If you’re thinking of selling your business be prepared for an onslaught of questions from potential business buyers. If you know what they want in advance you’ll have an excellent chance of preparing.
Here are some of main areas of inquiry business buyers will scrutinize before you can sell your business.
Due Diligence Process
When the Buyer and Seller execute a Letter of Intent re: a possible transaction and terms, the business is taken off the market and due diligence then begins in earnest.
The buyer or its agents will conduct due diligence of the books, records and operations of the Seller to its complete satisfaction.
Ninety percent (90%) of the business buyer’s emphasis will be on the Profit and Loss Statement (P/L) to help them understand how the P/L provides cash flow.
The business buyer will normalize Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). They are looking for non-recurring items of revenue and expenses such as legal fees, insurance settlements, professional fees, excessive owner compensation, above or below market rate rent expense, personal expenses, etc.
The business buyer will analyze profitability by product, customer and geography. They will look carefully for any operating expenses being charged to depreciation or interest expense which has the effect of fraudulently increasing EBITDA.
On the balance sheet, the business buyer scrutinizes changes in reserves which might reflect out-of-period costs that have an adverse effect on the P/L period under review.
Due diligence also has a perspective for the Seller. Sellers typically rely on a Trusted Advisor to coach them through this process—getting things cleaned up and controlling the process. The Seller must come to understand the true value of the business. This requires diligence. Fix what you can fix in advance of entertaining potential buyers. Set and manage expectations along the way.
The primary objective here is to arrive at an amount the Seller “needs” for the business—not what the Seller “wants”.
Are your books in order? Are your systems in place and above all are they easy to read and understand?
What is the status of your receivables and do you have deadbeat customers and late payers? The confidential nature of your customers dictates that your customers be named A, B, C, etc. until the final stage of due diligence. Then the Buyer will meet the important customers.
Are you under investigation or is there litigation pending?
Do you have signed and current contracts with your customers, employees and vendors?
When does your lease expire and what are the terms?
Are your business license and operating agreements up to date?
Are your ideas, proprietary products and processes protected by patents or trademarks?
What are the terms of your credit agreements?
Potential business buyers are going to want to understand you and your team as well as your company. They are going to dig deep into your vision and understanding of the industry. Don’t be surprised if they ask the following questions:
Why do you want to sell your company?
What do you see is the future of your industry?
What is your vision for the future of this company?
Unasked but most certainly ascertained – Will you be replaceable or is your company too dependent on your involvement?
Do you have an excellent leadership team in place and will they be prepared for the transition?
In addition to the above due diligence a prospective business buyer will delve into, you can expect more questions about:
Your Products or Services
Your Customers & Market Share
Your Operations, Distribution & Back Office
If you need a trusted advisor to help you through the process of selling your business or have questions about the process you are already involved in, please feel free to get in touch.
Follow these steps to ensure a clean balance sheet as the New Year dawns
While the steps needed to complete a year-end cleaning of a balance sheet aren’t terribly difficult, many company owners don’t tackle them because the owners don’t have the time. The result? The lack of balance sheet analysis nags at owners’ thoughts, preventing them from focusing all energies on the task of growing their businesses.
Balance Sheet Tip: Equipment
Take a tour of your facility, and identify those pieces of equipment long unused and sitting idle. They’re just taking up space, but should be generating income. You must find a way to convert these items into cash, by either selling them or having a service dispose of them. Once those pieces of equipment are gone, they come off the balance sheet. The difference between what you’re carrying on your books, and what you get back in cash for the equipment, goes into your profit and loss statement under “other expenses.”
Balance Sheet Tip: Inventory
Take another facilities tour, and this time look for inventory gathering dust. It could be a product you once manufactured, which didn’t sell as well as expected. Today, it’s filling valuable space and tying up your money. Get rid of it, gaining some cash in return if possible. The difference between its book value and the cash you garner goes into the profit and loss statement as a “other expenses.”
Balance Sheet Tip: Receivables
Many small business people believe they’re going to collect on long overdue receivables out more than 90 days. But if it’s not collectible, let’s write it off. It’s a bad debt, and it goes off of your balance sheet and onto the profit and loss statement as “other expenses.” Down the road, if the entity owing the money is able to forward you the long overdue payment, it will become “other income” in the year in which it’s paid.
Taking these steps will result in you, the business owner, being fully informed about what’s on your balance sheet. Your questions have been answered, and you have a higher degree of comfort than you otherwise would have about the veracity of that balance sheet. If you need help undertaking the process, don’t hesitate to get in touch with me.
I offer a 100 percent guarantee on my interim CFO work. I take on only clients I can help. Call me and let’s talk about your business. My phone number is 630-269-7646.
Buffing Balances Brings Benefits
The passage from an old to a new year is the right time to focus on cleaning up your company’s balance sheet. Doing so can yield a broad variety of benefits.
On the asset side of the balance sheet, the number one benefit is eliminating the “dead wood” of non-yielding assets. Any assets that no longer produce income, and may in fact be obsolete, should be removed from your balance sheet at this time.
On the liability side, you want to ensure your liabilities are properly stated on your balance sheet as you enter a new year. You want all accruals for taxes, and all other liabilities in which you owe a third-party payment, stated on the balance sheet. Waiting until next year forces you to go back and correct the prior year.
A clean balance sheet helps your banker and tax preparer
Cleaning up your balance sheet at year’s end should meet with the approval of two figures important to your company: your banker and your tax preparer.
If your lender knows he’s looking at reasonably “clean” numbers on your balance sheet, he won’t have to ask as many questions when you seek a loan. If you have an existing loan, and he has requested to review your most recent financial statements, he will be inclined to ask fewer questions, be more trusting of information you provide, be more likely to extend the loan and, conversely, less likely to call in the loan.
Your tax preparer is likely to report to the IRS the numbers you provide her. So if you fail to clean up your balance sheet, you’re essentially reporting “dirty” numbers to the IRS, which could lead to additional, and unwelcome, scrutiny.
A clean balance sheet helps plan your company’s financial future
Having a clean balance sheet lets you undertake some “on the money” forward financial planning. In other words, that cleaned-up balance sheet makes it easier to facilitate your future-looking financial planning process. It also makes you more inclined and more highly motivated to get into crucial forward planning.
When you analyze each account to see what comprises the balance on that account, you are able to create carry-forward schedules that can answer any and all questions about what’s in that account. That’s a way to document what’s in the balance sheet, and very few companies have that luxury, because they’re just so damn busy. That may, in fact, be you.
I offer a 100 percent guarantee on my work as an interim CFO. I take on only clients I can help. If you are having issues, call me and let’s talk about your business. My phone number is 630-269-7646.
The ornaments have been removed from the trees and packed away for next year and the cruise ships have returned from Mexico and the Caribbean, so it’s safe to say the holidays are over. As most individuals head back to work, entrepreneurs (who may not have stopped working during the holiday) are starting the year with a clean slate, new goals and high hopes for the opportunity of 2012. If you are one of the business owners who would like to get a handle on your finances, it is the perfect time for a refresher course. This month, we are featuring a blog series on the basics of financial reporting that every business owner should know:
Week 1: Examining the Balance Sheet
There are three fields on a balance sheet – assets, liabilities and equity.
Assetsrepresent things of value that a company owns and has in its possession. For example, the equipment that produces your products, accounts receivable from customers, or inventory that you are currently holding are all considered to be assets.
Liabilities are what a company owes to others – such as bank loans, supplier invoices, taxes and accrued employee wages. Liabilities are obligations that must be paid under certain conditions and time frames.
Equity represents the retained earnings and funds contributed by its shareholders, who accept the uncertainty that comes with ownership risk in exchange for what they hope will be a good return on their investment. Or, if the company is a sole proprietorship, equity represents the funds that the single business owner has invested in the company to keep it open.
The relationship of these segments is shown in the following balance sheet equation:
Assets = Liabilities + Equity
This means what your business owns is exactly equal to what your business owes plus what has been invested and retained in the business. As a company’s assets grow, its liabilities and/or equity also grow in order for its financial position to stay balanced.
How assets are supported, or financed, by a corresponding growth in accounts payable, debt liabilities and equity reveals a lot about a company’s financial health. Depending on a company’s line of business and industry characteristics, possessing a reasonable mix of liabilities and equity is a sign of a financially healthy company.