A Soft Year Is a Story Before It Is a Number

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A soft year in a set of financials is a story before it is a number, and the story decides almost everything about what to do next.

When an owner comes to me having had a down year and wondering whether they can still go to market, the first thing I want is not the number. It is the reason. A soft year caused by losing thirty percent of the business to a competitor that just moved into the territory is one kind of problem, and not a good one, because it is structural and it is probably not over. A soft year caused by a single large job that went bad through no fault of the business, or by an owner who got sick and needed a procedure that pulled them out of the company for months, or by a death or a divorce, is a completely different story. Those are one-time events with an explainable cause and, often, an obvious recovery.

So the questions I work through with an owner are not really financial at first. What caused it? Is it over, or is it ongoing? If the business is recovering, is that recovery explainable and close to inevitable, or is it a hope? The answer to those questions drives everything I would recommend, because a buyer and a lender are going to ask exactly the same ones, and the owner who can answer them with evidence is in a far stronger position than the owner who just wants the weak year to disappear.

That instinct, to wait a year and get the soft year in the rear-view mirror, is the one I would push on hardest right now. It used to be reasonable advice. It is less obviously right than it was, for two reasons. The new SBA rules test debt-service coverage on the most recent fiscal year or the average of the last two, and they bar relying on projections to make up the difference, so a single weak year carries more weight in what a buyer can finance than it did a year ago. And AI is reshaping what businesses in a lot of sectors will be worth going forward, which means a year spent waiting is not a neutral year. The value you are waiting to protect may not sit still while you wait. For some owners, mitigating and explaining the soft year now is cheaper than parking the whole decision for twelve months and hoping the landscape holds.

None of this is one-size-fits-all, and I would not pretend it is. Every business is unique, and the facts and circumstances of a soft year have to be fully understood before anyone makes a call. But understanding the story is always step one, and it is the step owners are most tempted to skip in their hurry to either explain the year away or wait it out.

If you have had a soft year and you are thinking about what it means for a future sale, the most useful thing you can do is get clear on the story first. The number will make a lot more sense once you do.

A note for the CPAs who refer clients to me

You are often the person who actually knows the soft-year story, because you were there when it happened and you saw it land in the numbers. That makes you unusually well placed to help a client think through what it means for a future sale, and to help me understand whether a recovery is genuine and explainable or wishful. When a client of yours has had a down year and is starting to wonder about timing, that is a good moment to bring me in, because the decision about whether to wait, mitigate, or go now turns on exactly the facts you already hold.