Looking out for America's Wealth: Small Business Accounting Firms

Looking out for America’s Wealth: Small Business Accounting Firms

Small businesses in the United States generate over 43% of our Gross National Product and employ almost half of the country’s private sector work force. Ninety-nine percent of all companies in the US are small businesses – the real backbone of the American economy. And for most of the owners of the 36.2 million small businesses in our country, over 80% of their personal wealth is tied up in these small businesses.

Most of this wealth isn’t created in billion (or trillion) dollar IPOs. The lion’s share is created one customer interaction, one sale, or one small expense-saving measure at a time. By literally stacking up nickels, dimes and quarters each day small business operators create trillions of dollars of sales, profitability – and wealth.

And who is really keeping an eye on how the wealth creation is going?
Accounting Practices.

Small business operations benefit from discipline and fresh insight offered by an accounting firm.

Because accounting is such a fundamental business discipline, many small businesses have an accounting professional, office manager, perhaps a controller on staff. And many track their expenses and income in programs like QuickBooks. However, the many services provided by outside counsel are critical to the success of a small business. In addition to bookkeeping and accounting, perhaps payroll services; tax planning, strategy and preparation, many accounting practices are fulfilling the roll as a business consulting and strategy partner.

So in addition to helping with the ‘bean counting’ – which is critical for the ongoing maintenance of profitability and success – accounting professionals become a key, trusted advisor to small business ownership and have the opportunity impact long-term success, wealth creation and the initial planning for the eventual sale of the business – the exit strategy.

Owners of small-to mid-size accounting practices develop client-intimate relationships with their clients. Necessarily! Accounting lays bare the strengths and weakness of an enterprise, and the consulting relationship is key to helping ensure accurate profit and loss statements, reporting, compliance, and tax planning. Owners of accounting practices “see what’s behind the curtain” and deliver daily and strategic consultation on items both critical and mundane.

When it comes to selling a business – the exit strategy – the accounting consultant is frequently the first person who is made aware of the intent to exit after the business owner’s family or partners.

Helping with initial stages of exit planning.

According to the Exit Planning Institute, while 83% of business owners claim to hold regular family conversations about transition, 70% have no formal exit strategy written and documented — and 82% don't feel fully prepared to execute a transition. That gap matters, because business owners are not always in control of their exit timing.

Do you believe your clients are prepared for an exit?

Approximately 50% of business owners are ultimately forced into involuntary exits due to partner disputes, health events, death, disability, or financial distress. Keeping these facts at the forefront of strategic conversations with your clients is great client service. Planning for what may be inevitable is simply smart business.

Then to begin, there are three things that can be directly addressed by a business owner – with the help of a trusted accounting advisor, honest appraisal of an owner’s client relationships, and finally, with the help of a business broker and consultant:

• Are the company’s financials clean, accurate, and defensible?
  This is the key area where your knowledge of the company’s books and reporting processes is invaluable. Buyers — especially private equity — will scrutinize every line item. Inconsistent records, owner add-backs that can't be supported, or weak balance sheets, which could erode valuation and kill an exit deal.
• Can the business operate without the owner?
  A company that runs on the owner's relationships, approvals, and presence is a higher-risk acquisition. Buyers pay premiums for businesses with capable management teams and associates and documented processes. Helping the owner realize that he or she may need to stay on for a pre-determined length of time after the sale is important.
• Does the owner know what the business might actually be worth?
  Has the business owner undergone a real business valuation process in the past. This doesn’t mean what he thinks it might be worth — or even what your estimate of the business value might be. it means what a sophisticated buyer in today's market would pay for the enterprise.

There’s no “Kelly Blue Book” for any business in any industry. Business valuation is both art and science, and again, since for most owners, 80-90% of their wealth is tied up in their enterprise, the value that can be established for the business is one of the most important numbers at which they can ever arrive. Almost nothing could be more important in the life of a business than clarifying its value, especially in today’s environment. An accurate, professionally developed business valuation is critical.

Surveys conducted nationwide reveal that around 70% of business sales transactions ultimately fail. Seventy percent! Starting with the right valuation helps improve the chance of deal success, whenever that may occur.

The successful transition and continuity of your client’s business impacts employees, vendors, customers, charities, and surrounding communities for whom they provide jobs and social well-being. The alternative – a business shut down – affects all the above, and the business, a lifetime of work, might be liquidated for pennies on the dollar.

For all these reasons getting an exit plan done and getting it right matters. This applies whether the owner decides to transition to a family member(s), partner or key employee, sell to an outside entity, or go through acquisition or purchase by private equity. Every option requires preparation and expertise.

As a trusted advisor to your clients, keep exit strategy on the strategic “To-do List” and please, let me know if you have any questions on a business valuation process for one of your clients.

Please call me with any questions. 612-964-8884

Matt Sobieski