Seller Financial Literacy

January 08, 2018

by a professional from Marquette University in 21370 SW Langer Farms Pkwy #196, Sherwood, OR 97140, USA

I was recently talking with a small business owner. He does just under $2 million in revenue and is looking to grow it to $5 million in a few more years. While that may be optimistic, what really surprised me was his comment that he knows what the letters, "EBIDTA" stand for, but he'd like to learn more. He's been working with his accountant to understand them. I've also asked owners who are looking to sell if they understand the term Seller Discretionary Cash or Seller Discretionary Earnings. Response is something like, "Yeah. I saw that on BizBuySell. What is that?" As you search for companies to buy, Maybe these represent little gems that can be purchased at reasonable prices. These owners are not MBA graduates from big name universities. They are often great sales people, having built their businesses from scratch, one customer at a time. They don't readily understand all the financial stuff that a searcher does. That's why they often hire brokers and others that take a good portion of their money in the sale and drive up the price.

Reply by a searcher
from Hong Kong University of Science and Technology in Miami, FL, USA

Yes. There is more and more literacy possibility. I personally am working with two very sophisticated Chairman/CEO, one finance savvy, one not. The one that is not however, is extremely business savvy (company does $50MM in revenue) so I am working with that one to work alongside the to help them get the "most value" for themselves, while remaining reasonable. Paying it forward it our duty, doing right by doing good will make this CEO and advocate for us in the future - so teaching them everything so they're knowledgeable will help you benefit even more (even though some HBS'ers might argue otherwise) if you're in this for the long run; you want to be "on the same side of the table" as possible, and helping sellers become more educated is one way to earn trust and favor while building rapport!

Reply by a searcher
from Arizona State University in Boston, MA, USA

Great point! I grew up in a family business and was asking my Dad what kind of metrics he used and he had 2 basic metrics. Net Profit margin and one operationally (which I don't remember). In addition, I was talking to another searcher, they mentioned that a company they looked into in New England area they had a bookkeeper friend who came up from Florida every six months to do the books. I agree with Silvio as the is an opportunity (if they care) to build rapport.

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