People know when it’s time to call the undertaker. The signs are obvious. Though it’s an exceedingly painful task, we confront the difficult circumstances because we know we have no choice. It’s less obvious to know when to call hospice, that awful time when you recognize the patient is likely to die and needs comfort. It’s a hard thing to see, much less admit. It should therefore not be surprising that most business owners do not know when to call hospice for their business. Unfortunately, it is often the business broker who has to deliver the sad news.
Last month I had calls from two business owners telling me they were ready to sell their business. I set a time to meet with each, and told them I would need to review their financial statements during our meeting. When I first arrive at these meetings I have a 20 to 30 minute get-to-know you conversation. I like to understand the business and personal history of the owner before I dive into the details of the business.
More times than not during these initial conversations I develop a “dead or alive” prognosis through the owner’s choice of words, body language and general level of enthusiasm.
Here are the code words that clue me in to the current state of the business. If I hear the word “potential” too much, I know the business isn’t growing. If I hear about a conflict within the management team, I’m certain the business has revenue problems. If I hear about lack of banker cooperation, I know there’s a problem with cash flow. If I hear frustration about receivable collections, I know there’s a lack of customer loyalty.
You probably know where I am going with this. When I hear about potential, complaints about management team dysfunction, frustration with the banker, and slow receivables, I don’t even need to look at the financial statements. Hearing all that — in one conversation — tells me all I need to know, the business needs hospice, maybe even the undertaker.
Here is what a business that needs hospice looks like through the lens of their financial statement: they only have enough cash for a month or less of overhead, their current liabilities are equal to or greater than their accounts receivable, and their long-term liabilities are greater than the fair market value of their tangible assets. What you have is a business that is dying, a business that needs hospice.
So back to the two calls I got last month. Lest you think my code word analysis is over-simple, I can tell you in both meetings I heard all of those phrases, then what did I see when I looked at financial statements? You guessed it … enough cash to fund overhead for a matter of weeks, a negative balance between AR and payables, and a negative balance between long term debt and asset value. Simply said, I saw two businesses on life support. In each case, the business had survived like this for three or four years, and frankly, they might be able to lope along like this for three or four more years. But was the owner happy? Was there an engaged productive workforce? Were there “raving fan” customers? Were there signs things would eventually get better? Were there buyers waiting in the wings? No, no, no, no, and no.
I had to tell each business owner that selling their business, as a going concern, was not a viable solution. Oddly enough, when I deliver this message the business owner will seldom then ask “what should I do?” because deep down inside, they know the answer, liquidation, but they can’t bring themselves to recognize it.
But here is the saddest part of the story, when I go into a conversation like this, I can usually spot two, three or maybe even more things the business could do to improve their situation, or at least mitigate the pain. But through experience I can tell you that a business owner in need of hospice is usually not a good listener. Cue the undertaker.
Tennessee Valley Group
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