Good books, bad deal

"I don't even look at a business unless their books are in order."

I was recently chatting with a fellow MBA about their journey toward entrepreneurship through acquisition.

It's something that's becoming increasingly popular -

As baby boomers are retiring and selling businesses,

Business savvy operators are acquiring bunches of "boring companies"

And building new revenue streams

To support their life

And to fulfill their entrepreneurial dreams.

The MBA was talking to me about her requirements for businesses she would consider acquiring.

And that clean books were a big deal to her.

"If you can't trust the books,

How can you even be sure what you're buying?"

While that is an extremely good point, there's an issue with it:

If those pristine books show you that the business is clearly great,

Chances are, that value will also be clear to every other buyer on the market.

And the competition to buy them will be high

(As will be their price).

AND

Clean books may be a sign of a well-operating business with nothing to improve.

Which you actually DON'T want

Since acquisition price consumes the profits you'll make for the first 3-7 years.

And to make any money sooner, you'll need to increase that profit somehow.

(Aka, something needs to be broken, unoptimized, or underpriced.)

And so, while clean books might make it easier to spot a great company,

They might not be the best way to spot a deal.

You may be better off finding a diamond in the rough using other indicators

And cleaning up the books after the deal is done.

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