Rock LaManna07.20.22
If you wanted to buy a hockey team, would you look only at the previous year’s record without any other data – or would you look at the current season as part of your analysis? You don’t have to be a hockey expert to know that last year’s record and this season can be vastly different.
There may be new players, fresh injuries, or a change in team dynamics. League-wise, the team makeup of your opponents can shift dramatically within one season, as can the coaching staff and many other factors. As a hockey team buyer, recent data is vital to your analysis.
The same is true in preparing a business to sell in the graphic arts industry. All data sets – including the most recent 12 months – are pieces of the puzzle. Yet, surprisingly, many owners do not know why we request a Trailing Twelve Months (TTM) report when we begin our financial analysis. The TTM is commonly used in researching publicly-traded companies and investments. At LaManna Consulting Group, our team uses it to evaluate businesses before sale. Let me share an example.
We also needed to find out: “Was the business ready to be marketed? Was the owner emotionally prepared to sell? Were there risks and issues that would create a Code Red situation? Was there anything that was an obvious Go or No Go indicator?”
You see, there is no point in getting a company ready to sell if we can’t cross the finish line. According to Harvard Business Review, 70-90% of active deals in the world of M&A (not our deals) fall apart. Of those that finally close – in all categories of M&A – many have difficulty with integration and execution after the sale. For that reason, we always dig deep when examining the financial performance of the seller’s company.
In this seller’s case, her fiscal year was set to end on September 30, which was just a few months away. It was crucial to get the proper data sets to inform our understanding.
For a valuation, we will look at three years of tax returns. However, the most recent tax return was for fiscal year October 1, 2019 to September 30, 2020. That data was 20 months old! The information wasn’t irrelevant, but we needed the TTM.
The TTM shows us a full year of sales, costs, fluctuations due to seasonality, other cyclical effects on sales revenue, cash flow strategies, and year-end activities. It shows us the risks and weaknesses in the financial picture. Best of all, it does not focus on tax strategies and preparation, which paints an incomplete picture.
For a seller to maximize the sale price, there must be reasonable evidence that the new owner could operate profitably. A tax return, on the other hand, demonstrates that the company can be as unprofitable as the law allows.
When we look only at a tax return as a signal of financial strength, we see the CPA’s work in reducing the tax impact for his or her client. We may see a sliver of a multi-year program to purchase or sell off assets. We usually see salaries and bonuses designed to pass wealth to family members. Unfortunately, we often see deferred maintenance, lagging compensation for non-family members, and inadequate capital investment as a form of cost containment. All the data must fit together to create the bigger picture. If that’s the case, how does the TTM fit in?
The Trailing Twelve Months helps us see what the owner is talking about, where the money is coming in, and where the owner has the discretion to reduce a tax burden. Once we gather the rest of the documents, complete the research and analyze the evidence, we determine the valuation. This sets the stage for determining the asking price and addressing issues that affect the deal flow.
Next, the buyers’ in-house financial experts will generate their own reports and independent analysis. They will look at documents such as TTMs and tax returns with knowledgeable eyes. Getting the right data in front of the right people influences timing, funding, and the buyer’s perception of the opportunity.
Therefore, we must get to the core of the three T’s – Trust, Truth (Transparency), and Timeline – before the business is presented.
Investing in the professional services of an expert who has exclusive time to evaluate your business and assemble pro forma evidence that can increase a sale by hundreds of thousands – or even millions – of dollars. Data tools like the TTM are the foundation of price and positioning.
Rock LaManna is The Deal Flow Guy. He helps qualified buyers and investors find businesses that are ready for acquisition or transition. On the sell side, he helps owners improve their businesses, increase value, and position strategically in anticipation of sale, exit or succession. Sign up for his newsletter at TheDealFlowGuy.com and start the process.
There may be new players, fresh injuries, or a change in team dynamics. League-wise, the team makeup of your opponents can shift dramatically within one season, as can the coaching staff and many other factors. As a hockey team buyer, recent data is vital to your analysis.
The same is true in preparing a business to sell in the graphic arts industry. All data sets – including the most recent 12 months – are pieces of the puzzle. Yet, surprisingly, many owners do not know why we request a Trailing Twelve Months (TTM) report when we begin our financial analysis. The TTM is commonly used in researching publicly-traded companies and investments. At LaManna Consulting Group, our team uses it to evaluate businesses before sale. Let me share an example.
Was the owner ready to sell?
Last year, a label company owner approached us for a valuation and our proprietary road map assessment (RMA). She wanted to know, “How much can I sell my company for?” As is usually the case, she had a price in mind and wanted to see if the data would justify it.We also needed to find out: “Was the business ready to be marketed? Was the owner emotionally prepared to sell? Were there risks and issues that would create a Code Red situation? Was there anything that was an obvious Go or No Go indicator?”
You see, there is no point in getting a company ready to sell if we can’t cross the finish line. According to Harvard Business Review, 70-90% of active deals in the world of M&A (not our deals) fall apart. Of those that finally close – in all categories of M&A – many have difficulty with integration and execution after the sale. For that reason, we always dig deep when examining the financial performance of the seller’s company.
In this seller’s case, her fiscal year was set to end on September 30, which was just a few months away. It was crucial to get the proper data sets to inform our understanding.
For a valuation, we will look at three years of tax returns. However, the most recent tax return was for fiscal year October 1, 2019 to September 30, 2020. That data was 20 months old! The information wasn’t irrelevant, but we needed the TTM.
What insight does a TTM offer?
A Trailing Twelve Months report goes back exactly 12 consecutive months from the date the report was ordered. There’s no fudging around to find the best 12-month period. It’s 12 months previous to today. Done. An owner might tell us they’ve looked at such data, but have they understood what they’re seeing?The TTM shows us a full year of sales, costs, fluctuations due to seasonality, other cyclical effects on sales revenue, cash flow strategies, and year-end activities. It shows us the risks and weaknesses in the financial picture. Best of all, it does not focus on tax strategies and preparation, which paints an incomplete picture.
For a seller to maximize the sale price, there must be reasonable evidence that the new owner could operate profitably. A tax return, on the other hand, demonstrates that the company can be as unprofitable as the law allows.
When we look only at a tax return as a signal of financial strength, we see the CPA’s work in reducing the tax impact for his or her client. We may see a sliver of a multi-year program to purchase or sell off assets. We usually see salaries and bonuses designed to pass wealth to family members. Unfortunately, we often see deferred maintenance, lagging compensation for non-family members, and inadequate capital investment as a form of cost containment. All the data must fit together to create the bigger picture. If that’s the case, how does the TTM fit in?
What role does the TTM play?
For a private seller, it’s hard to get past the idea that if they show a profit, they may have to pay more taxes. Owners will do everything possible to tell us verbally that they are profitable, but they want nothing in writing that proves it.The Trailing Twelve Months helps us see what the owner is talking about, where the money is coming in, and where the owner has the discretion to reduce a tax burden. Once we gather the rest of the documents, complete the research and analyze the evidence, we determine the valuation. This sets the stage for determining the asking price and addressing issues that affect the deal flow.
Next, the buyers’ in-house financial experts will generate their own reports and independent analysis. They will look at documents such as TTMs and tax returns with knowledgeable eyes. Getting the right data in front of the right people influences timing, funding, and the buyer’s perception of the opportunity.
How does data help us gauge readiness?
Next, we ascertain if the business is ready to be put on the market. The seller loses credibility and trust if there are too many red flags or inconsistencies. So do the advisors. Also lost is the benefit of the period after the business goes on the market, that sweet spot when everyone is curious. If we have to pull a company off the market to deal with an issue, we may never see those buyers again.Therefore, we must get to the core of the three T’s – Trust, Truth (Transparency), and Timeline – before the business is presented.
How did the data work in the seller’s favor?
In the case of this owner, she had many things going for her. She had developed her own software, had a loyal and longstanding workforce, had weathered the pandemic reasonably well, and had personal wealth to fill in the gaps. An intelligent buyer could look at this business and see the potential we saw. We could hand-carry this seller and her pro forma to a buyer who would appreciate a diamond in the rough.Ready to take a closer look at your own data?
As you envision your own exit, remember that a prospective buyer always perceives your value based on data points. Yes, it helps to have chemistry between buyer and seller. It helps if the business looks fresh and attractive. It helps if the market is stable and buyers feel confident in their investment.Investing in the professional services of an expert who has exclusive time to evaluate your business and assemble pro forma evidence that can increase a sale by hundreds of thousands – or even millions – of dollars. Data tools like the TTM are the foundation of price and positioning.
Rock LaManna is The Deal Flow Guy. He helps qualified buyers and investors find businesses that are ready for acquisition or transition. On the sell side, he helps owners improve their businesses, increase value, and position strategically in anticipation of sale, exit or succession. Sign up for his newsletter at TheDealFlowGuy.com and start the process.