What's the problem? Tom lives in a fantasy world. He thinks his company is worth way more than it really is. That's almost as bad as thinking two cheeseburgers at McDonalds are healthier than a Big Mac (everyone knows it's the fries that'll kill you).

On the outside, it looks like Tom's business isn't even so bad. He's been running it for over 20 years. It's provided him with a good income, enough to keep his three kids out of jail and even sufficient to send two of them to college. It's paid for the lease on his BMW. 

Tom's got a good amount of cash in the bank. Granted, a little less than before the market crashed. But it's coming back. His balance sheet shows receivables at least 50 percent higher than his payables and no other major liabilities on the books. He even owns the building that houses his company. So, now that he's hitting his mid-60s, why can't he unload the thing and retire?

For the same reasons why many penny-pinching business owners find out their business is worth a lot less than they thought: They don't take care of the intangibles. And so they live in a fantasy world.

For example, after over 20 years of existence, wouldn't you think that Tom's company would have a database of its customers? Not a chance. Instead, there are spreadsheets, e-mail files, paper files, sticky notes and some bare-bones information in his accounting system necessary for printing out an invoice. Snooki from Jersey Shore is probably more organized. Tom never collected profile information about his customers. What products they bought. What products they might be interested in buying. Organizations they belong to. The beer they drink. Their favorite sports teams.

And he certainly never did this for his prospects either. Thousands of interested customers have passed through Tom's world over the years, many of them getting quotes or callbacks from his sales guys. But was this data stored? Nope. All the information was in Tom's head. Not in a database. And if it did get filed somewhere, the data was never updated. It's of little value to a buyer. Tom didn't realize this.

That's because buyers are looking for something more than just cash, receivables and hard assets. They pay extra, a lot extra, for solid intangible assets too. A complete and accurate customer database is of huge value to an incoming owner. A complete and accurate prospect database is icing on the cake. Some deals are made because of the strength of the seller's data. If Tom was more organized, he might have more reason to entice a potential buyer.

Tom also thought that once he sold his business, he could wash his hands and walk away. And without the seller staying on for a few years to ensure a successful transition, the value of a potential acquisition can quickly decreases. A potential buyer of a small company rarely buys unless they intend to bring on its existing management for a period of time. Like most companies, Tom's would fall apart if he weren't there. This would change overnight? The minute Tom told a potential buyer that he was "outta here," any buyer would turn and walk right out the door. Good penny-pinchers who want to sell their companies know that the selling process continues even after the sale is made. They have to stay on for a while. It's the only way to maximize the value of their asset.

Sure, I admit to fantasizing about a lot of things. Getting rich. Sailing around the world. Having hair. But I'm kind of proud to say that I don't have fantasies about my business. Without me, it's valueless. My clients like us a lot. My employees (I think) like me a lot. But I lack long-term contracts with any of them. To a potential buyer, this is a big problem.

Tom thinks he's got a long-term relationships with his customers. He thinks his employees will stay on forever after he's gone. But that's a fantasy. He's a distributor. He has no service contracts. No commitments. No employment agreements. A customer can jump to one of his competitors tomorrow without recourse. A key employee can quit next week without any further thought.

Accounting firms are easy to value because most clients have long-term engagements that can be easily forecasted. It's kind of a pain to leave your accountant. So there's a predictable future revenue stream. Tom does not have this. He thinks he does. But it's a fantasy.

Time for a wake-up call. We can help you with an exit strategy.

Gustavo A Viera CPA

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