Financial statements others can understand

In too many cases, business financials are so confusing that no one can understand them or analyze them.  And it’s not uncommon that the year-end statements don’t match up with the internal profit and loss statements.  These can become major problems when the business owner tries to obtain financing or sell his or her company.

Far too often business owners take a hands off approach to their financial statements.  Despite the request of their Accountant they dismiss the idea of reviewing those results with their advisor and, more importantly don’t ask how to improve the results.

Those owners who take an active role with their business financials, often:

Find ways to save money.  Ever go to the grocery store and quickly pick up a few things, get to the register and wonder how you just spent $100 or $200.  Then consider those times you carefully looked at what was on sale, compared no name brands, or carried coupons.  It seems ridiculous but you find you spend 25% less and end up with the same amount of goods.  The same principle needs to be applied to your expenses. Business owners who regularly review expense accounts quickly discover there are areas they are carelessly spending.

See threats and weaknesses sooner.  Picture how productive you would be if you could do just a little more strategic thinking, speak directly to a few more key customers or develop future marketing initiatives. Business owners who use their financial statements as a tool are better able to identify threats and weaknesses.  They are not bandaging symptoms but rather correcting the causes.  

Improve the marketability of their business.  If sellers don’t understand their financials how can they expect buyers to get them?  Since finding a willing buyer will require the business financials to be analyzed in detail, the fewer obstacles placed in front of buyers the better.  The more difficult it is to determine a business opportunities financial picture, the more often buyers will continue their search and never give your business a fair shake.

It is absolutely critical that a business has a set of financial statements and internal bookkeeping that are easy to understand and make sense to anyone who has to review them.

Do you have a small business question you would like answered about this article or others?

Bill Sivell is a salesperson with VR Windsor Inc. [www.vrwindsor.com] 519-903-7807, which sells businesses to buyers across Canada and around the world. His 14-year career includes diverse senior management positions in marketing, advertising, sales management and operations management. His blog appears every Tuesday.

 

What about that Big Customer

Many companies have a single customer or a few large customers that dominate their overall sales.  After all, nobody wants to turn down business!   But when it comes time to selling the company, this becomes a huge problem.

Why?

Revenues could drop! Many buyers won’t look at a business whose revenues could drop dramatically after closing from the possible loss of those customers.  Imagine the impact on a small manufacturer if 30% of their sales volume was moved to their competitor.  While variable costs may mitigate the short term hit, fixed cost will inevitably cripple most companies.  And, most importantly in the buyer’s eyes, cash flows can be dramatically reduced and in some cases eliminated.

Seller’s relationship with key customers.  In many cases those large customer relationships are as a result of the owner’s involvement.  They are typically long standing customers or were acquired as a result of the owner’s involvement in the sales pitch, the product production, the service provided or all of the above.  Regardless, in the customer’s eyes, not only did they buy from the company they bought from the company because of the owner.  Transferring a business like this requires a buyer willing to accept these risks and typically a more lengthy transition period in order to re-establish a relationship with the new owner. 

Buyer’s look for discounts.  The risks associated with stepping into the owner shoes will dramatically affect its value.  Business value is based on its cash flows and a multiplier.  A business multiplier is borne from the principles of risk and return.  The riskier the venture the higher rate of return expected from the buyer.  Since cash flow is established at a fixed historical average or a forecasted expected return, the way to realize a greater return is by paying less for the investment in the beginning.  Business owners with customers that represent greater than 20% of their overall sales revenue typically see downward pressure on value.

Somehow, some way, business owners have to find a way to diversify their customer base before they ever decide to sell their business.   Finding predictable, repeat and diversified customers will not only improve bottom-line profitability, it will also ensure business owners will maximize their value when it’s time to sell.

Do you have a small business question you would like answered about this article or others?

Bill Sivell is a salesperson with VR Windsor Inc. [www.vrwindsor.com] 519-903-7807, which sells businesses to buyers across Canada and around the world. His 14-year career includes diverse senior management positions in marketing, advertising, sales management and operations management. His blog appears every Tuesday.

 

Excessive personal expenses can lower business value!

It’s not uncommon to find business owners who take advantage of the perks of owning their own business.  Who would blame them?  In many cases the very idea of being able to “write-off” some personal meals, car insurance, travel, etc. is a driving force to being your own boss.

However, burying excessive personal expenses in the business financials can lower business value!

The most popular method of valuing a business uses a multiple of earnings over a period of years.  Business owners should be aware of that while attempting to reduce the bottom line with personal expenses to minimize taxes.  Though there are a number of deductions that may be added back to determine true cash flow, not all add-backs are considered legitimate by buyers or lenders.

Common personal expenses are auto & auto insurance, health insurance, life insurance, meals & entertainment, office supplies, phones, subscriptions, and travel.  Most buyers understand these, and more. 

The difficult challenge is to determine what is excessive. 

First, you must document and be able to corroborate your expenses to buyers.  Recently a seller couriered a shipment of antiquities from South America and expensed the cost in his retail business.  It is not a strong enough explanation to suggest an allocation of freight expense as personal without receipts and proof purchase.  Most buyers will assume freight cost in retail outlet are the costs of doing business.

Second, there must be a clear distinction between personal and business.  It may be difficult for a buyer to rationalize 100% of the meals & entertainment expense being personal.   To suggest that all luncheon expenses are with family and friends when the owners business is wholesale sales of construction supplies may be considered unreasonable to a buyer.  Most buyers will assume that some portion, if not all, of that expense is to meet clients and build relationship with their customers.

Finally, sellers must understand the more difficult they make it for buyers to understand what they are buying, and perhaps more importantly, the more sellers cause buyers to doubt the legitimacy and accuracy of the financial details the more difficult they will find it to maximize their value.  And, make it less likely for a successful transaction.

By securing the services of a good business broker to help the seller navigate through these issues can be good preventative medicine.  A qualified facilitator will help to ensure these potential potholes are covered. 

Do you have a small business question you would like answered about this article or others?

Bill Sivell is a salesperson with VR Windsor Inc. [www.vrwindsor.com] 519-903-7807, which sells businesses to buyers across Canada and around the world. His 14-year career includes diverse senior management positions in marketing, advertising, sales management and operations management. His blog appears every Tuesday.

 

 

Minimize risks when selling your business

Whenever I meet with business sellers, they want to know how to protect themselves in a way in which the new buyer meets the financial obligations and a smooth transfer of ownership occurs.

For many sellers, protecting themselves is more important than determining the value of the business.   What sellers need to keep in mind is that there is just as much risk in selling a business as there is starting a business.

Similarly, they can minimize their risk when selling as they did when starting the business.

Although there are no guarantees, a combination of the following can significantly reduce the risks to an owner selling their business.

Many of these suggestions, such as having an adequate training period for the new owner, having a good client base, having strong relationships with supplier, etc. are obvious.  However, many are not.

One common mistake is not getting enough of a down payment.  Few incentives inspire a new owner to succeed like the risk of a significant loss of their own money.  In simple terms, it is a lot harder to walk away from a $200,000 down payment then a $20,000 down payment.

Know the buyer.  This means more than having some of the same interests, common friends and a shared love of the Toronto Maple Leafs.  A seller needs to thoroughly review the buyer’s credit history, personal financial situation and accomplishments and life experiences.

A well-intentioned but common error sellers make is having a due-on-sale clause in the promissory note.  In some cases, buyers find that being a business owner is not what they thought it was going to be, or something has occurred in their life which has changed their desire to own the business.

This is exactly what happened with a home-improvement contractor.  An out-of-town family matter for the new owner forced the owner to leave the area.  Instead of closing the business without meeting his financial obligations to the original seller another buyer could be found to meet his conditions as well as the obligations to the original seller.  For the original seller, this meant that instead of having one buyer on the promissory note, he now has two.

Finally, securing the services of a good business broker to help the seller navigate through these issues can be good preventative medicine.  A qualified facilitator will structure the transaction to ensure that potential potholes are covered. 

By incorporating these obvious and not-so obvious suggestions, business sellers will be able to significantly increase the likelihood that they won’t have to come back into their business once they have left.

Do you have a small business question you would like answered about this article or others?

Bill Sivell is a salesperson with VR Windsor Inc. [www.vrwindsor.com] 519-903-7807, which sells businesses to buyers across Canada and around the world. His 14-year career includes diverse senior management positions in marketing, advertising, sales management and operations management. His blog appears every Tuesday.