Re-Structuring the Balance Sheet
The next objective of financial positioning is to fine-tune the assets and liabilities of the business to facilitate a sale.
Review the balance sheet with the objective of making the company as “lean” as possible, towards this objective:
a). Inventory should be physically tabulated. Many sellers do not know the actual value of their inventory and it may be far more than imagined as many small businesses have their profits in the form of built-up inventory. Excess inventory should be reduced or liquidated to bring the inventory to the lowest possible operational level. The reduced inventory can not only create profitability, but will reduce the price of the business making it far easier to sell assuming the seller will retain cash deposits at the time of the sale.
b). Delinquent receivables should be turned over for collection. Again, the objective is to turn idle receivables into cash.
c). Excess or unused capital assets such as equipment, furniture, fixtures, should be sold as the best price possible. These same items will probably have no value to the buyer and they may be more advantageously disposed of prior to a sale.
d). Current liabilities and accounts payable should be reduced to , but maintained at a normal operating level. Many sellers pay down current bills and position the business for sale without debt, however, this may be a mistake as the assumption of reasonable liabilities may remain a convenient way to help finance the sale.
e). Stockholder loans should be reviewed. Loans due or from the business should be considered for repayment, however, an accountant should make the decision based on tax considerations.
f). Tax liabilities, accrued expenses and overdue accounts should be paid. These oftentimes small items are magnified by buyers and put even the best company in a poor light.
It would appear that each of these steps are as applicable to basic financial management as they are to positioning the business for sale. In large measure this is true. The company not on the market, however, may operate with financial inefficiencies and often they are forced to put their financial house in order due to a pending sale.
Projecting the Financial Future
Buyers are primarily interested in the future of the business. The past becomes important only to project that future.
The one most common seller’s error is to overlook this point and not provide the buyer a clear vision of where the business is headed. The seller’s accountant shares this responsibility. The most comprehensive financials have little value if the buyer cannot quickly see one or five years hence.
Where sales are on the upward trend, a sales graph for increasing profits or other favorable financial characteristics is also wise. Every factor emphasizing the business potential should be outlined.
A knowledgeable buyer will also be interested in the cash flow projections. A one year projection is usually sufficient, however, the projection should be backed up by hard data to support income forecasts.
The cash flow projections coupled with the income statement will help the buyer project the financing the business can support and the operating capital required. To this extent, the cash flow projections should be adjusted to reflect the net operating surplus to the buyer, before debt service.
The financial information and other supporting data should be presented in a professional manner. The fact that the information is immediately available and contain the many items of interest to a potential buyer will create greater interest.
For more information, please feel free to contact our office 716-668-6868 or e mail us at Broker@BizBrokersUSA.com