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Seven Profit Robbing Mistakes: 

"Petroleum Owners Regularly Make Seven Profit-Robbing Errors When Merging Or Selling Their Business That Costs Them Dearly!"

1. Not knowing the true market worth of their business. You want to get every dollar your business is worth. Without a professional valuation prepared by a firm thoroughly knowledgeable in the industry, you set yourself up for severe disadvantage during any negotiation. Without the professional valuation, if your idea of value is greater than true market, you risk embarrassment, reputation, and drive away buyers. It doesn’t take long for the word to spread that you have an unrealistic expectation. Even if you later get a valuation and come down in asking price, your best buyer may not come back to the table. Conversely, without a professionally prepared valuation, someone offering a stack of cash can lure you into selling your business for less than it’s worth, shortchanging you and your family. Solution: A Meridian valuation so you know your true market worth. 

2. Thinking more assets equals bigger selling price. Many owners think the bigger their balance sheet, the more they have to sell — that big total assets means ultimately more cash in their pocket at the end. Nothing could be further from the truth! Because return on assets (profit divided by total assets) is one of the calculations used by valuation professionals, the more assets you have, the more profit you must produce to meet industry standards. It is your company’s performance compared to industry average ROA that drives value. Achieve a higher than average ROA, and your company can legitimately command a premium price. Solution: Keep your total assets lean! Reduce inventory and receivables through aggressive management practices and sell off any non-producing assets before you go to market.

3. Delaying efficiency-driving spending. Once you know you’re getting out of the game, it’s tempting to put off purchases especially technology upgrades. You just plain don’t want to fool with them. In today’s competitive marketplace, though, to keep your profit up, it takes efficiency. That means you must stay technologically current. What many owners don’t realize is that buyers factor into their offering price all the spending they will need to do to bring your operations up to date. 

They will likely reduce their offer price by more than the actual cost! The other danger when you decide not to update is that your profitability falls off compared with peers that are driving more automation into their system. This in turn lowers the price your business can command in the marketplace. Too many unsuspecting owners let their company value decay once they make the exit decision. Solution: stay up to date; keep investing in education and efficiency-driving assets, especially technology.

4. Stopping growth. Ever wanted to stop growing your company? Just take a breather? Many owners make the misguided decision to simply maintain, rather than grow volume once they decide they are going to sell. This decision makes them miss out on the price premium enjoyed by growing companies. Since today’s valuation methods rely heavily on net present value formulas of future cash flows, strong growth trends are carried into those forward calculations. When a professional valuation firm values two companies with exactly the same volume and profits their last fiscal year, the steadily growing company will always value (and sell) at a higher price than the stable or declining volume company. Solution: Keep growing your company, even after you decide to sell, staying mindful of target ROA.

5. Deciding to sell after profits begin to decline. 
Because today’s market prices are highly dependent upon a buyer’s estimation of future cash flows, those declining trends result in much 
lower offering prices than a stable or growing profit company. Solution: Sell your company while profits are growing. Don’t wait until your past the profit peak and are already on the downhill slide.

6. Not tracking company cash flow. If all you do is track your bottom-line, you may be missing critical components to vital price-controlling cash flow. A company’s value is driven by cash flow, not just profits. Solution: track your cash flow, no less than annually. Not exactly sure what you should include? Then call Meridian. Every company’s cash flow is unique, and we’ll help you with what to include and exclude in your cash flow tracking. 

7. Handling negotiations by yourself. 
Have you ever walked away from a deal wondering if you left something on the table? You likely did! No matter how expert a negotiator you are, a third party expert can mean fewer compromises plus relieve you of a ton of stress. Solution: Employ a seasoned, confidential, thorough firm with the ability to handle your most important transaction. Meridian is the undisputed leader when it comes to buying, selling and merging petroleum companies. 

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Meridian Associates, Inc. 510 S. Bowie Dr. Weatherford, TX 76086 • (800) 728-9005 • Fax (817) 594-3397 • www.askmeridian.com

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