Axial.net recently wrote a great article about maximizing cash flow prior to selling a business. This is one of the most important pieces of selling a business. To many times owners wait until cash flows start to decline before thinking of selling their business. This oftentimes creates fear amongst buyers because they start to ask will this decline continue and how far down will it go before I can expect financials to stabilize or preferably start to improve. Because of this fear buyer's will greatly discount their offer price. Here is Axial.net's article with only a few changes.
The most important thing for any business owner looking to sell is to prove the success and sustainability of his business. There are a number of financial metrics one can use to do so, but in almost every case it is essential that a business owner presents a strong picture of a company’s cash flow. For investors, particularly, this is an important measure as it represents the “excess” cash a business has after paying all of its expenses and meeting commitments to employees, and eventually represents what is left over to pay to investors or back to the owner.
Cash flow, Seller's Discretionary Earnings (SDE) and Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) are the main tools buyers use as a measure of the performance of a business. SDE is typically used on main street businesses whereas EBITDA is primarily used on businesses with over $5MM in revenue or $1MM in net income. However, cash flow is used on all businesses.
Focusing on cash flow allows a business to account for all capital expenditures, working capital requirements, current debt payments, taxes, or other fixed costs which buyers will not ignore. The cash needed to finance these obligations will need to be defensible if the business wishes to grow, compete, and maintain or increase profitability.
Before approaching buyers, there are a couple of ways a business owner might look to boost cash flow in order to bring the best deal to market:
Reduce overhead
One great place to start is to save money with your vendors. Do a quick inventory of what services you are paying for. Are there any services you are not using? Do you have any equipment that is lying idle? If so, trim the fat and lower your costs.
Once you have eliminated any services you don’t use, take a look at the ones you do. Are you receiving all agreed-upon discounts? After looking into this detail, consider negotiating with service providers to secure a better deal.
Pursuing some type of supplier financing agreement may be an option for businesses who want to lock in competitive rates and quicken the production to sale cycle. Exploring negotiation around trade credits might also be an opportunity. Receiving a modest discount by paying bills early can produce great results. For example, paying all bills due in 30 days within 15 days might result in a 1 percent discount.
Do a customer audit
A late paying customer isn’t necessarily a bad customer. Many businesses are too quick to write-off customer billings. Instead, explore new payment plan options with these select customers and make a focused effort on collecting old billings even if it means compromise or turning to a collections agency.
Pursue growth strategies
Many businesses spend years pursuing aggressive growth strategies even if the end goal is to sell, with the idea of a better outcome for the business and better sale price for the owner in mind. This might mean taking on growth capital, exploring expansion into new geographical markets, pursuing M&A targets of smaller, peer or competitive companies in your industry, consider partnerships, horizontal or vertical integration strategies, or other more organic growth mechanisms.
The most important thing for any business owner looking to sell is to prove the success and sustainability of his business. There are a number of financial metrics one can use to do so, but in almost every case it is essential that a business owner presents a strong picture of a company’s cash flow. For investors, particularly, this is an important measure as it represents the “excess” cash a business has after paying all of its expenses and meeting commitments to employees, and eventually represents what is left over to pay to investors or back to the owner.
Cash flow, Seller's Discretionary Earnings (SDE) and Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) are the main tools buyers use as a measure of the performance of a business. SDE is typically used on main street businesses whereas EBITDA is primarily used on businesses with over $5MM in revenue or $1MM in net income. However, cash flow is used on all businesses.
Focusing on cash flow allows a business to account for all capital expenditures, working capital requirements, current debt payments, taxes, or other fixed costs which buyers will not ignore. The cash needed to finance these obligations will need to be defensible if the business wishes to grow, compete, and maintain or increase profitability.
Before approaching buyers, there are a couple of ways a business owner might look to boost cash flow in order to bring the best deal to market:
Reduce overhead
One great place to start is to save money with your vendors. Do a quick inventory of what services you are paying for. Are there any services you are not using? Do you have any equipment that is lying idle? If so, trim the fat and lower your costs.
Once you have eliminated any services you don’t use, take a look at the ones you do. Are you receiving all agreed-upon discounts? After looking into this detail, consider negotiating with service providers to secure a better deal.
Pursuing some type of supplier financing agreement may be an option for businesses who want to lock in competitive rates and quicken the production to sale cycle. Exploring negotiation around trade credits might also be an opportunity. Receiving a modest discount by paying bills early can produce great results. For example, paying all bills due in 30 days within 15 days might result in a 1 percent discount.
Do a customer audit
A late paying customer isn’t necessarily a bad customer. Many businesses are too quick to write-off customer billings. Instead, explore new payment plan options with these select customers and make a focused effort on collecting old billings even if it means compromise or turning to a collections agency.
Pursue growth strategies
Many businesses spend years pursuing aggressive growth strategies even if the end goal is to sell, with the idea of a better outcome for the business and better sale price for the owner in mind. This might mean taking on growth capital, exploring expansion into new geographical markets, pursuing M&A targets of smaller, peer or competitive companies in your industry, consider partnerships, horizontal or vertical integration strategies, or other more organic growth mechanisms.
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