In the world of buying and selling businesses, the owner(s) is an expert in that business. There are owners who know exactly what that business is worth. And then there are owners who suffer from G.I.V.E. This stands for grandiose, inflated, valuation expectations. GIVE is common in the world of mergers and acquisitions. The owner grabs his number out of the air. He then digs himself further into a corner, shouts his commitment to that number in front of every potential advisor, buyer or seller he meets. It usually ends badly. Remember that statistic I shared in an earlier post about 80% of businesses that go to market fail to close? Could this be one of the reasons? I believe so. This post is designed to challenge your fixed mindset and expand your awareness around your numbers.
First of all, ask yourself where the business is in development. Are you an emerging business? If so, do you have an accounting firm that works with you? Do you have employees who are responsible for accounts payable and receivable? At this stage, bring in your CPA to work with your employees to establish systems and processes that are scalable, sustainable, and serve the business in working capital management. My suggestion would be to create a system that includes a compilation, a review, or an internal audit every year. The CPA, your employees and future CFO will then have yearly opportunities to discover options for increasing value overall.
For the organization in the growth stage, the CFO can implement the yearly review or audit. As an owner with a growth mindset, who is also aware of the long-term objective, will you authorize your CFO to create a team who innovates and problem-solves? Will this team be empowered to fail, in real time make the necessary adjustments, recalculate again and again, if necessary? What would it look like for this team to accumulate the data of each iteration, complete an assessment and then present with the underlying assumption that each person is committed to success? How would this team function if innovation, creation and evidence is presented to show how each project either contributed to the value of the company or, by witnessing a “failure”, documented the learning to the institution’s bank of knowledge?
To take value creation another step further, will your CFO be authorized to enlist the aid of an outside organization to do a review, or an independent audit, or a valuation? Will the budget committee add this line item, knowing that the news may or may not support the widely-held internal valuation by the CEO? What will you do with the knowledge? What would it look like to have this kind of compilation, review or audit take place in operations, people development, culture, or an audit of growth patterns within your industry? What if every department, team member and seasonal employee knew the financial story so well that they felt they own it? How might this change your organization’s trajectory? How will the company use this to avoid the dreaded GIVE?
The mature stage business, with a growth minded owner, adds value with an awareness of the ecosystem energy. That owner knows that there are aspects of the organization up for further cultivation. This may be the time to call for recommendations for business brokers, investment bankers or those who offer independent valuations. An independent valuation may cost as much as $30K. It is an investment in the organization’s future. If an investment bank or business broker offer to do this service as part of a contractual agreement, the organization is often obligated to use that banker, or broker, to buy or sell. This may or may not be aligned with the owner’s long-term objective.
On the other hand, this is an opportunity to begin to see these experts at their work. What factors do they use to determine valuation? How do those factors align with the priorities you have established? How do the systems and processes in place stand up to outside scrutiny? You can begin to get a sense of the advisor’s approach without being obligated to a future working relationship. This also invites outside recommendations to add value. The growth mindset allows the space for an organization to put the systems in place to enter into the mergers and acquisitions process without the GIVE blinders.
So, here is a suggested 10 year plan for inoculating yourself against GIVE:
- Years 1-3: Internal Compilation, Review, or Audit: numbers, people, operations
- Year 4: External Audit by CPA
- Year 5: Operations Audit or Culture Audit
- Year 6: Operations Audit or Culture Audit (whichever wasn’t done last year)
- Year 7: Independent Valuation
- Year 8: Implement & Execute recommendations from audits
- Year 9: Internal Audit: numbers, people, operations
- Year 10: External Audit
- Year 11: Independent Valuation as part of pitch process
As owner, you have the power to build a growth mindset and culture of awareness that includes knowing the numbers from the very beginning. Work the numbers to create value to accelerate your organization’s growth. Develop relationships within the company to reward innovation, embrace change, and add to the institutional knowledge. Get to know the advisors who may join your team. A mature business adds value by developing awareness- introduce the practice of compilation, review, audit and valuation as soon as it is useful. Don’t wait until “the time is right” to know your business. Know your numbers to know your business.