How Not To End Up With A Business Worth Zero

Bill Faeth
Posted on June 18, 2018

I recently got a call from operators in the Northeast who wanted to sell their company, retire, and move South to a warmer climate. Unfortunately, after speaking to them for five to 10 minutes and asking a few very important questions, they asked me what I thought the company was worth.

The answer? ZERO.

It was heartbreaking for me to have to tell them this and I actually thought about not telling them because I knew the news would be devastating as they were planning on selling their home and moving to retire.

Big Financial Mistakes Businesses Make

All too often small businesses make fundamental mistakes in how they run the back office of the business. The ground transportation industry is no different.

In this case, the owners of the company were running every personal expense possible through the business. This sounds great to most owners, because it will lower the amount of income you pull from the business, hence lowering your annual tax burden. The problem is when you sell your business, the tax returns, balance sheets, and P&L have been devalued and you will get a lower valuation for your business on the exit.

I look at it very simply. Every dollar I can show as profit today will be worth $3 to $5 on an exit in the future.

In the case of the operators, they have $250,000 in annual revenue, $100,000 in vehicle debt, and didn’t know what additional debt they had, what monthly cash flow projections were, or what the EBITDA was for 2018 YTD/2017/2016.

One of the issues here is the owners were running $2,000 to $3,000 a month in personal expenses through the business. This is $24,000 to $36,000 annually that appears as an expense on a P&L versus profit devaluing the business significantly. This could represent up to, or even greater than 50% of their profit margin. The business operates at a 20% GPM on $250,000 in annual revenue.

Plan To Sell To Educated Buyers

Not knowing these numbers presents a real problem for anyone wanting to sell their business, especially if you are selling to an educated buyer who has done some M&A in the past and has a remedial knowledge base of the ground transportation industry.

The lesson to be learned here is to plan for your exit before it becomes a necessity. In most cases for a lot of companies it’s almost always too late. They have devalued their business and will either sell at a discount or a loss, or will have to wait a few years to clean up their accounting then try to exit again.

Believe me, this happens all too often, and if you are a small- to medium-sized company I am certain you will fall into this category to some extent. I have consulted on 11 acquisitions this year, and unfortunately see this same scenario in almost every transaction.

Three Steps To Sound Financial Management

Here is my recommendation moving forward:

Have an accounting system in place. There are plenty of CPAs, accounting firms, and even bookkeepers who you can retain locally to manage your books, provide monthly P&Ls, and submit cash flow reports. Having this information is the only way you would be able to truly manage your business effectively.

Make sound financially driven decisions, and be ready for a sale when it becomes necessary or wanted. Most of these programs run around $475-$600 per month and will deliver P&Ls, updated balance sheets monthly, and even reconcile your bank statements.

Don't run all of your personal expenses through your business. Be prudent with what you run through your business, and be sure what you do is legal by consulting with your CPA. Remember, the value of every dollar you pay taxes on is three to five times higher in the future, and if you’re like me, you don’t want to be forced into working well into your 60s and 70s just to pay your mortgage.

If you have any questions about this topic, don’t know where to start, or you’re unsure on what you should or shouldn't be running through your business, send an email to [email protected] and I will help.

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Bill Faeth is the founder of Limo University (www.LimoGrowth.com), Inbound Marketing Agents (www.inboundmarketingagents.com), and 23 additional startups, including Silver Oak Transportation of Nashville, Tenn. As a successful former operator and active advocate for the industry, Bill continues to invest into educating and training operators on how to grow, manage and sustain a more profitable business. You can reach Bill at [email protected]

Related Topics: Bill Faeth, business deals, finance, mergers & acquisitions, selling your business

Comments ( 1 )
  • Theresa

     | about 6 months ago

    Very insightful commentary and not a topic that we hear much about. Thanks for providing relevant content. This is excellent food for thought.

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