Last time on the Growth To Exit® Blog, we talked about the 2nd Key Area in your business, Human Capital and the importance of Human Resource Management in small businesses.
Buyers who are interested in your company specifically evaluate and scrutinize 5 Key Areas of your business. Flaws and problems in any of these areas can impede the value of your company and result in a reduced offer from the buyer, who will need to spend extra money and time to fix these issues. To be sustainable, you must implement best practices, processes and systems in these five critical areas.
As a reminder, the five keys areas include:
This time we will take a deeper look at the financials of a small business and discuss what buyers are looking for inside the Financial House of your company.
One of the primary concerns that buyers have about privately-held businesses is the lack of stability.
Buyers want to know that your company will still be viable post-sale and after the transition in ownership. They will look at prior historical performance to try and predict the future value and profitability of your business.
Expect a sophisticated buyer to dive very deep into the financials of your company, and even ask for 5 or 7 years of historical financial information. In many cases, buyers want to see data beyond the performance reporting that you, as an owner and as an operator, need to run your company. They may ask for different types of information, in a different format, for different periods. They may overall, ask for information that you're not used to providing and reporting.
As Jim Shields loves to say, “Proper planning prevents poor performance.”
The Buyer’s Financial Analysis
Typically, buyers take the financial information that you have provided them with and run a forecast model that they believe is relevant, accurate, and predictable. They will rarely, if ever, show you their analysis and prediction, but they will base their negotiation offers and the purchase price on this financial forecast.
How to Best Prepare Your Company’s Financials
As a seller, it is important that you do your own financial forecast and due diligence, so that you are prepared for the buyer’s scrutiny. This will also help you in understanding whether the offers that you receive reflect your company’s value, and if a buyer is asking for reasonable or unreasonable things.
Here are a few important things that you can do, to best prepare for the financial analysis of the buyer:
The four areas just mentioned are the tip of the iceberg. Buyers look at the financial condition of your company with a laser focus, because the numbers determine the value, and help predict future performance. Throughout the Growth To Exit® course, Jim Shields covers more of the key financial areas that are important to buyers. He also provides suggestions to establish best practices in this area of your business, and how to secure your company’s information during the due diligence phase.
The Bottom Line
Everything that you, as a seller, can do to improve the credibility of your company, is going to help you attract higher caliber buyers, and will make the transaction process easier, smoother and quicker.
At the end of the day, while you're evaluating your own company's financial performance, places you in a stronger negotiation position. You want to look at your company just like a buyer, both financially and operationally, so that you can negotiate more efficiently and be better equipped.
Next time at the Growth To Exit® Blog we will talk about the fourth of the Five Key Areas, the IT and IP Systems.
Your company is the product. Growth to Exit® is the process. The Buyer is your customer.
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