Opinions expressed by Entrepreneur contributors are their own.
Key Takeaways Unreliable and inconsistent data can result in a much lower purchase multiple. It creates mistrust and gives buyers a reason to decrease their offer.
Another unseen barrier is having a founder-dependent finance function. If it’s dependent upon the founder, buyers will perceive a high degree of execution risk.
Being exit-ready means management reports are generated within days (not weeks), your KPIs have been consistent over the past three years and your working capital is clean.
At eight months before selling a portfolio company, the buyer’s diligence group asked us to provide monthly revenue data for each customer segment. A straightforward request — except that this information existed in three different systems — Salesforce, QuickBooks and Excel spreadsheets.
It took us six weeks to gather the information, and after we provided it to the buyer, the differences in the various systems had generated enough mistrust of the company’s financial reporting that the buyer lowered its offer by $8 million, which equated to about one full EBITDA multiple of what the business was worth. The business and the strategic plan were good. But poor data resulted in a lower purchase multiple.
According to EY’s Private Equity Exit Readiness Study, 72% of businesses do not have access to reliable and consistent data and KPIs needed to support exit readiness. In fact, this is not a matter of data quality. It is a matter of valuations being affected by unreliable and inconsistent data.
Buyers cannot risk losing their confidence in a seller’s numbers. If they cannot believe the numbers, they will decrease the purchase price. If they need to spend extra weeks reconciling the seller’s financial reporting, the deal momentum will cease. If a seller’s financial reporting function is dependent upon the founder, buyers will perceive a high degree of execution risk.
The value of having clean data
In terms of how much clean data adds to your overall value, according to GF Data, businesses that hired a third party to conduct a sell-side quality of earnings (QoE) report prior to exiting received an average of 7.4x TEV/EBITDA, compared to those that did not receive an average of 7.0x TEV/EBITDA.
... continue reading