Do your numbers support the story of your business?

Every industry has its own special language, and the world of mergers and acquisitions (M&A) is no exception. A blemish uncovered during due diligence may “torpedo” a deal, an active market is described as “frothy,” and tense moments between buyer and seller can cause deal “turbulence” — as in fasten your seatbelt while we get through the bumps.

A good turn of phrase has some underlying truth in it, and the best have a touch of humor. But there’s one saying in M&A that I’ve come to take issue with. It goes like this:

“If your numbers are bad, your story better be good.”

What I love about this statement is that it illustrates how the story of your business is told in two languages: one narrative, the other numerical. There are several instances where you may be asked to tell the story of your business. These can include raising capital, bringing on a partner, or selling your business to a buyer. One of the things I enjoy most about my job is telling the story of a business well enough to attract nationwide interest from the best possible buyers. But after almost nine years of helping business owners sell, I am no longer sure that any story makes up for “bad” numbers.

Bad numbers can fall into two main categories. The first has to do with the financial performance of a business. Examples might be declining sales, negative earnings or shrinking margins. The second refers to the financial statements of the company being in disarray. While the former may be difficult and expensive to overcome, the latter sort of “bad” numbers can often be fixed with surprisingly small amounts of dedication and resources.

So, what constitutes “good” books? From where I sit, solid financial statements share the following attributes:

  1. They are accurate and current. Hint: You should be able to pull financial reports at any time, not just year-end.
  2. There is sufficient detail about both income and expenses to show someone exactly how your business makes money. Hint: If you have one line at the top of your P&L that says “Income,” you probably need to get more specific.
  3. They are prepared by a credible source. Hint: If you’re the business owner, that’s probably not you.
  4. They are in a format that is universally accepted and easily understood, like Quickbooks accounting software. Hint: That internal spreadsheet you’ve created isn’t going to cut it.

In a word, they are trustworthy.

Many business owners delegate the chore of bookkeeping as soon as they can afford to. The days of the shoebox give way to regular entries into Quickbooks. Yet we rarely ask our financial statements to tell us much about our business besides how much we’ll owe in taxes each year. That’s more than a shame, it’s a missed opportunity.

The value of keeping good books goes well beyond tax time. They can be used to improve cash flow, make better decisions, and contribute to the overall value of your business. One of the top two reasons businesses don’t sell is because the financials are not reliable. While cleaning up the books may seem like a low priority today, it will shoot straight to the top of the list if you ever decide to sell your business.

It may not constitute the most exciting investment, but there is little downside to hiring the right help to keep your books in good working order. In fact, this is one area of your business that can be easily outsourced to a local accounting firm. There are even cloud-based services now that act as virtual bookkeepers. And if you need a CFO, you can rent one. A CFO will take your financial statements to the next level, helping you understand the key financial drivers of your business, effective use of capital, and how to make strategic decisions based on your numbers.

Great businesses not only have a compelling narrative to share, they also have financial statements that support every word of their story. If your business lacks this kind of two-part harmony, a tune up is as easy a phone call to your CPA.

This post appeared as a Guest Commentary in the September 29, 2014 issue of the Northwest Arkansas Business Journal.

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