The Valuation Seesaw: Is your cashflow healthy?
Does your business fund its own overheads? Does your cash get absorbed immediately by costs? Is your cashflow healthy? If your cashflow is unbalanced, the value and sale of your business could be compromised.
When a prospective buyer is contemplating a takeover, their priority isn’t simply to reward your blood, sweat and tears with one big cheque; but to contemplate how to get a return on their investment.
The reality is therefore, that the buyer isn’t just assessing all your businesses profits and revenue; they are reviewing the inherent liabilities too. The more cash you need to operate, the less people will want to buy your business. This means your buyer won’t be handing over just one cheque, metaphorically speaking they write a second covering the operating costs!
Imagine that these two cheques are balanced on the opposite ends of a seesaw. Their monetary values are converted to weight. If a buyer only has limited funds, for every bit of capital required to fund the operation of the business after sale, money must come off the first cheque, which is the offer price you are paid.
Can you become more attractive to a buyer?
Of course! Take simple steps to ensure your business can take to ensure its expenditures are covered and your cashflow is healthy. This could be easier than you anticipate. Are you too kind to your debtors? Are you too soon to settle your debts with creditors? You may even be tied into penalties or, liquidated damages, where contracts are involved. By simply extending the payment terms of your payables, ensuring that you collect receivables more quickly and minimising contractual commitments, you will have a healthier cashflow.
But its not just how you manage your payables, receivables and commitments. Do you manage your stock efficiently? If you’re holding a huge amount of inventory before an order has been placed, then there’s a problem. The same is true if your stock ageing profile means that you are carrying significant levels of slow or obsolete items, or your suppliers are struggling to meet delivery lead times.
Make to order, if possible within your business model, and likewise, learn savvy production methods. Look at applying the Kraljic Matrix, mapping stock into two key dimensions: risk and profitability. Apply regular stock audits, to avoid the rocketing variable prices of holding stock and to keep things running efficiently.
Buyers are attracted to a business with less capital infusion required. Most importantly, you must demonstrate that your business funds its own overheads with good practice when it comes to inventory levels, margins and billings, property/rent, insurance, and utilities; all of which require a capital outlay.
As always, to grow your business and achieve maximum value before you sell, think like a buyer. Find out where your business sits on the Valuation Seesaw and please contact us today in the strictest of confidence. Call 01606 535020.