Does your accountant dread your visit? Bad record keeping is, in fact, the biggest roadblock to selling a business.
Buyers want a business with a proven track record of consistent financial performance with solid/growing revenue and earnings. Yet, most of us are rather flabby when it comes to fiscal fitness. Spending some time with a trainer/coach can boost your strength and health and business worth.
Let’s start with some top financial drivers of business value. Focusing on these will make it easier for you to sell your business and get you more money – then as well as now. Assess your own business, determine which factors affect your business the most and prioritize what you want to work on.
Keeping (in the) good books
A proper set of books prepared with proper accounting software is a necessity. Your documents need to be current and correct, demonstrating timely remittances and filings.
Compliance is essential: issues with the Canadian Revenue Agency (CRA) or others can freeze your accounts and destroy your business. Continuity is also important. Are you dependent on a single employee who could leave?
Outsourced bookkeeping provides efficiencies that small businesses can benefit from. Businesses pay for work that’s done, not standby hours. Clean and compliant books will contribute to a good relationship with your accountant and save you dollars there, too.
A good bookkeeper will also help you understand your numbers. They can do forecasting, financial analysis, identify cash flow risks, and provide much more than effective use of a software program.
It’s important that owners keep records and communicate changes to the business. They’ll often dispose of assets or sign a new lease and forget to advise the person doing their books.
Financial value drivers
Clean up the Balance Sheet. A Balance Sheet provides a snapshot of the business’s health. Use it to pinpoint and get rid of obsolete and slow-moving inventory or excess cash. Resolve potential liabilities and lawsuits, ensure that assets are properly recorded and note expensed R&D investments.
The top reason businesses fail is not unprofitability; it’s because they run out of cash held hostage in accounts receivables or inventory.
Increase revenues and profits. All else being equal, a better bottom line leads to a higher business valuation: a) sell more to existing customers b) sell to new customers c) combination of the above.
How efficient are you at turning revenue (sales) into profit, i.e. controlling expenses? Try the profit calculator and related article on the Action COACH web site. The site has many business tools and resources, including an introduction to financials.
Keep in mind that we spend six times as much money trying to attract new customers to our businesses than we do to up-sell, on-sell and generally over-service existing customers. You’ll want to keep your customers coming back and bring their friends with them.
Review and reduce or eliminate discretionary expenses. See the effect on your profits when you reduce your net cost by only 2%. A $25,000 increase in your bottom line might add $100,000 to your selling price. Phone bills, office supplies and insurance expenditures are areas that should be reviewed by outside agencies annually, anyway. Be careful with insurances, though. Your coverage needs to be adequate and the right kind. Having a proper insurance policy with up-to-date coverage assures a purchaser they are protected for what they’re buying.
Maintain a steady revenue or aim for revenue growth. Steady sustainable revenue beats one that’s erratic.
The higher market share, the better. Market share can be more important than revenue. A business with a 50% share in a defensible position is attractive to buyers.
Resolve and diversity issues of customer concentration. It’s risky to have any one customer representing more than 10% of your business. Resolve and diversify supplier concentration. A dependency on any given supplier is also a risk. Line up alternatives.
Prepare reasonable future business projections – set goals with detailed steps to meet them. Show the earning capacity of your business. Base your plan on your existing records, market and technology; document the steps that will take you there.
Get a business valuation now. A valuation tells you where you are now vs where you want to be x years from now. It also helps pinpoint changes to boost the business value.
Research tax implications upon selling the business, including “vendor take back” and earn-outs. Who doesn’t want to minimize the tax consequences when selling? We’ll explore some of the options—share sale, family trusts, deferred payments, Retirement Compensation Arrangements, IPP’s, etc. with input from professional advisors in a later post.
The Process of Selling a Business