Why do Business Transitions Fail?
Brian E. Christian, Partner
Recently Axial Forum (www.axial.net) published an article by Tom Schramski, President and Managing Partner of Vertess entitled “7 Reasons Why Some Businesses Don’t Sell”.
I loved this article for several reasons:
- It is well written,
- The subject matter is straight forward,
- It is easy to read, and most of all,
- The number one reason cited is something that I am passionate about…
Mr. Schramski writes:
“More than once, we have encountered sellers that neglected to regularly monitor financial performance and then make adjustments that could substantially improve their results. They managed a ‘lifestyle business’ that was focused on short term personal compensation (aka excess compensation), not the long term value of their life-long investment.”
In breaking the above down further…financial performance is like anything else in life. That is, you can’t improve on anything unless you first measure it. Since this is March and college basketball is ubiquitous…I’ll use a basketball metaphor: Close games frequently come down to free throw shooting- teams that make most of their attempts usually win (which directly impacts the career employability of their coach). Can a basketball coach implore his team to improve their free throw shooting unless he/she first knows what their shooting percentage is now? Does he/she know which players are the team’s best free throw shooters? Which players make the most “clutch” free throws? Are some player’s better free throw shooters early in games (when there is arguably less pressure)? Which players step up and make a higher percentage of free throws in the last quarter or in overtime when the game is on the line? Knowing the answers to the above would allow the coach to position his/her team with the best opportunity to win.
In business, how does an owner or CEO (whose livelihood is also at stake as much, or more than, a basketball coach) know his company is as good as it can be if company performance is not measured in the form of key performance indicators (or KPIs). Selecting the right KPIs to monitor differs by industry and can even differ by company within a given industry- they are ultimately open for argument amongst company management teams, usually due to management’s ability to have direct control over them. What isn’t or shouldn’t be open for argument is whether or not they should be measured. When done properly, KPIs are not only measured, they are budgeted for and forecasted. A properly forecasted KPI should be intrinsic to the business such that when financial statements are released and reported, the owner or CEO should view them as merely a confirmation of what he or she saw from the forecasted KPI.
At B2B CFO® our Certified Business Transition ExpertTM training provides our partners with the skills and resources to benchmark our clients’ financial results against their peer group within the client company’s industry. In almost all cases, these comparisons are eye opening to our clients and they shed light on past management practices that are in contrast with maximizing the long-term value of the client’s business.
A key consideration is income taxes. While I haven’t yet met the owner or CEO that likes to pay them, managing the company over time with the practice of reducing earnings (and company financial performance) in order to pay less income tax can be detrimental when it comes to the business transition process. A typical buyer wants to pay a price for the business that is in line with the company’s financial performance over the previous 3-5 years. If that time period immediately preceding a sale has been spent suppressing the company’s financial performance, the resulting difference in opinion as to the value of the company is usually difficult to overcome. This dichotomy leads to this being the number one reason why the sale breaks down.
I strongly encourage anyone with an interest in the above or in business transitions in general to read the above referenced article as well as our firm’s book, “The Exit Strategy Handbook”. These topics and everything else you would need to know from the buyers’ and sellers’ perspectives are covered in this book. If additional information
is desired, I welcome inquiries at firstname.lastname@example.org or via telephone at (262)391.0337.