Whether you are starting a new business or considering selling your seasoned business, start with the end in mind.  In the early days, it’s challenging.  There’s so much to do and so little money, the business owner has to set priorities.  As the business grows, it’s tricky to balance the need for big company-type organization with the costs of implementing systems.

Regardless of where the business is stable or on a growth curve, here are a few things you can do to make your business a better target for sale.

·         Keep the records clean.  The first thing a buyer prospect will want to see is three to five years worth of historical financial statements.  If a division of the business is the target, the buyer will want division-level financial data.  Refrain from using the business checking account as your personal account since this will cast doubt on the reliability of the data you provide and cause the buyer to mitigate risk by making a lower offer.  High risk equals lower value. 

·         Get professional help.  Businesses involves a lot of moving parts and whether you’re dealing with the day-to-day or looking to sell, you’ll need to assemble a good team.  Attorneys guide you to the best corporate structure.  Certified Public Accountants address important tax issues and assist in setting up your bookkeeping.  Financial planners put together retirement plans.  In-house accountants and financial analysts prepare budgets and forecasts.  Commercial bankers advise on financing options.  

·         Separate yourself.  In the beginning, you ARE the business and you’ll need to wear multiple hats.  Quickly, though, you need to work yourself out of a job by putting systems and procedures in place that operate when you’re not there.  A buyer isn’t interested in keeping you around for very long and if they can’t take over your duties quickly, they will consider the purchase high risk.  An organized operation makes for an attractive target.

·         Minimize risks.  Diversifying your client base, training employees on safety procedures and making sure your income and payroll taxes are filed timely are all ways to reduce risk for you and for a buyer.  Lower risk equals higher value.

·         Develop good cash flow.  The one thing more important than low risk is abundant, stable cash flow.  You’re selling a cash flow stream.  If the stream is declining, you’re going to get less for it – if you can sell it at all.  Buyers like growth potential and solid cash flows offer a good base from which to grow.  Good cash flow equals higher value.

·         Know what it’s worth.  To evaluate an offer or begin marketing your business for sale, you need to have an idea of what the company is worth.  A business appraiser (or business valuator) uses the company’s financial statements and comparable sales transaction data from the marketplace to determine the most likely value or range of values for the business.  Whatever the result, remember that true value will be determined by what someone is willing to pay.  

Along the way, step back and ask yourself – “Would I buy this business?” If not, you may still have some work to do.

Most small business owners would say, they live or die by cash flow, but sadly, so few businesses have a good process for forecasting cash flow.

Companies such as Sage offer canned packages, but the best cash flow management tool is going to be the one customized to the needs of the business and it doesn’t have to be complicated.  The first step is to identify the sources of company data available to you.  Most of what is needed can be found in the accounting department, including accounts receivable and accounts payable aging schedules.

The next step is to identify cash inflows and cash outflows.  Cash inflows are cash receipts, collections from customers and refunds.  Cash outflows are payroll, insurance, office supplies and inventory, to name a few.  The type of operation will drive the types of inflows and outflows.  The majority of costs for a service business will likely be labor related, whereas, a product centered business will have inventory costs.

When constructing your analysis, remember that your focus is on cash, so start with the reconciled cash balance and forecast out in a frequency that matches your accounts payable cycle.  For instance, if you pay bills every week, forecast out in weekly increments.  If you pay every two weeks, forecast in two week increments.  Add the cash inflows and subtract the cash outflows for each expected increment.  If you’re short in the forecast for any given week, you’ll need to make adjustments, such as stepping up collection efforts now to shore up the anticipated shortage. 

Don’t forget annual and semi-annual payments for expenses such as insurance and software.  One of the biggest advantages to cash forecasting is to be able to plan ahead for these larger expenses.  Cash flow forecasting is an opportunity to review the inflow and outflow patterns of the business, which may end up exposing areas in need of improvement such as the collection policies and procedures of the business.

Slow collections can cripple the cash flow of a small business.  Few people like to ask for money, but there are some ways to speed up the collection process without being obnoxious.

First, consider offering terms, such as 1% or 2%, net 10.  Such terms allow the vendor to take a discount of one or two percent if they pay within 10 days of the invoice date.  Beware though, some vendors will take the discount AND pay slow, so this policy may require discretion. 

Second, get in the habit of sending statements or gentle email reminders on open invoices.  At 30 days passed invoicing, resend a copy of the invoice with a note that the invoice is still outstanding and ask if there are any questions.  This is good customer service, is a gentle way to let the customer know you are still waiting on payment, and puts your invoice back on the top of the stack.

Third, encourage your accounting or bookkeeping staff to develop a relationship with their vendor counterparts.  People naturally favor people they know and like.  If you’re on a first name basis with your customer’s accounts payable clerk, your bills are more likely to get paid before someone else’s, especially if there’s a cash crunch on the vendor side.  Sending periodic holiday greeting cards throughout the year is a low cost way to nurture long distance relationships and encourage familiarity.

Taking credit applications up front and checking references is a good way to avoid problems before they get started.  Plan to address credit requests quickly to mitigate customer complaints about the application process and be mindful not to tighten credit policies to the point they negatively effect sales.

If you want to take a more assertive approach to collections, consider having an attorney draft a form letter outlining your companies collection process and have it handy to be included with statements to the slowest paying customers.

The bank reconciliation is an unsung hero of the accounting world.  It can protect you from fraud, act as a monitoring tool for your accounting operation, keep you in compliance with state laws and bank policies and give you the most accurate picture of available cash.  A bank reconciliation is a powerful tool and should be prepared every month, as soon as the bank statement is available.  

A bank reconciliation is a great overall monitoring tool.  It provides the business owner with a recap of the total cash inflows and outflows for the month and the true cash balance considering any items that may be in transit.  Cash receipt journals and check registers, which are the basis for the bank reconciliation, detail all customer receipts and vendor payments.  With so many details in one concise presentation, a business owner can scan the transactions for anything out of the ordinary or potentially fraudulent. 

The traditional bank reconciliation is a double-sided calculation with one side representing (business) book activity and the other side representing bank activity.  The book calculation takes into consideration all monies in and out of the account during the month.  The bank side summarizes transactions that have cleared the bank.   The difference between the two is commonly referred to as “in transit” or “outstanding” items and includes activity that has been processed on the business side, but has not cleared the bank, or vice versa. 

Bank reconciliations also offer a means to comply with state laws and bank policies.  Some states, Arizona being one, require businesses to report unclaimed property (including checks) that remain outstanding after one to three years, depending on the type of property.  Furthermore, banks often require customers to notify them within 30 days after receiving the bank statement in order to be covered for fraudulent related losses and the bank reconciliation process is a good oversight tool.

Valuations are used for a variety of purposes and the purpose will affect the value.  The variable making the most difference is the use or lack of discounts.  For instance, in matters such as divorce and shareholder disputes, the most common valuation standard of value is “fair value” in which discounts are not applicable.  For matters relating to the IRS, such as estate or gift tax, the standard of value is “fair market value” and frequently involves discounts for lack of marketability and/or lack of control for a closely-held company.

At this point, it’s worth mentioning that fair market value for an estate and gift valuation is not the same thing as fair market value in a mergers and acquisitions transactions.  The former is based on theory and studies and the later is determined by what someone is willing to pay.

A client once asked me, why would I want the value of my business discounted?  In the case of an estate or gift valuation, discounts can significantly affect the value being taxes.  Accordingly, any discounts should be well documented and explained in the appraiser/valuator’s detailed valuation report.

If you’re consulting with a business appraiser before marketing your business for sale, there’s a very good chance the value estimate you receive will not equal what the business eventually sells for.  That’s because the appraiser is making their best estimate based on the data available to them to try and predict what any given buyer might pay.  A strategic buyer, for instance, might be willing to pay more than a private equity group.

Buyers come from many places including, but not limited to, strategic buyers in the same industry, investors such as private equity or venture capital groups, existing company management, employees and family.

Strategic buyers are often in the same industry and may actually be competitors of the business who are looking to grow by acquiring customers they haven’t been able to obtain through sales efforts.

Private equity and venture capital groups often specialize by buying businesses within a certain industry or at a certain stage of the business life cycle.

Some owners choose to sell their companies to existing management or employees through a leveraged buyout such as an Employee Stock Ownership Plan (ESOP).

We live in an international world and the percentage of overseas buyers is increasing.

• Depth of management
• Diversified revenue streams
• Systems and processes
• Strong relationships with customers

If you’re planning to sell your business, it’s best to try to work yourself out of a job and here are a few suggestions:

• Look at your client base.  More than likely, the 80 / 20 rule applies.  Twenty percent of your clients are producing eighty percent of the revenues.  Determine the demographics of your ideal client and develop a marketing plan to obtain more of those high value customers.  Conversely, twenty percent of your clients may be soaking up eighty percent of your time and efforts without contributing much to revenue.
• Document your processes so you can train a replacement.  Consider creating a mentorship program to involve some of your more capable employees in management decision making.
• Diversify your client base within your field.  If you supply specialty medical products, perhaps you can market the same or a similar product to the veterinary industry (without changing your core competency).  If you sell manufactured equipment, consider creating a used equipment or service department to diversify the revenue sources.

For businesses with revenue over several million dollars, the characteristics of the business will drive the best marketing source.  An advisory firm specializing in sales of businesses with $3 to $50 million in revenue will have the expertise to market your business to the best buyer whether it be to a private equity or venture capital group or a strategic partnership.

Larger businesses that may be considering going public may consider an investment banker and may have a department that specializing in mergers and acquisitions.

Certified Public Accountants (CPAs) are licensed by the state. State licensing requirements vary, but almost all states require a passing grade on the national exam and a combination of education and experience. CPAs are governed by standards established by professional associations such as the American Institute of Certified Public Accountants (AICPA) that are intended to create a consistent level of service to the public.  The AICPA offers its own professional credentials including Certified in Financial Forensics (CFF).

The National Association of Certified Valuation Analysts (NACVA) offers several credentials, among them are the Certified Valuation Analyst (CVA) and the Certified Mergers and Acquisitions Professional (CMAP). Credentials are awarded based on the results of an exam, education and experience.  All of the credentials mentioned here require continuing education as a part of renewal.