By Tom Schramski, PhD, CM&AA  

Volume 2 Issue 15, July 21, 2015

As Chris Blees of BiggsKofford and Graeme Frazier of GF Data noted at the recent Alliance of Merger and Acquisition Advisors (AM&AA) conference in Chicago, the quality of financial reports is a key to obtaining premium multiples of EBITDA in most transactions.  This conclusion is based on considerable research, as well as common sense.

Importantly, “quality” is not simply based on good, or even great financial results. It also refers to the clarity of presentation and, as Berman, Knight, and Case write in Financial Intelligence, “the art of using limited data to come as close as possible to an accurate description of how well a company is performing.”  When “accurate” becomes “cloudy,” it usually translates into buyer questions and doubt.

Here are some reasons why the quality of your financials is so important:

• For most businesses, they are the first thing potential buyers look at after a thumbnail outline of the nature of the business and whether or not it is a going concern.  If your results are poor that is one matter, but often the biggest issue is whether or not the results make sense from the financials themselves.

• Your financials are part of the trust that usually develops at some level between seller and buyer.  If there is clarity yet some challenges, trust can develop.  If there appears to be a myriad of difficult-to-decipher add backs that create remarkably positive results, distrust usually ensues.

• In our experience, the quality of financials is a projection of the business personality of the owner and this reflects the larger culture of the business enterprise.  How attentive is the owner to the daily needs of the business, including employees and customers?

• The quality of the financials is often related to how active management and employees are in the operational accountability of the business.  The clarity of the financials is especially important in businesses that are not too dependent on the owner and are relatively transparent.  These are value adds for most buyers.

Buyers don’t expect perfection.  If they are successful, they understand adversity and the challenges that impact every healthcare business.  What they do expect is to understand the operational truths of your company.  High quality financials are an essential linchpin for success.