Last week we talked about several of the key attributes a business buyer looks at when deciding the value of your business. Every business is different, but if you have these initial value centers in place, we have the foundation of a valuable business. This week, we discuss several key financial elements you need to understand if you hope to sell the business for the maximum. By knowing where your businesses profits come from you also get the best results from your marketing investments.
We won’t discuss deal structures today, but we will cover that in the next couple of weeks. Today, we talk about putting your financial house in order so a buyer can evaluate the value of your business and you get the offer you deserve.
It’s funny, whenever I take on a client I get them to begin developing their financial dashboard so they can better manage their business. The more of this information that’s available, the better we can leverage their business’s marketing strengths and future growth. It also provides these entrepreneurs the tools they require to take their business to the next level. Since many of my clients are in emerging technology markets and are led by strong sales and marketing leadership, they tend to have limited access to strong financial professionals to help them. In the past, that could be a problem. Today in the world of interim CFOs and strong regional accounting firms, all robust high growth businesses can have access to strategic financial talents at a reasonable price. For many years, my retained search practices thrived on conducting searches for experienced CFOs in emerging markets. Today, I can pick up the phone and within a couple days we can get the right person in place to help guide my entrepreneur clients in the right direction.
Here’s what I put on my financial wish list when I start preparing a business for sale. Typically, I try to do this two or three years before the business goes to market. That time frame allows me to maximize the value of the firm.
We want to see annual audited financials; this provides the management team with many key elements to evaluate how the business is currently doing. We can take many critical measurements from these documents that help the present owner see where the opportunities might exist in their business. They also allow a potential buyer to make their buying decision faster because they can evaluate how they are going to increase the value of the firm after they buy it.
I work with the financial team to better understand their EBIDTA. I also begin the process of teaching key members of the team about the magic of EBIBTA when it comes to how a business is valued. Part of this process includes how the owner’s personal position in the company is improved by maximizing the EBIDTA number. We begin recasting prior financial documents based on what the firm’s founder or owner may be taking out of the business that an acquiring organization probably won’t be doing.
Many of us were trained in corporate finance in our formal education. Private business finance has several unique qualities but paying the government maximum taxes is not among its key qualities. The business owner’s objective is not to maximize taxable income. Working with professional financial managers allows us to better understand where the value hides within a privately held business. This process is critical to showing a potential buyer the value in your business. Almost every deal I’ve been involved in has recast financial documents in the sales process. The creativity comes when evaluating upside in a reasonable way so that the potential buyer can clearly see our thinking.
In an ideal world, we begin the budgeting and financial analysis at the business’s founding. In the real world, for most privately held businesses, this actually occurs when the business exceeds sales of several million dollars. By having a budgeting process in place, a business owner can better evaluate where they invest their time and resources. This allows an organization to better utilize their capital during the high growth stages of their business. It also permits the owner to better manage accounts receivables and accounts payables during the ups and down throughout the business year.
I can tell you that every business purchase I’ve been involved in has been done because the buying company thought they could get significantly more growth out of the business than the current owner. If we couldn’t, we wouldn’t buy the business. Having an individual with strong financial analysis capability can make a significant difference in the way you run your business. We spend significant time during the due diligence process evaluating budgets and providing analysis back to our executive team. The more accurate the budgets and forecasts, the less risk involved for the buying organization.
Now, we’ve talked about several key elements in how to increase the value of a business by understanding the key financial elements evaluated by the buyer. Next week, we finish up this series by talking about three key financial elements that allow you to maximize the value of your business when you sell it. See you here next Wednesday.