Your Accounting Books Aren’t Exit-Ready. Here’s What To Do About It.

Almost every IT MSP we talk to has the same spiel. “Our business is very simple and our books are clean. My bookkeeper said we are on accrual (or GAAP) basis.”

I fell for this on one of my earliest transactions. It was a sizeable $5M EBITDA business with a seasoned fractional CFO. Then we got obliterated in diligence during the buyer’s Quality of Earnings (QofE) analysis. Turns out they were not on GAAP or full accrual basis. The books were not clean. And no, the business was not as simple as they thought it was.

I have come to realize that an owner of a business proclaiming his accounting is pristine is like me saying, “My business is secure. Everything is in the cloud. Our files are backed up by Dropbox. We have Gmail and they have a great spam filter. Oh, and let’s not forget Windows Defender protecting every computer.” In fact, why do I need to pay for cyber security? Having worked with so many MSPs and MSSPs, I realize how ludicrous that claim is now. I’m not a cybersecurity expert and most owners are not certified accountants or financial professionals.

Here is a checklist to see if your books are clean and you are exit-ready:

• Are your books closed by the 10th of the following month?
• Do you accrue for bonuses, bad debt expense, or PTO?
• Is your P&L organized by function like Sales & Marketing (S&M) vs. General & Administrative (G&A)?
• If not, is there a single line item called Salary & Wages for all employees?
• Is your gross margin generally consistent month to month?
• If not, do you need to explain why your gross margins fluctuate month to month?
• Can you easily track gross margin by service type and/or by product type?
• Can you accurately forecast, within 10%, your revenue for the next 6 months?

These aren’t difficult to implement for someone who has the proper experience and capabilities, just as it’s not difficult for an IT expert to implement Datto Back-up and Sentinel One end-point security. But they need to happen to have a great outcome in a sale transaction.

Why is this checklist important?

• If your books are closed late, you are basically driving your business while looking in the rearview mirror. It’s also endemic of poor bookkeeping, if the books of a “simple” business can’t be closed in 10 days or less.
• Bonuses, bad debt and PTO accruals are the canary in the coal mine. If they aren’t handled, most likely other things aren’t handled either. The risk is that a Buyer’s Quality of Earnings will find that your EBITDA is lower than what you stated due to lack of proper accruals.
• P&L statements that bucket all employees into one line item is how mom-and-pop shops are run. Mature businesses recognize that G&A grows slowly, Sales & Marketing can be largely discretionary, and if you are investing in AI, R&D is also discretionary. Providing transparency here drives value. For example, redundant G&A spend represents direct cost synergies to a buyer and S&M spend can be optimized.
• Consistent gross margins are important. If you are selling the same product for the same price, the gross margins should be consistent. If not, questions start to arise. That creates uncertainty and uncertainty leads to valuation discounts. Either you have poor bookkeeping or you have poor business operations.
• In the same vein, you want visibility into gross margin at a granular level. If a buyer sees quick wins to improve margins, you may get credit for that in a competitive process, but only if they can analyze it. Otherwise, it will be passed on as good-enough or not good-enough.
• Forecasting revenue is hard, but if you can do it, you’ll get credit for it. A multiple on the next twelve-month EBITDA is much better than the same multiple on the last twelve-month EBITDA, assuming you are a growing company.

As an M&A expert, having worked on dozens of transactions in the last couple of years, the problem is obvious. It’s the equivalent of relying on Windows Defender for your endpoint security – you’re not going to pass a cybersecurity audit. This simple check list represents the lessons learned from our past transactions experience and is designed to help business owners quickly gauge where they stand.

I’m not a CFO by training – even I couldn’t implement all six of these into my business easily. As more people asked us to be their CFO, we hired several talented professionals with finance and accounting backgrounds. Their experience spans public companies and private equity portfolio companies. SMB business owners may think that is bringing a bazooka to a knife fight, but the reality is that it is more like bringing a chainsaw when everyone else is using an axe: It quickly provides much needed clarity.

Experienced, high-quality people can do the job better and faster. Our CFO services make a difference right out of the gate.