ARE BUYERS CONFUSING EARNINGS WITH BUSINESS QUALITY?

Something I've noticed lately is just how closely buyers are examining year-to-date profit and loss statements.

And I mean closely.

Month by month.

Why was revenue down in August? Why did margins fall in September? Why are wages higher than they were this time last year?

And I understand why given the economy.

If you're buying a business, you want to know what's happening right now. Not just what happened two years ago.

But I've been wondering whether we're sometimes confusing a decline in earnings with a decline in the quality of the business itself.

They're not necessarily the same thing.

Let's say a business has been trading successfully for 15 years.

It's built a loyal customer base, developed a strong reputation, trained its people, established systems and survived a few economic cycles along the way.

Then it has three ordinary months.

Has the business suddenly become less valuable?

Possibly.

But has the underlying quality of the business changed?

I think this is a different question that buyers and sellers should spend more time considering.

Because some of the most valuable things a business owns don't appear as individual line items on a profit and loss statement.

Customer relationships. Brand reputation. Intellectual property. Historical data. Experienced employees. Established systems.

These are the things that can take decades to build and, in some cases, are incredibly difficult for a competitor to replicate.

They're also often the things that allow a good business to recover from a difficult trading period.

Now, I'm not suggesting buyers should ignore a decline in earnings.

Far from it.

Three bad months might be the beginning of a much bigger problem.

But three bad months might also just be three bad months.

And I wonder whether, in our obsession with the latest numbers, we sometimes forget to ask what those numbers are actually telling us.

Has the business lost something that made it valuable?

Or has it simply experienced a period of weaker trading?

For sellers, I think this is becoming increasingly important.

You need to be prepared to explain your monthly financial performance. Buyers are looking, and they're going to ask questions.

But you also need to be able to articulate what makes your business valuable beyond its most recent EBITDA.

And for buyers, are you looking at a business that's deteriorating, or a good business that's having a difficult period?

There's a big difference.