alternatives are much less prevalent in today’s world than they used to be. If you are a first generation entrepreneur, your chances are better that your children will take over your business than they would be if your grandparents started the business. The “bloom is off the rose” for going public. First, unless your Sales volume is at least $100 million you don’t get a lot of attention on the public markets. The costs of going public are higher than ever and the costs of staying public, with the advent of Sarbanes-Oxley legislation, are even worse. But that’s OK. There are more pent-up dollars waiting to be used by both private and public buyers for acquisition of companies than we have ever seen in our history. When you do sell, if you are educated in the Merger and Acquisition process, organized and confident, you will achieve a higher valuation in the marketplace.
This is where Ronald Glickman and Associates can be helpful. We will help you estimate what the value of your company is now and what it can be in the future. We will educate you about what to expect once you make the sell decision. We will teach you the vocabulary used in the M&A world. How does a Leveraged Buyout work? What is involved in the Due Diligence process? What kind of Deal Structures are available and what are the risks associated with each? We do this for a reasonable hourly fee. We do not and never will charge investment banking type success fees. Now is the time to call us. It takes time to prepare and we want you to be ready when the time comes.