Tips for Management Company Executives
by Jim Manning, President
Walters Consulting Group
April 2011 Topic: Quick Observations about businesses
by Jim Manning
Your Business Financial Records Are Reallllly Important!
For the past year, I have worked with several management business owners to resolve various needs. They want to buy out investors, merge companies, make an offer to buy another business, examine exit strategies or sell the business. In every case, save one, the lack of basic business record keeping and use of financial professionals has proven costly in hard dollars. Just like a navigator on a great ship, owners need to get a "fix" as to where they are in route to monetizing their business asset. Without it, they are ill prepared to make the "deal" they want.
The stories. Owners are misusing financial management resources. CPAs, banking relationships, a qualified business attorney are prime examples. This is a costly error in long term planning for a really valuable asset which is your business. Here are two examples.
- In a deal, then out and then in again….at a 5% loss. Owner has accepted the letter of intent, the down payment has been sent to escrow. The remainder is in route when the buyer finds an inconsistency within the reports. Though there is an eventual answer that satisfies the buyer, the buyer wants extended terms on the carry back. Rather than fight a possible costly debate about vacating the escrow, seller agrees to new terms and closes. At an overall loss of money in the 5% range. Reason? Seller hadn't been up to speed on the how the records are maintained and believed those he submitted were exact and correct. Trusting employees to keep everything on track meant a back-step, without an out.
- Overleveraged buyout. Several buyers borrow private funds to buy a business. Terms call for a repayment in a few years. Buyers contend they have plenty of time and commence building the business and taking "salaries" for advisory VP positions. No one is watching the clock, or the books. When it comes time to enjoin a bank for long term financing, borrowers learn that a "no profit" (for tax purposes one would expect) bottom line that doesn't endear them to the banking community. Private lenders are threatening foreclosure on the business which could force a bankruptcy election. If that leaks out ….
The lessons. It's basic business. Have a CPA set up your bookkeeping system to reflect your ownership and stick to the plan. Meet at least twice a year, excluding tax time, to go over your plans. Make necessary changes. Find a banker and a bank that understands your type and size of business. Make clear your expectations and explain your industry. Make sure the bank is aware of your current financial position at all times. These are basic items but they create a strong team when you need to make a move or solve a problem.
I'll be speaking on HOA management expertise at CAI National in Boca Raton on May 6, 2011.
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