| Control
Panel |
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| Introduction |
Your sales presentation to a prospective buyer will
include the company financials for the past 3 years.
Therefore, you should always prep your business
to show a 2 or more year up-trend that supports your
market value. This includes:
About This Guide
We will review the financial requirements needed
to secure the maximum value for your business.
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| You Need Increasing
Sales and Managed Expenses |
The buyer will scrutinize two key line items from
your profit and loss statement:
1: Are Your Sales Trending Up
This is a given requirement before any business will
sell. If your sales are trending down, it's best to
revisit your marketing strategy prior to listing your
business to sell (unless your strategy is to exit
the business).
The buyer will analyze the sales numbers. They will
want to know what strategy you have in place
that will support these sales figures when you transfer
the business over to them — we
have more information about building a marketing strategy.
Additionally, the buyer will want to know:
2: Are Your Expenses Being Managed
The second line item the buyer will
scrutinize is your expense items. They want to see
expenses that are strategically managed — in
other words, expenses incurred must support the operating
business and marketing strategy. Frivolous expenses
only raise questions about your financial assumptions.
Prep your business by removing:
- expenses that are personal or non-business
related:
you accomplish this by paying off company loans made
for personal or non-business use
- expenses that do not produce income:
analyze individual line items and pay-off or terminate
service relationships for expenses that do not generate
income.
Prep your business by documenting:
- equipment purchases that support the business operations
and sales strategy
- expenses items that are part of your marketing strategy
— view Marketing
Planning Model
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| Company Assets |
Selling the company means selling the company assets.
The buyer is only going to pay for income-producing
assets.
Current assets include the following:
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account receivables
- inventory
- short-term notes
- other
The buyer wants to see collectible receivables
dated no longer than 30 days or within industry
standards. Invoices or receivables dated more than 30
days indicate sloppy management and/or troubled collections.
- You should review your collection policy to ensure
that bills and payments are invoiced and collected
on time.
The buyer will evaluate your inventory management.
Dated inventory may be worthless in
the eyes of the buyer, regardless of book value. If
you can't sell the inventory, the buyer doesn't want
it.
- Get rid of your excess inventory by writing in off
or donating it at book value. Keep your inventory
at marketable levels.
Short-term notes generally include loans made by the
company to the owner or owner's family.
- You should pay off these loans prior to
the sale. The buyer will not assume any short-term
notes not directly tied to the operation of the business.
What are the fixed assets:
— leasehold improvements
— furniture and fixtures
— equipment (machinery and tools)
— company vehicles
— building(s)
— land
— other
Fixed assets that should be included in the sale
are those assets that are income-producing:
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| Company Liabilities |
Selling a company comes with its obligations. The
obligations that should be included are those line
items that produce income.
Current liabilities include the following:
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account payable
- salaries
- short-term notes
- other
The buyer wants to see payable accounts that
support the day-to-day operations of the
company. These accounts should be paid on-time, taking
advantage of discounts and other payable perks.
Short-term notes include loans that must be paid
back within 5-7 years. These loans should be exclusively
tied to the operating needs of the company.
What are the long-term liabilities:
— long-term notes for building
and land
— long-term notes for equipment
— other long-term notes
— other
In most cases, buyers will only assume those obligations
that are directly tied to the income-producing assets
of the company, such as operating equipment.
Buyers generally will not buy the land and building
if it is owned by the seller. Including the real
estate in the sale will increase the cost to the
buyer while keeping the company earnings at the
same level. The buyer's going cash position will
be decreased making the business less attractive.
The seller's best option is to not include
the building and land in the business sale.
You should list the building and land as a separate
sale if the buyer is interested. In many cases,
the business owner leases the facilities back to
the buyer with an option to buy.
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| Recasting the Financials |
Documented business financials are "minimized"
to show as little taxable income as possible. The
company's true economic value is generally greater
than the reported taxable value.
To derive the economic value of a company, you
need to recast the financials to show the
company's true economic value.
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For example, your tax position
may allow you to take accelerated depreciation
on capital investments.
Let's say you invested $10,000 in capital equipment.
If you depreciated your investment within 3 years,
the reported book value after 3 years would be
$0. Does that mean that the "market value"
for the piece of equipment is valued at $0?
That is why you need to recast the financials
to show the true market value of the capital investment.
How to Determine Market Value
Market value reflects the cost to replace a piece
of a equipment or asset to its current state minus
its wear.
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It is advisable to re-value
your assets and equipment on the low side.
If the buyer questions the value you assign certain
equipment, it may raise flags that question your
intent and asking price.
Another related line item is the owner's salary
and perks. You need to add back owner salary
and perks to reflect the true financial
position of the company.
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For example, if the owner takes
$100K in salary and perks showing a taxable income
of $100K, you will need to add back the owner's
salary and perks to show the true sales value
of the company.
Recasting the financials reflects the true economic
value of the business, prior to depreciation, non-operating
interest charges, owner salary and perks, and non-recurring
expenses.
Recasting the financials require:
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adding back depreciation and reflecting
the replacement value of capital equipment and
assets
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adding back non-operating interest
expense taken for non-business use.
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adding back owner salary and perks
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adding back owner family salary
and perks if it is unlikely that family members
will stay with the company once it is sold
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remove any bad debts that will
not be forwarded to the new owner
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remove any obsolete inventory
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remove any assets that will not
or should not be sold to the new owner; i.e.,
the company car used by the owner or members of
the owner's family
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write-off any loans the company
made to the owner
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| Cash is King Whenever
You Sell a Company |
The cash flow position supports the asking
price for your company.
Think about it. If I am going to invest $100K as
a down payment to buy your company, the return of
my investment needs to equal a cash return that
is greater than my return if I invested the down
payment in the equity markets.
Additionally, if I am going to expense my "sweat
equity" to manage and grow the business, the
cash return must be greater in value than finding
a job that gives me equal value.
That is why cash is a determinant factor
when making a business purchase. Let's demonstrate
an example:
| Example: |
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| Estimated Sale
Price: |
$450,000 |
| Buyer Down Payment @ 33%: |
$150,000 |
| Business Financing @ 67%: |
$300,000 |
| Financing Interest Rate: |
10.0% |
| Financing Term: |
7 years |
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| Annual Sustainable Cash Flow |
$180,000 |
| Less: Debt Service |
$59,764 |
| Less: Debt Service Cushion
@20% |
$11,953 |
| Less: Annual Capital Expenditures |
$5,000 |
| Less: Owner's Salary |
$100,000 |
| Cash Flow Coverage: |
$3,283 |
The example
shows that my "down-payment" and "sweat
equity" will generate a positive cash position
after paying financing costs and deducting a
cash salary. |
How to Determine Cash
You must show your cash position in its true recasted
position:
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adding back depreciation
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removing non-business expenses
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minus non-business investment
income
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adding back owner salary and perks
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adding back owner family salary
and perks if the family members will not stay
with the company
The stronger your cash flow position, the
greater the value of the company. Review
our Market Planning Model
on strategies to increase your sustainable cash flow
position.
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| What Will the Company
Look Like in 3 Years |
The buyer needs to understand the expected projections
over the next 3 years.
You generally achieve this by showing the
growth projection made over the last three
years and continue that trend going forward.
A more supporting projection can be made from a well-planned
marketing strategy as discussed in the Market
Planning Model.
It is up to the buyer to calculate the effects of
competition, economic conditions, the prevailing market,
and what the buyer can accomplish.
The 3-year forecast should reflect income before
depreciation, non-business expenses and owner salary
and perks.
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| Getting the "Company
for Sale Financials" Prepared |
We have on staff financial professionals who can
analyze your financial statements and prepare the
documentation necessary for the sales presentation.
We can review your current financial position,
review line items that should be removed or recasted,
calculate the "economic" cash position
of the company, and prepare the documentation necessary
for presentation to the buyer.
For more information: click
here
The Novars Group is a professional business brokerage
operation with expertise in business transfer and
sales. Our services include:
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