I just had a really interesting conversation. A buyer who several months ago bought a business (not through me) that he got a great deal on because he could see past the poor books and records. We were talking for hours about how many businesses fail to sell and how the primary reasons were the poor records of the business and the inability of the buyers to secure financing because the powers that be (banks, lenders, accountants, traditions, lawyers) said so.
Any Business Broker in the industry would tell you that 3 of the main things you need to do to sell your business is Florida is to keep good books and records. Why? Well its simple…without good books and records you cant prove the numbers and therefore you can’t get good deals and financing from banks.
Books and records remind me sometimes of the “Guarantee” scene in Tommy Boy. They make you feel good but how do you know the “Guarantee Fairy (Books and Records Fairy) isn’t a crazy glue sniffer?
Now business owners one would think would be smart enough to know that having good books in a world where there are few businesses with good books would put them in a high position of demand and therefore drive their price up…simple supply and demand you learn in freshman year economics right? Well right…in a vacuum that is right….the reality is that in small business (you know ones like your neighbor has) they have other realities. Things like: sales tax, payroll tax, banks who won’t extend lines of credit unless you keep 5000 dollars in their bank at all times, income tax, cost of living, kids, etc etc etc.
All these things impact a small business owner so they cut corners. Its a dirty secret but this is what happens.
Then there is the buyer who thinks having worked in the corporate world that everyone should just keep those good books….well “walk a mile in their shoes buddy”. You dont cause you generally have to pay a cpa and that 2k to 500 bucks a month to maintain monthly records…that becomes a challenge when things like covid come along and your trying to survive and feed your family and keep your business alive that you poured you blood and sweat into.
So what is my point? My point is there are other ways besides what some suit looks on a piece of paper or the balance sheet that was prepared while your feeding your kids. Lets talk reality.
Every day I meet business owners that make money but their records are crap…so how do I figure it out? Long experience and a little classical education. See the essence of a business…its bones and you can drill down to reality. The pl and balance sheet are incidental.
Lets look at three examples:
Pizza Parlors: Notorious for cash and crap records cause there is cash, the average transaction is generally under 25 bucks (hence cash), they tend to be in areas that run the demographic spread and where the consumers operate in a cash environment so….the books suck. So how do you back into reality? 1) pull the tape…the tape / pos machine generally has the right transaction….credit card will be there as well as cash…so take note of the difference. 2) get the tickets from suppliers of boxes for pizza, and suppliers. Cross reference with the owner to determine how many pounds of pepperoni go on a pie and sausage, how many cans of sauce per pie, cheese etc….work out the week and then back into the revenue and on the tapes. You should be able to do samples of weeks to determine reasonable reality against what the seller is representing. As a further check…count the boxes …if there are 50 boxes on the floor Friday morning…check Saturday to see how many left….sample the tape….you follow…backward math is a thing…this is Main Street and how operators operate.
Coin Laundry’s: The core of the business is wash and dry….for every wash there is a corresponding dry. When there is heavy cash you need to look at the essence of a wash. So tell my Mike what is that? Its the water silly. Each washer has a run duration and a gallons of water used in a cycle. Take the sellers water bill monthly and divide by the gallons per run on the specs per the machines. Multiply by the rate per load…there should be a correspond dryer run as well. Simple math often adds up…it will show a exception but again…its testing for reasonableness that matters in the Main Street world.
Bars: Anyone who has watched “Bar Rescue” knows the secrets of running a bar. Know the science, observe the waste, theft and the upsells. There is cash and there is human execution which creates opportunity for waste and theft. Bar rescue has some great examples of simple changes in execution that lead to margin lift. There are so many ways of identifying and proving out the cash component that I can’t list them all but one is knowing the yield on kegs and standardizing pours (craft bars have too many glass sizes making it impossible to gage yield HINT HINT). Know your yield per keg and cross reference with the tape. If its off its cash or its theft or its waste….identify and process eliminate the error.
So my point is…if you want great books on your business deal guess what? You are going to pay a premium…so thank your lawyer and accountant for pushing you in that direction. Good Operators control their lawyers and accountants like a general controls a chaplain or logistics officer….they are necessary but they are not in command you are. Poor records do not make a business bad…they just mean the operator isn’t organized…I am not saying ignore them. Rather I am saying know how to ferret reality through other methods and leverage the bad records to get the best deal
Michael Shea is the Senior Partner in Central Florida with Transworld Business Advisors. With over 16 years of practice he has sold over 315 businesses in industries from restaurants, to advertising, to logistics and medical practices. Transworld is the worlds largest business brokerage with over 250 offices world wide. Contact Mr. Shea at 321-287-0349 or email him at firstname.lastname@example.org for a private consult.