There are five deal factors so significant that they don’t just affect price, they affect the fundamental ability to sell your company and complete a deal. For this reason, these are considered Deal Killers. If a company has one or more of these attributes, it will be difficult to find any buyer. Any buyer will very likely discount the value to accommodate the risk that these Deal Killers bring.
My 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.
Deal Killer #3 – Financial Inconsistency
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.