When Does a Sale Become a “Sale”?

 

We recently received an email from an old friend who was looking for clarification and help for her husband’s daughter.

The daughter works as a sales person for an optical equipment company receiving 100% of her compensation as commission.

There is also a bonus structure based on “sales” at the end of the fiscal year.

 

WHEN THE YEAR ENDED …

When the fiscal year ended, there were several last minute “sales” for which the company was declining to recognize for her bonus.

The “reasons” given in the email included: The orders arrived on the East Coast too late to be shipped; the Sales Manager didn’t want her sales to exceed the sales of the owner’s son, and other emotional issues.

But it was clear from the various issues, that she didn’t really understand what constituted a sale on the part of the company.

 

WHEN IS REVENUE RECOGNIZED?

There are several International Financial Reporting Standards criteria for the recognizing revenue on the sale of goods and services.

They break down into Critical Events and General Rules with some exceptions.

 

Critical Events Approach

The Critical Event Approach provides five criteria for identifying the critical event for recognizing revenue on the sale of goods:

1. Risks and rewards have been transferred from the Seller to the Buyer

2. The seller has no control over the goods sold

3. Collection of payment is reasonably assured

4. The amount of revenue can be reasonably measured

5. Costs of earning the revenue can be reasonably measured.

 

General Rules Approcah
Under the General Rule:

1. Revenues are realized when cash or claims to cash (receivables) are exchanged of goods or services. The revenues can be recognized when the asset received in such an exchange are converted to cash or a claim to cash

2. Revenues are earned when such goods or services are transferred or rendered. Both such payment assurance and final delivery or completion (with allowances for warranty, returns, etc.) are required for revenue recognition.

 

 

UNIQUE CIRCUMATANCES …

There are unique circumstances that are related to revenue recognition:

1. Revenue from rendering services are recognized when the service is completed and invoiced

2. Revenue related to the use of company assets (money, rent from using fixed assets or royalties for using assets) is only recognized as time passes and the asset is used and is or maybe invoiced for the percentage use of the asset.

3. Revenue from the sale of an asset, other than inventory, is recognized at the point of sale when it takes place.

 

SEVERAL EXCEPTIONS …

There are several exceptions to the revenue recognition criteria both for revenues that cannot be recognized at sale and for revenue that can be recognized prior to a sale:

1. If the sale contains a buyback agreement in which the company sells a product and agrees to buyback the product after some time. If the buyback covers the cost of the product and any related holding costs, the “sale” cannot be recognized until the buyback expires.

2. If a company experiences a high rate of returns and cannot reasonably estimate those returns, it cannot recognize the revenue until the returns can be reasonably estimated and reserved for against the revenue.

3. In companies with long term contracts such as construction or development and the contract includes a provision for invoicing based on a percentage of completion clause, then revenues may be recognized based on the agreed upon percentage of completion.

4. There is also and exception that allows revenue recognition even when there is not a “sale” at all. This generally applies to agricultural products and minerals. There is generally a ready market with reasonably assured pricing and the units are interchangeable with a low cost of selling and distribution.

 

A GOOD EXAMPLE …

A good example of the problems that can occur with improper revenue recognition was a company that became a client of Revitalization Partners where they shipped product prospectively to dealers with rights of return if not sold and also gave 180-day payment terms.

They were essentially using the dealers as warehouses, however they invoiced them, treated the shipment as revenue and an as account receivable when shipped. They had no idea if the product would get sold and their process led to problems with their bank and credit line. Part of our process was to restructure their sales process for a new bank.

As for our sales person and her bonus, a discussion with her management as to how her “sales” do or do not fall into these categories, may be helpful.

 

 

We specialize in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.

United Airlines….Again!

 

Almost exactly one year ago, we wrote two blogs regarding United Airlines. If you recall, the major episode involved using armed authorities to drag a man off a United flight that he had booked, paid for and was in his seat.

The reason was that United needed four seats to move a flight crew from one city to another.

At the time, the United CEO, Oscar Munoz apologized and indicated that they would put all their customer facing employees through a new training program.

A year later, over the past two weeks, United has done it again. Several times!

A flight attendant forced a women passenger to place a dog, in an approved carrier in the overhead compartment where the dog died during the flight. That was bad enough, but the flight attendant insisted the dog go in the overhead despite the woman and her child screaming that it was a dog.

 

FOR ALMOST 3 HOURS …

Supposedly, because the woman spoke little or no English, the flight attendant claimed that she did not know it was a dog. Yet, the woman had paid $125 in fees to carry the dog onto the plane and the dog barked and whined in the overhead for almost three hours. 

The airline says that the flight attendant did not understand that there was a dog in the carrier, a story the family and other passengers state is only not true, but given the noise, could not be true. United Airlines says they are “investigating”.

In other incidents, a ten-year-old German Shepherd was sent to Japan when it was supposed to be going to Kansas. In that case United chartered a private jet to fly the dog home at a reported cost of $90,000.

In another case, two days later, a St. Louis bound United flight made an unplanned stop in Ohio because a dog was, once again, on the wrong plane.

 

CAUSED MORE ANIMAL DEATHS …

United has caused more deaths of animals than any other airline in the United States. And once again, Mr. Munoz states that thousands of workers will be going through a new training program that will train them to better handle situations based on safety, compassion and efficiency. 

He further stated that “We put our folks in bad places when we give such definitive, specific, concrete, rigid rules that they’re not allowed to show a little caring and compassion.

To top all of this off, United tried to bump a passenger off a flight based on her having the lowest priced ticket.

She started tweeting her experience in real time and by the time she was done, her compensation was $10,000. She’s probably created a new level of compensation for a flight being overbooked.

 

STARTS AT THE TOP …

Airline expert George Hobica says the airline’s failures start at the top, with CEO Oscar Munoz. It’s just a lack of integrity in their leadership,” Hobica stated. And a lack of integrity trickles down from the top. The flight attendant who lied about the dog should be terminated immediately. There were enough witnesses to know what happened.

And speaking of witnesses; where were the passengers when this flight attendant was being “rigid”?  This dog barked for almost three hours while suffocating to death.  

Have we become so fearful, as a country, of someone with even a little authority that we cannot speak up. It makes a mockery of the term “See something; say something”. How about: “Say something, get kicked off a flight”?

The animosity between management and employees became more clear earlier this month, when the company briefly replaced quarterly, performance-based bonuses with a lottery that would hand out a smaller number of larger bonuses – and tried to frame it as a positive development. After a weekend of employee outrage and negative press, the company halted the change to “consider the right way to move ahead.”

 

MORALE ISN’T GOOD ….

In March, the airline introduced “core4,” a new training program for employees who interact with customers. The program was designed to improve their efficiency and prevent customer service issues from escalating into scandals. Wasn’t this the training that was promised a year ago?
“Morale isn’t good,” a United employee told Inc.

“There’s so much bad blood after the lottery bonus scandal. Everyone is wondering how they could even suggest something like that. And we still don’t know whether they’re going to take our bonuses away anyway.”.

“An underpaid and overworked staff will be unhappy, and they’ll take it out on customers.” Hobica said. “It needs to be fixed, or it will get worse.” Something that those who own and manage companies should remember.

This is a disastrous outcome for United, because not only has it lost control over the narratives; (which it was never going to have) but it has it leaned into it in a way that reinforces every single previous stereotype the public has of airlines, not only has it fed into the current fascination with the arbitrary exercise of power – but it has shifted all of these narratives onto itself.

United has now become the living embodiment of everything godawful about air travel.

 

AN ORWELLIAN HELLSCAPE …

It didn’t have to be this way. But recovering now may be too little too late; United doesn’t simply need to make this situation right – it must rectify the larger systemic issues which make air travelers feel as though they are potentially navigating an Orwellian hellscape every time they need to get on a United flight.

In other words, it needs to transform “come fly the friendly skies” from a slogan into a value statement – and then bring it to life in its day-to-day operations. It has compensated passengers.

But none of that addresses what has become at this point, years of increasingly callous, inhumane service characterized both by reducing capacity while jacking up prices in an ongoing mission to ensure every possible seat is filled and by creating conditions in which people can expect to be treated poorly.

United owns the terrible experience of travel.

Getting out from under that is going to take a lot more than a public apology and the promise of an investigation. It means taking a good hard look at its attitude toward its service and its customers, and the structures it has put in place that perpetuate these situations. It means taking immediate steps, that may cost them short-term profit but generate real, positive goodwill.

 

And it means that United needs to stop chasing the golden snitch of efficiency to the exclusion of all else. Efficiency will never and can never take the customer experience into account except insofar as it measures the amount of suffering that can be inflicted before one starts losing money.

Maybe then, the Board of Directors will recognize the lack of integrity in management.

Nobody expects United to be a charity, but cramming miserable, resentful people into a sardine can while killing their pets, isn’t the only way to make a buck. It’s a recipe for disaster that has seemed to reach critical mass, and it’s time United got serious about doing better.

 

We specialize in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations.

Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.

Integrity & Accountability

 
 

The March 8, 2018 issue in the Seattle Times presents the story of a former Coast Guardsman who injured his leg during a fall in 2011. He went to the Puget Sound VA and had surgery on his leg.  

After having excruciating pain following the surgery and having three more surgeries, he finally went to a private doctor.

The doctor determined that the VA surgeon had inadvertently pushed a surgical screw about a centimeter into a nerve bundle, causing him chronic and excruciating pain.  Despite multiple X- rays by the private physician showing the screw, the VA doctor denied that he had done this and denied medical negligence.   However due to the delay in getting the proper care, the lower leg had to be amputated.

In this case, due to a donation to an organization that uses amputated limbs to train rescue dogs, the limb was still available. A pathologist that examined the leg found that the screw had indeed been pushed into the nerves.

 

UNDENIABLE EVIDENCE IS “SILLY” …

The VA doctor, in the face of this evidence continued to deny any responsibility and claimed that the evidence by the private doctor and the pathologist was “silly”.

Yet, in pretrial mediation the VA agreed to pay the individual $1.75 million to “avoid further litigation.  $1.75 million to an individual who had been in pain for years, lost his job, lost his wife and finally had his lower leg amputated.

In the final blow, the Justice Department had rejected the settlement, offering $1.4 million and denying any wrongdoing by the VA. Exhausted, the individual accepted the settlement.

The Orthopedic Surgeon and his management continue to work for the VA.

 

THE ORGANIZATION’S OPERATING CULTURE …

We have all read about the horrors outlined by those who have had difficulties with the VA. 

Those who manage the VA, from the top down are focused on avoiding accepting any responsibility for errors made by them and those who report to them.

In this case it was a leg; in others it has been life and death.  But always, admitting an error is to be avoided at all costs.

But what about when it isn’t life or death, but the conduct of your company or business.  Like the VA, rarely do the character flaws of a single individual fully explain corporate misconduct. 

More typically, unethical business practices involve the tacit, if not explicit cooperation of values, attitudes beliefs and behavioral patterns that define an organization’s operating culture.

Ethics and integrity is as much an organizational as a personal issue. 

Managers who fail to provide proper leadership and fail to institute systems and behaviors that insure ethical conduct are as much responsible for those who benefit directly from the lack of integrity of the company.

 

NEW FEDERAL SENTENCING GUIDELINES …

Executives and managers who ignore ethical behavior run the risk of personal and corporate liability in today’s increasing tough legal environment. New federal sentencing guidelines are increasingly recognizing the organizational and management roots of unlawful conduct by members of the organization.

We see and have seen these issues in companies ranging from the largest to the smallest entrepreneurial business.  Consider the recent Wells Fargo fiasco.

Several years ago, Wells Fargo decided it was not doing enough cross-selling, Cross-selling means getting customers who use one service, such as checking, to use other services, such as savings or credit cards.

Wells Fargo developed a specific strategy to encourage cross-selling, which was to involve its employees in telling customers about other products and services. In order to encourage employees to support the program, Wells Fargo employed the strategy of providing incentives to employees who succeeded at cross-selling. 

 

WHERE EVERYTHING WENT WRONG …

This is where everything went wrong. Employees not only responded to these incentives by cross-selling, they manufactured fake accounts in the names of existing Well Fargo customers.

Some customers figured this out, but many didn’t and ended up paying fees on accounts they didn’t even know they had. 

The problem was huge.  In attempting to correct the problem the company fired 5,300 employees including its CEO, John Stumpf.

The Wells Fargo mess teaches a clear lesson which is that you get what you pay for. 

Specifically, you can talk yourself blue in the face about ethics, as many Wells Fargo managers did, but you cannot send employees a clearer signal than their paycheck.

 

ALL ALMOST ALWAYS IGNORED THIS …

The first reason this is important is that when organizations think about creating an ethical culture, they almost always ignore the organization’s reward system. They print codes of conduct, mandate training and establish ethics hotlines. But if you are rewarding the wrong things, you will get the wrong behaviors.

This is as true of the teller at your local branch bank as it is of the top levels of an investment bank. Organizations signal what they really care about through their reward systems. Remember that the one corporate document every employee reads is their paycheck.

The importance of this lesson goes well beyond ethics. The idea is that you can get better performance out of employees if you abandon pay for performance in favor of one or another strategy that rewards “the whole person” and not just the paycheck. The peak of this phenomenon is, a veritable tangle of cross cutting evaluations and peer-enforced group-think.

 

WHAT BEHAVIORS YOU “REWARDING”?

The Wells Fargo case shows once again the power of paying for performance. Unfortunately, it also showed the power of paying for performance when you pay for the wrong performance.

The performance systems of most organizations are the jealously guarded hostages of either executives or in larger companies, HR.

Executives who want to run truly ethical – and effective – organizations need to take responsibility for ethical behavior before engaging in silly talk about the greater good.  

You will have a lot better chance of avoiding the sort of ethics crisis that Wells Fargo has undergone if you effectively manage your organization’s reward system.

 

WE DISCOVERED SOMETHING …

At the other end of the scale, Revitalization Partners was recommended by a bank to assist one of their clients that did not have any financial management.

In attempting to establish proper systems, we discovered that the company was placing funds in another bank, which was in direct violation of their loan agreement.

When challenged on this issue, their response was that they were worried that the bank would stop lending to them.  Additionally, they were signing certification documents that they knew were not correct.

Because of their unethical behavior, the bank elected to ask the company to find a new bank and the company is no longer a client of RP.

Unethical behavior and lack of integrity has a cost. And it is often not only the managers and executives that pay the price.

 

We specialize in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations.

Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.

Middle Market Lenders Concerned Over Borrower’s Leverage

 

A survey of trends in U.S. middle market lending revealed substantial and growing concern about the higher amounts of debt leverage carried by middle market companies heading into 2018 and found that less restrictive loan documents are a significant source of worry for traditional and alternative lenders and their professional advisors.

Conducted by Carl Marks Advisors, a leading investment banking firm, the survey also concluded that alternative sources of capital like mezzanine lenders and business development companies (BDCs) may experience the greatest challenges in their loan portfolios this year versus traditional banks and asset-based lenders.

 

Some Key Findings …

Some of the key findings in the survey are:

  • 76 percent of respondents are more concerned now than they were at the start of 2017 about the level of debt leverage at U.S. middle market companies. Respondents also said that macroeconomic and geopolitical issues pose the greatest downside risk for leveraged loan portfolios in 2018.
  • Most respondents (48 percent) said they believe that loan documents executed in 2017 are less restrictive to borrowers than loan documents that were executed immediately prior to the financial crisis of 2007/2008.
  • The loan document concessions that present the greatest concern for lenders in 2018 are covenant-lite or springing covenants with lower triggers and the allowance of add backs to EBITDA calculations.

 

Likely To Experience Challenges …

The survey also polled industry professionals’ views on which types of lenders are most likely to experience the greatest challenges in their loan portfolios in 2018.

The largest group of respondents, 26 percent, indicated that mezzanine lenders are most likely to face problems in their portfolios, followed by 23 percent cited BDCs, 18 percent selected distressed investors, and 14 percent listed traditional bank lenders.  Bank ABL lenders and equipment finance companies were seen as least likely to encounter portfolio troubles.

“The survey revealed a split view on the likelihood of technical and payment defaults at middle market companies in 2018,” said Patrick Flynn, Managing Director at Carl Marks Advisors. “43 percent of respondents said defaults will increase while 43 percent said they will remain the same.

While there are well-founded concerns about the impact of less restrictive loan documents, the survey results suggest that these concerns will not significantly alter the willingness to continue to lend on borrower-friendly terms.”

 

Differing Perspectives …

The survey also shed light on differing perspectives between lenders and private equity/hedge fund sponsors in default situations.

When asked how private equity firms are most likely to respond in 2018 when a portfolio company is facing a potential default, 59 percent of all non-private equity/hedge fund respondents said they would expect the firms to make no further investment, but rather to negotiate for additional time.

Conversely, about half of private equity/hedge fund executives responding to the survey indicated that their firms would support their portfolio companies with further investment in the hopes of making a higher return in the long term.

The public or bank driven hedge funds will place additional strain on the non-supported companies as the price of debt holders granting extra time increases the cash strain on the companies. 

Just doing this without a plan for recovery of the company increases the lightly hood of default and/or failure.

 

Lenders More Likely To …

Based on the survey results, it is believed that lenders will continue to be more prone to work out issues in their portfolios in 2018.   Only 17 percent of all respondents said that lenders would be likely to sell their debt and move on.

In terms of policy issues, half of the respondents named tax reform as the policy development most likely to positively impact middle market company performance in 2018.

Reduced regulation was cited by 29 percent of respondents, while international trade deals and immigration policies were listed as positive contributors by only 17 and 3 percent respectively.

Higher leverage levels and borrower friendly loan agreements, the result of highly competitive market conditions over the last year, pushed lenders to make concessions that could impact loan portfolios if companies’ business performance comes under pressure.

 

Third Longest Economic Expansion …

“This is now the third longest economic expansion in US history. 

Companies are not necessarily improving and there is a lot of capital, both equity and debt, chasing too few deals.”  Flynn commented.

“In 2017, many a transaction added debt to companies, but there has not been a lot of value created.”

“There are not a lot of unencumbered assets to borrow more money against.   If a company doesn’t perform, it will likely see a restructuring.”

Leverage on middle market institutional deals increased in 2017 to 5.51x total debt to EBITDA compared to 4.95x in 2016.

 

Consessions Lenders Offered …

Regarding concessions that lenders have offered to borrowers and private equity sponsors in the face of aggressive market conditions, 48% of respondents said they considered loan documents executed in 2017 to be less restrictive for borrowers than those executed immediately prior to the 2007-2008 financial crisis.

Thirty-five percent said they did not consider documents to be less restrictive, while 17% said they were unsure.

Middle market covenant-lite issuance reached an all-time high of US$25bn in 2017, LPC data show. By comparison, before the financial crisis, 2007 middle market covenant-lite volume totaled US$7.49bn.

There remains a fully functional credit market and continuing pressure to deploy both debt and equity capital.  If these factors remain in place it is expected that 2018 will look much like 2017.

However, should the EBITDA supporting a company’s debt declines, it will have a significant impact on a company’s financial flexibility with respect to incurring additional debt, thereby increasing both credit risk and risking the value of equity.

 

Significant Debt?

Companies with significant debt levels should have a strong restructuring plan to be executed if their debt load becomes difficult or overwhelming.

 

 

 

We specialize in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations.

Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.

How to Lose Customers and Clients – Part II

 

In October 2017 we wrote a blog entitled “How to Lose Customers.”

It was focused on larger companies in the market.

This second part of the series is focused on the more personal interactions of small business and how that impacts their ability to maintain their customer base.

 

Let’s start with a few statistics:

· 68% of customer defection takes place because customers feel poorly treated
· 95% of people who have a bad experience do not complain
· 13% tell up to 20 other people (and a lot more on social media) while a satisfied customer tells only 5 other people (and is less likely to write a social media review)
· It can cost five times more to gain a new customer than to retain an existing one

 

A Limited Number …

I live in a relatively small town with a limited number of “fine dining” establishments, especially in the winter.  Recently, four of us went to dinner at one of these places. The other couple knew the owner well and selected the restaurant.  

We had been there many times before and had always had a reasonable experience.   But that was about to change.

I walked in and told the owner we were here and had a reservation.  She informed me that our reservation was for an hour later, which was disputed by the person who made the reservation.   But since they had tables, no harm, no foul.

The server took our order and left the table.   We asked for separate checks as one couple drinks and the other doesn’t.   

She came back in a few minutes with an order pad saying that she believed that she had the order screwed up and could we start again.   We laughed and did so.

 

If It Could Go Wrong … It Did

To state that everything went wrong would be the understatement of the night.  

Some salads and appetizers came in the proper order, others didn’t come at all.  

One salad came with the entrée, and one of us had a clam dish in which one third to one half of the clam shells were empty. 

And, of course, we did not get separate checks and were billed for one of the salads that did not show up.

Despite the apology of the owner, we stated: “We’ll never be back.”   And that started us thinking about how many businesses lose customers and clients who never say anything; they just leave.

 

An Interesting Observation …

Jason Fried of Basecamp made an interesting observation: “Customers don’t just buy a product or service; they switch from something else.

And customers don’t just leave a product or service; they switch to something else.”

Remember, you and your business are not in the business of getting more customers.  

You’re in the business of getting one more customer for life.   And then another one and another one.  

What is a customer for life?

It’s someone who supports you and your business, will frequently buy from you and will consistently refer more people to your business. 

They are the people that make up 80% of your continuing revenue.

 

Simply Amazing …

Another set of stories center around two individuals that spend their days at small eateries while working on the internet.

In one case, the customer ordered the daily special; a shrimp salad.   A few minutes later, the owner came out and apologized, stating that they were out of the daily special.   But, she said; “Please order anything else on the menu and it will be free”. FREE!

A restaurant runs out of what a customer ordered and to make it up, they offered something for free. Amazing.

Let’s contrast to the other individual who spent much of his time at another bookstore and coffee shop.   

According to his own words: “I was a loyal customer and wanted to support the store I spent so much time in.  

Between books and expensive cappuccinos, I was spending more than $1,000 per month and was happy about it.” Until……..

 

Then, A New Rule …

The store implemented a new rule that no one could occupy a café table for more than 90 minutes.   And the customer understood the rule because someone would come in, get a free glass of water or one drink and spend 10 hours working.  

But, when our customer was there, he would buy drinks, food and books throughout the day.   So, on the days he was there, he spent a lot of money.

Until one day, the manager told him that he could only stay for 90 minutes.  

And even though the café was almost empty, and he had just ordered more food to eat, the manager explained that there were no exceptions to the rule.   And, at least $1,000 per month walked out the door to never return.

 

What People Will Remember …

The lesson here can be summed up in a quote from Maya Angelou:

   “People will forget what you said.

    People will forget what you did. 

    But people will never forget how you made them feel.

Whatever the size or shape of your business, that lesson will, sooner or later, define the success of your enterprise.

 

 

We specialize in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations.

Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.

When It’s Too Good to be True

 

 

It may be an offer from Africa, Europe, or even in the United States.  But the offer is pretty much the same.

You have a business and you want to sell. You’ve talked with investment bankers and perhaps business brokers and they’ve informed you that the business is not really “salable”, especially for what you believe it’s worth.

Perhaps you’ve lost money for a significant period of time.  Maybe the asset base of the business has deteriorated.  Or you’re just tired and ready to get out.

 

But Here Comes An LOI …

And then, along comes a “Buyer” with a serious Letter of Intent (LOI).

This LOI makes you an offer that almost knocks your socks off. The amount represents more than your advisors told you that you would probably receive. And, of course, it’s an offer to purchase your stock or equity, despite that more than 90% of small and mid-sized business sales represent a sale of assets.

As a result of this Non-Binding LOI, you begin to send paperwork so that they can understand your business. You may have requested and received a Non-Disclosure Agreement.  A non-disclosure agreement is only as useful as it is enforceable.  If the potential buyer improperly uses the information you provided, are you going to bring legal action against them in Europe or Africa?

 

You Don’t Need An Advisor …

And assuming that you have retained advisors to assist you, the “Buyer” suggests that the advisors will “only slow this deal down or mess it up”  is a common statement from an experienced scammer to an inexperienced seller.

Another common request applies to due diligence.  Revitalization Partners sold a business in receivership to a vendor. The vendor was over 3,000 miles away from the company.  And yet, they insisted on completing their due diligence by coming out to the company and addressing all of the issues in person. 

Contrast that to the potential Buyer that suggests that you just send him all your books, contracts and records. 

Especially, as we have seen in one case, the proposed Buyer was outside the United States.

 

No Information Available …

In another case, our client received an LOI from what purported to be an investment group, located outside the United States and having ownership of over a dozen companies. 

In researching this group, we could not find a single piece of information relating to any of this companies.

 

Another Common Scam …

Another common scam is where the “Buyer” goes through the process and at closing, the amount of money agreed on is not quite there.

It is a bank screw up or “the check is in the mail and must have been delayed.” 

But because all of the closing documents are ready to go as of the closing date, let’s just go ahead and close since the money is only “a day or two away.”

Once the Buyer has control of the company, they strip the assets and cash and disappear, leaving the Seller with nothing or only a small deposit.

 

Who Falls For This? …

Think no one falls for this? Think again!

There were at least two groups that worked this for years before being arrested by the FBI.

 

 

How To Protect Your Company …

So, what are some of the ways that you can protect yourself if you are contemplating a sale of your company?

1.   Perform an extensive background check on any potential buyer, including a review of the person’s or company’s banking references, credit reports, litigation history, tax liens, and, if they have purchased other companies, obtain references from the former owners of companies they have purchased.

2.  Beware of sales that go too smoothly. Legitimate buyers will perform due diligence, asking tough questions, inspecting financial records, and calling customers and vendors. If the buyer wants to close the sale in a hurry, beware! And NEVER send due diligence information to a buyer based on an LOI. Either they can come to you or, there are ways to establish a data room where the data can be reviewed but not copied or downloaded.

3.  Make certain that any LOI contains a non-solicitation clause. This clause does not allow the potential buyer to hire any of your employees should the deal not complete.

4.  The buyer must meet deadlines and supply all requested data in a reasonable time. If he or she is always late, move on. Find a buyer who’s serious about the transaction.

 

Remember That You …

Remember that you typically only sell your business once.

Make sure that you get your advisory team in place early and involve experienced business advisors and an experienced business attorney as part of that team.

They may save the value of your business.

And finally, if it is “Too Good to be True”, it usually is!

 

 

Revitalization Partners is a Northwest business advisory and restructuring management firm with a demonstrated track record of achieving the best possible outcomes for our clients. And now, we’ve written a book to help our readers understand the issues facing their businesses. You can find this compilation of our business thoughts at: http://revitalizationpartners.com/we-could-write-a-book/ or on Amazon.

We specialize in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations.

Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.