9 Financial Tips to Keep Your Business in Sale Ready Shape
When it's time to sell your business, your numbers must tell the right story. Ensure you know your numbers inside and out by following these 9 tips.
The lack of financial integrity is one of the most common hurdles encountered during the process of selling a business. Reliable financial records are not only a critical element of business management but also support the business leverage, profitability, operational efficiency and its solvency.
Avoid Surprises to Get Top Dollar
In the purchase of a business, the buyer will perform some level of financial due diligence. If the buyer is not comfortable when reviewing the company’s past financial performance or if a financial forecast is just "unbelievable," there is no deal or, at best, a reduced value for the company.
If a buyer faces a seller who asserts that the company has been making $1 million per year for the past three years, the seller will be required to prove it. If the seller then produces past financial statements that do not support that claim, are incorrect, or incomplete, the buyer will most likely be gone.
Therefore, it is a good idea to know everything you can about your business financials now so you can avoid surprises later when a buyer is performing due diligence. You should be ready with the answers to the questions that will assuredly be asked. Manage your business financials so they are transparent, reliable and up-to-date. Buyers want to see a detailed financial history in well-kept books and will not pay top dollar for mediocre records.
9 Tips to Keeping Your Business 'Sale Ready'
To make sure your company remains attractive and can win top dollar when it is time to sell, here are nine tips for keeping your business in sale ready shape:
1. Understand and know your profit margins on each line of business.
2. Know which products are the winners, and which ones are the losers.
3. Know which territories are the winners, and which ones are the losers.
4. Know your largest customers and your profitability in those relationships.
5. Regularly evaluate your costs and pricing.
6. One time expenses and/or startup program expenses and businesses should be separately identified.
7. One time expenses and costs associated with certain types of business growth need to be isolated in your internal reporting.
8. Compare each year's performance to prior years.
Create a document that compares the performance from year to year. In the document, explain the reason for the variances. Conducting this process annually increases the probability that you'll remember the specifics when you sell your company.
9. Regularly compare your company's performance to industry benchmarks.
For instance, if you have inventory three times higher than the industry standard, too much cash is tied up in excess inventory. If inventory is kept correctly sized, the company would be more attractive to a buyer.
If you can put these tips into practice, your business should command a valuation premium over other competitors in the business-for-sale marketplace. While other owners may be scrambling to prove the worth of their business, you will be on your way to a secure retirement.