The Business Sale: Top Financial Factors to Build Value

By Amy Luoma




The Business Sale: Top Financial Factors to Build Value

By: Amy Luoma

When you visit your accountant, do they dread your visit? Buyers are more interested in businesses with a history of reliable financial performance with stable, growing revenue and earnings. Disorganized record keeping is the biggest barrier when it comes to selling a business.

Focusing on the following top financial drivers of business value will make it easier to sell your business and get you more money—then as well as now. Assess your business to find which factors affect you the most, and prioritize what you want to improve.

Plant with coins in financial office

Keeping (in the) good books

An accurate set of books prepared with proper accounting software is essential. Documents need to be current and precise, demonstrating timely remittances and filings.

Compliance is imperative as issues with the Canadian Revenue Agency or others can freeze your accounts, and destroy your business. Continuity is also important. Are you dependent on a single employee who could leave?

Having your bookkeeping outsourced provides efficiencies that can benefit small businesses. You pay for work that’s being done, not standby hours. Organized and compliant books will strengthen your relation­ship with your accountant and help you save money there as well. A good bookkeeper will also ensure you understand your financials. They can provide forecasting, financial analysis, and help you find cash flow risks.

Maintaining good records and telling the appropriate people about any changes is a requirement. Owners often dispose of assets or sign a new lease, then forget to advise the person doing the books.

Financial Value Drivers

Clean Up the Balance Sheet: A balance sheet provides a snapshot of the business’s health. It can help find and remove obsolete and slow-moving inventory or excess cash. Make sure to resolve potential liabilities and lawsuits, ensure that assets are properly recorded, and that expensed R&D investments are recorded. The big reason businesses fail is not poor profit, but dry cash flow being kept in accounts receivable or inventory.

Increase Revenue and Profits: All else being equal, a better bottom line leads to a higher business valuation. Sell more to your current customers, and also start selling to new customers. What is your efficiency at turning sales into profit and controlling your expenses? Remember, it takes six times as much money to attract new customers to businesses than up-selling, on-selling and generally over-servicing current customers. You’ll want to keep your customers coming back, and bringing their friends.

Review and Reduce or Eliminate Discretionary Expenses: A $25,000 increase in your bottom line might add more than $100,000 to your selling price. Phone bills, office supplies and insurance expenditures are areas that should be reviewed by outside agencies annually. Be careful with insurances – your coverage needs to be sufficient and the right kind. A proper insurance policy with up-to-date coverage assures a buyer that what they are purchasing is protected.

Maintain Steady Revenue or Aim for Growth: Steady sustainable revenue is preferred over one that’s inconsistent.

The Greater the Market Share, the Better: Market share can be more important than revenue. A business with a 50% share in a defensible position is attractive to buyers.

Resolve and Diversify Customer Concentration: It is risky to have any one customer representing any more than 10% of your business.

Resolve and Diversify Supplier Concentration: Depending on a sole supplier is also a risk. Be sure to have alternatives.

Prepare Reasonable Future Business Projections: Set goals with detailed steps on how to meet them. Show the earning capacity of your business. Base your plan on existing records, the market, and technology. Document the steps that will take you there.

Get a Business Valuation: A valuation tells you where you are now versus where you want to be x years from now. A valuation also helps highlight changes that can improve the value of your business. To learn more about a valuation for your business, contact us.

Research Tax Implications Upon Selling the Business: This includes “vendor take back” and earn-outs. There are options to minimize the tax consequences when selling, some of which include share sale, family trusts and deferred payments.

The original version of this text was published in the book Insider Tips on Selling a Business in Canada. Visit one of our offices across Canada for your free print copyOr, you can download a pdf copy of the book.

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