InSight

Exit and Growth Strategies for Middle Market Businesses

Avoid Deal Killers When Selling Your Company – Part 3

By Kim Levin | Aug 13, 2014

glasses and financialsOver the life of the blog, much has been posted about Deal Killers, those pesky things to avoid when you’re selling your company.  John Hammett wrote a great series of blog posts several years ago that still stands the test of time.  I thought it was a good idea to revisit this series of posts.  The first two blog posts in this series discussed Deal Killer #1  No Management Depth and Deal Killer #2 Customer Concentration.  This post will focus on a current problem for many companies…financial inconsistency. This is the 3rd in a series of 5.

Deal Killer #3 – Financial Inconsistency

by John Hammett

Inconsistent Financial History.  Buyers look back at four or five years of historical financial performance when they evaluate a company.  If that history shows big swings up or down in sales and earnings (and losses), it makes them uncomfortable that they can predict and control the future sales and earnings.  Historical volatility and inconsistent financial history are a Deal Killer for many buyers.

Antidotes.  There a number of ways to mitigate this issue.

The time frame of the history can be adjusted to show today’s results in the best context.  If the last three years are nicely consistent, show only those and ignore earlier years that may be volatile.  Or, if the volatility is in the last two or three years, including a five or six year history may give a more stable picture.

If the company’s industry has had ups and downs, tracking the company’s performance against industry trends may show that company is less susceptible to volatility than its peers.

It may be worthwhile to hire an accounting consultant or investment banker to review the company’s history to identify specific factors that can be restated to make history look more even.  For example, one-time legal bills, bad debts, and discontinued product lines can be restated out of the historical financial results to show a more consistent trend.  This kind of restatement is a common and accepted practice.


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