Time Kills All Deals, Part I of V

  • Time Kills All Deals, Part I of V

    Get your company’s financial house in order

    This series of blog posts covers the five critical steps to avoiding delays in the sale of your business–ensuring the transaction occurs when you want it to. 

    1. Get your financial house in order
    2. Identify the individual who will coordinate the flow of all documents throughout the sale process.
    3. Identify your advisors – Investment banker, lawyer, CPA, other advisors
    4. Get your contracts organized
    5. If you want to leave the business, get your senior management team locked in

    BACKGROUND: All sales people understand that the longer it takes to close a deal, the more likely the deal will never close.  As more time passes, so many different factors can cause a deal to fall apart.  For example, the buyer finds another solution; the economic environment changes; or a critical employee resigns. 

    So, for the most important transaction – the sale of your business – you want to make sure that time does not kill your deal.  There are five critical steps to avoiding delays in the sale of your business; the first is to:

    Get your company’s financial house in order

    Your financial and accounting operations must be in the best possible shape as you begin preparations to exit your business. There are three steps to ensuring success in this area:

    Have accurate monthly financial statements

    The most critical aspect of getting your financial house in order is to make sure that you have monthly financial statements – income statement, balance sheet and cash flow.  In most instances, these statements are critical to a potential buyer. 

    Completing a monthly reconciliation of all balance sheet accounts (not just your bank accounts) is essential to having accurate monthly financial statements.  An error in a balance sheet account means that your income statements are wrong.  Inaccurate financial statements will make a buyer wonder if other information you have provided is also incorrect.  Uncertainty about financial data or business operations means there is higher risk in a deal – that higher risk means a lower price.

    Have a monthly budget for the next two years

    A buyer also wants to understand your plans for the future.  Those plans involve two components – (a) Your understanding of how the business will evolve & (b) the budgets/forecasts reflecting that evolution.  Creating both a written document of your plans and a financial forecast model on an annual basis will help you convey that information to a potential buyer.  Creating these documents annually, even when you are not thinking about selling, will help you prepare for that time when you do want to sell.

    Identify the critical metrics in your business

    Understanding the critical metrics and regularly reporting on those metrics to your employees will keep everyone focused on running the business effectively.  Depending on the industry, each business can have different metrics.  Some common metrics include:

    • Revenue per transaction

    • Number of transactions by major business segment or major product line

    • Cost per unit of sale

    • Number of full-time equivalent employees at the end of each month

    • Common financial ratios

    • Overhead expense allocations between compensation & benefits, marketing, and office expenses 

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