Reliable Financial Data Is A Top Driver Of Business Value
The lack of financial integrity is one of the most common hurdles encountered during the process of selling a small business. What is being bought or sold is primarily a future stream of income. Not the assets or property of the business, but the income these assets will generate in the future.
Since future income is impossible to definitively compute and hard to estimate, the company’s financial history, at least, provides concrete facts and insight to future performance. So, reliable financial records are not only a critical element of business management but also support the business’ historic profitability, operational efficiency, and its solvency.
Most importantly, however, reliable financial data is the impetus for two critical events to occur in successful small business acquisitions: 1) the ability for a prospective buyer to forecast the future probability of growth and prosperity of the company, and 2) the likelihood that a bank will provide financing for the acquisition
If a buyer faces a seller of a business who asserts that the company has been making $1 million per year for the past three years, the seller will be required to prove it. If the seller then produces past financial statements that do not support that claim, there is either no deal, a reduction in price, or most likely, the buyer will walk away.
Therefore, review your business financials now to avoid surprises later when a buyer is performing due diligence. Be sure they accurately reflect your operation and are up-to-date. You should be ready with the answers to the questions that will assuredly be asked.
Buyers want to see a detailed financial history and will not pay top dollar for mediocre records. To make sure your company remains attractive and can win top dollar when it is time to sell, here are tips for keeping your business in sale-ready shape:
- Understand and know your profit margins on each line of business.
- Know the breakdown of sales and profitability by territory.
- Is there recurring sales in your revenue stream. Do you have contractual relationships with some of your customers? And, are the contracts transferrable to a new owner?
- Understand your customer base. Buyers would be interested to know if you have customer concentration issues. Can you show the percentage of total revenue each of your customers generate year by year. What industry sectors do you serve? What geographical area do you serve? Are your customers mostly local, regional, international?
- Are customers invoiced promptly? Do they pay on time? Buyers would want to review your accounts receivable and aging reports because this will indicate if your customers are facing cash flow issues.
- Regularly evaluate your costs and pricing.
- Are your accounts payable on time? Do you take advantage of cash discounts?
- Can you produce cash flow statements with projections and working capital analysis?
- One-time expenses and expenses for start-up programs and businesses should be separately identified.
- One-time expenses and costs associated with certain types of business growth need to be isolated in your internal reporting so that you can tell how the underlying business is doing without these non-recurring costs.
- Compare each year’s performance to the prior years. Create a document that compares performance from year to year. In the document, explain the reason for the variances. Doing this yearly increases the probability that you’ll remember the specifics when you sell your company.
- Regularly compare your company’s performance to industry benchmarks. For instance, if you have inventory three times higher than the industry standard, too much cash is tied up in excess inventory, which means you have less working capital on hand. If inventory is kept right-sized, the company would be more attractive to a buyer.
If you can put these tips into practice, your business should command a higher price over other competitors in the business-for-sale marketplace. While other owners may be scrambling to prove the worth of their business, you will be on your way to a secure retirement.
Sports teams and athletes compete against each other. They keep score with statistics on their performance. They meticulously measure their performance against themselves and others and use their numbers to find ways to improve. Should running a business be any different?