A few years ago, based on our team’s collective decades in guiding M&A transactions, we wrote a white paper on vital mistakes to avoid when selling a business:
Since it has been quite some time since we reviewed them here in our Insights articles, I thought I would dust the white paper off and briefly cover these five critical mistakes and how you can dodge them. They are:
Although each of these is serious and needs to be avoided, in order to keep this post from becoming a booklet, I am going to focus my attention on the first one listed, because if you make that mistake, you will most likely make all the others. They all tend to flow from the fact that far too many business owners have no idea what their companies are worth before going to market.
(Read about all five mistakes in detail by downloading our complimentary white paper)
The author Lewis Carroll once said, “If you don't know where you are going, any road will get you there”.
Although this applies to many things in life, it is really demonstrative of this primary exit planning mistake. We hear horror stories all the time from former business owners that accepted the first (and only) offer they received for their company, then realized after the deal closed that they undersold the value of the business and literally, in many cases, left millions on the negotiating table.
The only way to avoid this from happening is to have your company valued by a professional M&A advisory firm BEFORE talking to any buyers. I cannot emphasize this enough.
Your business is the single largest asset you own. If I were to ask you how much your car is worth, you would be able to give me a pretty good idea of it. Same goes for your house – you probably even have a good idea of what your neighbors are getting when they sell.
But do you have any idea what your business is worth? If so, how did you determine that? Most folks rely on uninformed guesses and you don’t want to do that when selling your business.
The Importance of Recasting
Here is what most business owners don’t realize: You have to recast your historic earnings BEFORE doing any valuation calculation. When I meet with clients post-deal close and tape their testimonials, nearly all of them have told me that the most valuable thing they learned at our exit planning conference was the concept of recasting.
So what exactly is recasting and how does it impact your value?
Technically, recasting is the accepted accounting principle of removing or adjusting items on your financial statements that are unrelated to the ongoing business.
It’s likely you have worked hard over the years with your accountants to under-report your earnings for tax purposes, which is perfectly legal and acceptable. But this practice also understates the true value of your company.
Keep in mind one key principle: Professional buyers are buying your future, not your past. The only way to accurately highlight your future profitability is by recasting your historical financials and then project out five years using the new recast baseline as your starting point.
Items removed or adjusted via recasting can be superfluous, excessive, or discretionary expenses, as well as non-recurring revenues and expenses. The recasting process can be quite time-consuming and tedious – but it is vital to the eventual sale of your company.
Let’s take a look at two examples of this in action. We’ll look at Company A and its earnings under two scenarios, one without recast earnings and the other after recasting.
Company A – Non-recast Earnings
Base Year EBITDA (earnings before interest, taxes, depreciation, and amortization) = $350,000
Pro Forma EBITDA Projections over 5 years:
Year 1 = 400,000
Year 2 = 450,000
Year 3 = 500,000
Year 4 = 550,000
Year 5 = 600,000
Using the non-recast pro forma projection, Company A is expected to generate $2.5 million in earnings over the next five years. Not bad. But what happens if we are able to recast $100,000 in non-recurring, non-business related expenses off the base year? Here is how it looks then:
Company A – Recast Earnings
Base Year EBITDA = $450,000 (after recasting)
Pro Forma EBITDA Projections:
Year 1 = 500,000
Year 2 = 550,000
Year 3 = 600,000
Year 4 = 650,000
Year 5 = 700,000
So the recast version of Company A’s earnings depicts the company generating $3 million in earnings. Over the five years, that is an additional $500,000 in earnings for the buyer.
Which of these two scenarios will generate the most interest and which will provide the seller with a better value? Obviously the recast earnings version will.
As you can see, recasting is vital to your sale. You will need help to do this accurately. If you are not using the services of an M&A advisor, you will need the guidance of a CPA that has experience in recasting financials (and not all do).
At a minimum, ensure that any items recast are adequately documented and can be proven to be realistic.
I have bolded this last statement because obviously if your documentation is not in order and defensible, you will naturally fall into the second mistake we listed above: Not having your documents in order!
Hire the Best!
That is why we recommend from the outset of your exit journey that you hire a very reputable, dependable, experienced M&A firm. They will understand the first step they should take is a complete and thorough evaluation of your business and a deep dive into your recastable items.
Avoid the M&A firms out there that say they don’t do an evaluation first because “the market will tell us what your business is worth”. Although this statement is technically correct and valid, how will you know if your company is being valued correctly by buyers if you have no baseline at the outset to work with?
There is a reason why our firm is one of the leading middle market investment banks in North America, having won multiple industry awards including Investment Banking Firm of the Year in 2018, 2017 and 2016, Valuation Firm of the Year in 2015 and 2014, as well as M&A Consulting Firm of the Year in 2013 and 2011.
Being named Valuation Firm of the Year twice is indicative of the quality work our evaluation associates do when valuing a business via the recasting process. There is no room for guessing and cutting the recasting process short. We have skilled folks who are not only well-trained, but also have countless years of experience in valuing businesses.
Again, if you want to learn even more about how to avoid all the mistakes listed above you have two options: Download the entire whitepaper and/or attend a Generational Equity exit planning conference. Our full-day meetings will guide you to a new understanding of not only avoiding mistakes, but doing the process the professional way.
Use the following links to learn more:
Carl Doerksen is the Director of Corporate Development at Generational Equity.
© 2019 Generational Equity, LLC All Rights Reserved
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.Larry Moore, Owner, A Company Portable Restrooms
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.Robert Evans, President and CEO of Mealtracker Dietary Software
We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
Tom Staszak is one of the most professional people I have dealt with in my last forty years of business. You’ve got a great group of people and you have built a truly professional organization.Michael J Polarek, President, Paragon Packaging
Thanks again Phil and feel free to have a future client call me if they would like a referral. You are a true professional!Andy Graham, Vice President, Modern Heating & Plumbing
Bruce and I wanted to take this opportunity to thank Generational Equity for assigning Musa Jagne to our transaction. In Bruce’s words, “Musa did one hell of a job for us!”Karen S. Williams, CFO, BW Manufacturing
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.Andy Graham, Vice President, Modern Heating & Plumbing
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.Terry D. Wickman, President, Keytroller
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
We will highly recommend Generational Equity and Musa Jagne to any business owner about to embark on the same process.Karen S. Williams, CFO, BW Manufacturing
We are extremely pleased with the way Generational Equity handled the sale of our company. Your associates, Tom and Chris, did an outstanding job of getting us (me) through the process.Michael J Polarek, President, Paragon Packaging
Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.Pete L.
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Terry D. Wickman, President, Keytroller
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.Robert Evans, President and CEO of Mealtracker Dietary Software
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.Jay Dinnison, Owner of Sharpe Mixers
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.Jay Dinnison, Owner of Sharpe Mixers
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).Bil MacLeslie, CEO, ipHouse
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
The information we learn from customers helps us personalize and continually improve your experience. Here are the types of information we gather.
We receive and store any information you enter on our Web site or give us in any other way. We do not sell or rent your personal information to others without your consent. We use the information we collect only for the purposes sending promotional information, enhancing the operation of our site, serving advertisements, for statistical purposes and to administer our systems. We DO NOT use third parties to provide customer service, to serve site content, to serve the advertisements you see on our site, to conduct surveys, to help administer promotional emails, or to administer drawings or contests, but reserve the right to do so in the future without advance notice.
Generational Equity, LLC’s affiliates are all part of one corporate family, they work with one another and may work together to provide services to you. The sharing of your information among affiliates enables Generational Equity to serve you more efficiently and makes it more convenient for you to do business with Generational Group. Generational Equity is permitted by law to share information with its affiliates. All of our affiliates follow similar privacy policies.
For reasons such as improving personalization of our service, we might receive information about you from other sources and add it to our account information.
Generational Group may license the use of its intellectual property including but not limited to its name, likeness, and logo for the use of affiliated offices. Such affiliated offices may not be owned, controlled, managed, supervised or staffed by employees, officers, or agents of Generational Group. Affiliated offices may be independently owned and operated. For more information about a particular office, please contact Generational Group at its office in Dallas, Texas.
This page may contain other proprietary notices and copyright information, the terms of which must be observed and followed.
Information on this web site may contain technical inaccuracies or typographical errors. Information may be changed or updated without notice. Generational Group may also make improvements and/or changes in the products and/or the programs described in this information at any time without notice.
Generational Group does not want to receive confidential or proprietary information from you through our web site. Please note that any information or material sent to Generational Group will be deemed NOT to be confidential. By sending Generational Group any information or material, you grant Generational Group an unrestricted, irrevocable license to use, reproduce, display, perform, modify, transmit and distribute those materials or information, and you also agree that Generational Group is free to use any ideas, concepts, know-how or techniques that you send us for any purpose.
Our computer system protects personal information using advanced firewall technology.
Information Generational Group publishes on the World Wide Web may contain references or cross references to other products, programs and services that are not announced or available in your country. Such references do not imply that Generational Group intends to announce such products, programs or services in your country. Consult a Generational Group representative for information regarding the products, programs and services which may be available to you.
Generational Group makes no representations whatsoever about any other web site which you may access through this one. When you access a non-Generational Group web site, please understand that it is independent from Generational Group, and that Generational Group has no control over the content on that web site. In addition, a link to a non-Generational Group web site does not mean that Generational Group endorses or accepts any responsibility for the content, or the use, of such web site. It is up to you to take precautions to ensure that whatever you select for your use is free of such items as viruses, worms, Trojan horses and other items of a destructive nature.
IN NO EVENT WILL Generational Group BE LIABLE TO ANY PARTY OR ANY DIRECT, INDIRECT, SPECIAL OR OTHER CONSEQUENTIAL DAMAGES FOR ANY USE OF THIS WEBSITE, OR ON ANY OTHER HYPERLINKED WEBSITE, INCLUDING, WITHOUT LIMITATION, ANY LOST PROFITS, BUSINESS INTERRUPTION, LOSS OF PROGRAMS OR OTHER DATA ON YOUR INFORMATION HANDLING SYSTEM OR OTHERWISE, EVEN IF WE ARE EXPRESSLY ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
Furthermore, all information contained within this website is the property of Generational Group.
Honored to win Investment Banking Firm of the Year 3 years running.
Over 50 awards and counting.
Sign up to receive regular email updates, industry-leading insights and details on complimentary M&A executive conferences in your area from our award-winning team
Success, you have been added to our list.