If it sounds too good to be true … maybe you just don’t understand the deal?
Part 4 of 5 – How we sold this Australian Small Business for Profit x 250
(Click here for Part 1, Part 2, and Part 3.)
Look, my focus is on helping businesses grow so the owners can live the outrageous life they always dreamed of. I’m not exclusively dealing with transactions, and I’m certainly not a one stop shop for selling your business.
You will need a great accountant and a great lawyer to get through this deal successfully. And wow – even just in the dozen or so transactions where I’ve been a lead partner or part of the negotiating team, I’ve met some mediocre examples of both.
The one phrase I’ve heard from multiple accountants and lawyers when my clients go to them with the early stage of a deal: “That sounds too good to be true.”
[Sidebar for any Accountants reading: You’re the expert in this conversation. Show your expertise, don’t shit all over the hopes and dreams of your client especially if you’re wrong.]
We’ve talking in the first three articles about how even great accountants are handcuffed when it comes to business valuations. So I don’t want to talk about those limitations – instead, I want to share how the Toaster Installers Inc deal (the life-changing amount of money for my young owners) was almost destroyed by their other advisors.
“I refuse to let you sign this contract. And if you want to sign it, then I refuse to represent you.”
That was an actual quote from the first lawyer the accountant recommended. I was invited to the meeting (unpaid, I might add, as part of my service agreement) and I couldn’t believe my ears.
I have a retinue of great transaction and tax accountants and lawyers that I can refer in these deals, but I also recognise that sometimes the best accountant is the one who knows your business already – especially if they have transaction experience and can bring their team.
This is when the accountant first revealed they may have been in over their head – because the lawyer they recommended clearly didn’t know what he was doing. He referred to the valuation (Profit x 250) based on the past 3 years’ EBIT, and used that to declare call “bullshit” on the whole deal.
I asked him his opinion on the impact the legislation change would have on future profits, and therefore valuation? He admitted he was unaware and hadn’t been briefed about a legislation change that (as disclosed in Part 3) was going to triple the size of the industry.
Needless to say, we found another lawyer.
He Wanted to be Lead Negotiator
Why do accountants think they’re great at sales? Accounting services for mid-tier businesses is like milk for a baby – it’s essential. When a customer needs what you have to sell, that is a very different sales process than when the customer can live without you.
Business owners can live without an advisor like me. They’ll do better working with me, of course, but the tax office doesn’t require you to provide “A written version of your Post-Recession Strategic Plan” – they just need a tax return.
So most accountants have never experienced genuine ‘no need’ sales (just like most have never experienced the overwhelming anxiety of starting their own business; but that’s a different discussion). Yet this accountant felt he needed to contribute.
Negotiation is a dance – it’s about feeling the energy of your negotiating partner, and in my practice it is a partnership “win-win or no deal” approach. The contract needs to reflect the agreement, and cover the multitudinous nuances of corporate and tax law.
You need the accountant and lawyer for the multitudinous nuances, not to help you dance. When this accountant made fifty-one changes to the sale contract and then sent it back by email without a conversation the Buyer walked away.
I helped the client bring them back to the table, and made it clear that allowing the accountant to directly contact the Buyer anymore was like trying to do the Waltz with an Out of Control Vibrator.
He Continually Missed Deadlines
Selling your business is among the most emotional things you can ever do. Unless you’ve done it, you may not appreciate this. Just as starting a business is an emotional rollercoaster you can’t learn from a book, so too raising capital or selling equity is an experience you cannot truly prepare for.
This gets magnified when your advisory team don’t appear to take it seriously. That business sale agreement with 51 unexpected changes? It also arrived 36 hours after a Buyer-declared deadline which the accountant and his team had promised was easily achievable.
The same pattern of behaviour showed up throughout, dragging on the sale process. Time kills deals. And since I don’t get paid by the hour, it nearly killed me!
Due Diligence Bombshells
As we established in Part 3, buying a business involves a lot of risk. No business is perfect, and no buyer expects a perfect business. But if there are furry bits to the transaction, good negotiation strategy usually entails sharing these on the front foot from a position of power.
The Buyer should not have to discover unpaid tax debt and overdue superannuation. The Buyer should not have to discover Balance Sheet liabilities that have been booked as expenses to reduce tax.
Was the accountant fearing for his own bottom line, should the transaction proceed and the client be lost to his firm? Perhaps his firm was just too small to help with a transaction, given the added pressure and timeliness it added?
Ultimately, the Buyer added several hundred thousand dollars of extra liabilities onto the transaction, in order for it to proceed. Not all of that is the fault of the accountant of course – we’ve already established Toaster Installers Inc was not a great client for doing what they were told.
But the lesson for me – and now for you, dear readers, is simple: Don’t choose the cheapest accountant or one who is only knowledgeable about tax minimisation. And if you do, find another accountant to help you with any business valuation and sale.
Otherwise that “too good to be true” opportunity may indeed be a false dawn.
