I admit that sometimes I live in a fantasy world. I actually think that I'm getting a buzz from lite beer. I sometimes believe that John Edward can really talk to the dead. Or that John Edwards' marriage isn't dead. Or is it the other way around?
Geez, those guys kind of look alike anyway.
I have a friend named Tom who's looking to sell his equipment parts distribution business. Problem is, he can't sell it. He's had more than half a dozen potential buyers and they've all offered way less than what he was looking for.
What's the problem? Tom lives in his own fantasy world. He thinks his company is worth way more than it really is. That's almost as bad as thinking two cheeseburgers at McDonalds are healthier than a Big Mac (everyone knows it's the fries that'll kill you).
On the outside, it looks like Tom's business isn't even so bad. He's been running it for over 20 years. It's provided him with a good income, enough to keep his three kids out of jail and even sufficient to send two of them to college. It's paid for the lease on his BMW (which, in Tom's fantasy world, is a better car than a Hyundai, even though we all know it's all about status).
Tom's got a good amount of cash in the bank. Granted, a little less than before the market crashed. But it's coming back. His balance sheet shows receivables at least 50 percent higher than his payables and no other major liabilities on the books. He even owns the building that houses his company. So, now that he's hitting his mid-60s, why can't he unload the thing and retire?
For the same reasons why many penny-pinching business owners find out their business is worth a lot less than they thought: They don't take care of the intangibles. And so they live in a fantasy world.
For example, after over 20 years of existence, wouldn't you think that Tom's company would have a database of its customers? Not a chance. Instead, there are spreadsheets, e-mail files, paper files, sticky notes and some bare-bones information in his accounting system necessary for printing out an invoice. Snooki from Jersey Shore is probably more organized. Tom never collected profile information about his customers. What products they bought. What products they might be interested in buying. Organizations they belong to. The beer they drink. Their favorite sports teams.
And he certainly never did this for his prospects either. Thousands of interested customers have passed through Tom's world over the years, many of them getting quotes or callbacks from his sales guys. But was this data stored? Nope. All the information was in Tom's head. Not in a database. And if it did get filed somewhere, the data was never updated. It's of little value to a buyer. Tom didn't realize this.
That's because buyers are looking for something more than just cash, receivables and hard assets. They pay extra, a lot extra, for solid intangible assets too. A complete and accurate customer database is of huge value to an incoming owner. A complete and accurate prospect database is icing on the cake. Some deals are made because of the strength of the seller's data. If Tom was more organized, he might have more reason to entice a potential buyer.
Tom also thought that once he sold his business, he could wash his hands and walk away. That's almost as big a fantasy as those dopey people buying dirt from the old Veterans Stadium in Philadelphia before it was imploded and thinking it would one day be valuable. It's dirt! In a bottle! A bottle of dirt!
And without the seller staying on for a few years to ensure a successful transition, the value of a potential acquisition can quickly become dirt too. A potential buyer of a small company rarely buys unless they intend to bring on its existing management for a period of time. Like most companies, Tom's would fall apart if he weren't there. This would change overnight? The minute Tom told a potential buyer that he was "outta here," any buyer would turn and walk right out the door. Good penny-pinchers who want to sell their companies know that the selling process continues even after the sale is made. They have to stay on for a while. It's the only way to maximize the value of their asset.
Sure, I admit to fantasizing about a lot of things. Getting rich. Sailing around the world. Having hair. But I'm kind of proud to say that I don't have fantasies about my business. Without me, it's valueless. My clients like us a lot. My employees (I think) like me a lot. But I lack long-term contracts with any of them. To a potential buyer, this is a big problem.
Tom thinks he's got a long-term relationships with his customers. He thinks his employees will stay on forever after he's gone. But that's a fantasy. He's a distributor. He has no service contracts. No commitments. No employment agreements. A customer can jump to one of his competitors tomorrow without recourse. A key employee can quit next week without any further thought.
Accounting firms are easy to value because most clients have long-term engagements that can be easily forecasted. It's kind of a pain to leave your accountant. So there's a predictable future revenue stream. Tom does not have this. He thinks he does. But it's a fantasy.
The world is full of people who like to fantasize. Barack Obama fantasizes that Republicans and Democrats will actually one day work together. My friend in New York fantasizes that the Mets may have a winning season this year. Ashton Kutcher fantasizes that people actually care what he tweets.
And some penny-pinchers, like Tom, fantasize that their business is worth way more than it really is.
Time for a wake-up call.
Gene Marks, CPA, runs a 10-person technology consulting firm in Bala Cynwyd, Pa. His latest book is In God We Trust, All Others Pay Cash: Simple Lessons from Smart Business People.
Register or login for access to this item and much more
All Accounting Today content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access