In Deal Note® 36, we explained the role of the person in charge of your accounting records. Depending on the size of your company, this person’s title might range from “CFO” to “Bookkeeper”. In this Deal Note®, we explain the importance of this individual and the potential impact on your business’ sale price. For purposes of this Deal Note®, we will call this person your Bookkeeper.
Your Bookkeeper is probably the single most important person when it comes to selling your company. While that may sound far-fetched, our 25+ years of experience have proven the hard truth: your middle-market aerospace and defense company needs a full-time, high-quality accounting professional to sell for an aspirational price.
Many privately held middle-market aerospace and defense companies do not invest heavily in accounting policies and procedures. They do not have a large or professionally trained accounting staff. This is fine for a small business with few or no outside investors, limited bank debt, and no intention of being acquired. For these companies, there is no reason to “waste” money on accounting, which is just an “overhead cost area”.
That is, until you want to sell your company, and then it is too late.
Once you sign a letter of intent with a buyer and they start their due diligence during the exclusivity period, it is too late to fix any accounting shortfalls. You should assume that 99% of the imperfections in your accounting policies and procedures will be found by the buyers. If a buyer is sincere in their strategic interest in acquiring your company, these accounting issues usually will not cause them to walk from the deal. But these imperfections will give them plenty of ammunition to argue for a reduction in the price. Often, these accounting imperfections lead to a reduction of 5-10%, or more, depending on the accounting imperfections that are identified.
As an example, assuming you sign an LOI for $30 million, a 5% reduction in the price would equate to a loss of $1.5 million. In contrast to the risk of losing $1.5 million, you could instead invest $100,000 each year for the 3 years prior to selling, and gain a net $1.2 million when you sell your business. As another example, if the reduction were to be 10%, then your gain from 3 years of accounting investment would be $2.7 million.
Whether you invest in people, systems, or outside accounting professionals, the impact of investing in your accounting is compelling. If you are considering selling within the next 3 years, you should start investing in your accounting now.
Hope this helps.
Cheers,
William Alderman
Founding Partner
