Why Do You Run a Business?

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by Michael Iverson

I recently met with a long-time entrepreneur who expressed growing frustration with the state of his business. He complained that his work hours are longer than ever, yet his profits are shrinking. So, I asked him: “Why do you do it? Why do you run a small business?”


The question seemed to surprise him. Despite his dissatisfaction with the recent financial performance of his business, it was obvious that he had not given much thought to the alternatives. As he answered, it became clear that running a business is more than just his work. Being a business owner is part of his self-identity.


I have had this conversation with several clients over the years. Each one has the skills, talent and determination to succeed in another line of work. I ask them to spend a few minutes thinking about why they started their businesses and to write down their reasons. The lists often include:

  • Earn a decent living.
  • Be my own boss.
  • Feel a sense of accomplishment.
  • Provide jobs for family members and/or friends.
  • Be an active part of the local community.


When my client created his list, I asked how many of those reasons remain valid today. The discussion that followed revealed the owner is not happy about what he earns, his frustrations have overtaken his sense of accomplishment and the family members and friends have retired or moved on to something else. In other words, many of the reasons are no longer valid.

Evaluate the risks and rewards

For this particular client, the rewards of ownership no longer outweigh the risks. Several of his key employees earn a better living than he does, yet the risk of personally guaranteeing sizeable business loans is all his. I am sure many other business owners find themselves in the same position.

The greatest risk of all, one that many business owners willingly take, is putting all of their eggs in one basket. An entrepreneur often puts all his financial resources, as well as all his time, into the business. Should the business fail, there could be severe financial impact.

Weigh the alternatives

Once a business owner is able to view the situation objectively, he may ask himself: “Why am I working 80 hours per week, putting all of my eggs in one basket and earning just 10 percent on my investment? I could get a well-paying 40 hour-per-week job, invest part of it in the stock market, and live better by working fewer hours and having far less stress.”


But, it’s clear there is a tradeoff. If running a business is something that really gives you pleasure, if you have fun doing it and you are earning a decent living, you may not want to give it up. You may be willing to sacrifice some elements of your personal and financial lives to continue doing what you really enjoy. Getting up and going to work is not “work” but rather fun and I happen to be making money at it too!


One way to figure out if you are at the point of change is to enlist the help of an advisory board–a group of individuals from different business backgrounds who have experience running and supporting a business. Look for our upcoming article about the ins and outs of an advisory board.

Could Your Business Benefit from an Advisory Board?

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by Michael Iverson

Self-reliance is a characteristic of most successful small business owners. When an important business objective needs to be accomplished, an owner often takes a hands-on approach. In my experience, the owner’s personal involvement usually assures that the objective is met.

There is a possible downside to self-reliance, however; an excess of self-reliance can stunt business growth. It’s possible for an owner to give too much weight to his own ideas, when listening to the ideas of others would yield better results. To guard against this possibility, many business owners establish advisory boards.

What Is an Advisory Board?

An advisory board is a group of peers that a business owner consults periodically and informally. Members of the advisory board provide perspectives and experience that help fill gaps in the business owner’s knowledge base. In other words, a humble business owner realizes that he doesn’t have all of the answers. Advisors usually make their most significant contributions by helping to shape strategic direction for the business, although some are capable of suggesting operational improvements.

Members of the advisory board are invited to serve because they are respected and trusted by the business owner. The business owner has a personal relationship with each member of the advisory board, so everyone has an interest in seeing the business succeed. Advisory board members serve on a voluntary basis; they have no fiduciary responsibilities to the business. They must not be afraid to offer honest opinions, because opinions and ideas are their principal contributions to the organization’s success.

Getting Started

Many business owners see how useful it would be to have an advisory board, but there’s an obstacle to putting such a board in place. The owners are so involved in the details of day-to-day business that they haven’t cultivated many professional relationships. Don’t let that become your excuse for not establishing an advisory board.

Good candidates can be found through a local business organization (Rotary Club, for example). Or, an owner can identify and approach retired executives with knowledge of the industry. Current business contacts are another source of excellent candidates. A supplier or vendor certainly has knowledge of your operations and an interest in your business success.

Recruit advisors whose skills and knowledge bases complement your own. Think about the biggest challenges you face in building your business and add advisors whose strengths speak to these challenges. No matter what business challenges you face, others have successfully addressed many of the same issues. Your task is to find them.

An advisory board should be a small, manageable group. Typically, the right size is three to six advisors. Knowledge of your industry is helpful, but it shouldn’t be a pre-requisite. At least one or two advisors should be from other industries. They will lend fresh perspectives. A good mix of advisors includes people from varied disciplines: sales, marketing, engineering, finance, human resources and legal, for example.

Compensating advisory board members is discretionary, but most business owners feel strongly that advisors should be compensated to reflect their contributions to an organization’s success. There are many ways to show your appreciation for a person’s valuable input. Gifts, dinners and cash bonuses are a few ways to express that appreciation.

If you would like to discuss how your business can establish an advisory board,contact us.  We’re glad to share our ideas!

Cash Flow Statement: The Best Starting Point for Business Planning

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by Michael Iverson

Check out this sample Cash flow statement for Acme Company

It’s my observation that most business owners review their financial statements in the following order:

  1. Income Statement
  2. Balance Sheet
  3. Statement of Cash Flow

Why is that so? Perhaps the most likely reason is that business owners borrow money. The lenders from whom they borrow focus on Income Statements and Balance Sheets, so those reports naturally become important to business owners.

However, when it comes to business planning and improving business results, I encourage clients to first look at the Statement of Cash Flow. As I’ve stated in previous articles, cash flow is often the most challenging metric for a small business to master. Balancing growth against the availability of cash is one of the most critical issues for a small business. Getting it wrong can put the business in peril.

Components of the Report

Unlike the Income Statement and the Balance Sheet, the Statement of Cash Flow is not based on accrual accounting. Rather, the report shows how a company generates cash and how its cash is spent. The concept of accrual accounting is matching the expense to the period when the obligation occurs or revenue to the period when it is earned. The cash flow statement is only concerned when a bill is paid or revenue is received.

The report has three component parts:  Cash Flow from Operating Activities; Cash Flow from Investing Activities; and Cash Flow from Financing Activities.

  1. Cash Flow from Operating Activities includes cash receipts from customers less amounts paid to suppliers and employees. The company in the example is generating healthy cash flow from its core operations.
  2. Cash Flow from Investing Activities shows a net cash outflow due to equipment purchases, which could be expected for a growing company.
  3. Cash Flow from Financing Activities is a large net cash inflow due to capital contributions and proceeds from a sizeable loan.

Check out this example for the ACME Company:  Cash flow statement

Improving Business Results
In the space of one year, the ACME Company in the example cash flow statement markedly improved its cash position. The beginning cash balance of $22,000 increased to $176,000 by year’s end.

During the same time span, the company invested in new equipment and replacement equipment. The new equipment might have been necessary for a new product line. The replacement equipment ensures against any unplanned disruption of existing production capacity. It appears that the company has prepared for continued growth over the next few years. With healthy cash flow from its core operations, the company is poised for growth opportunities.
Of course, there are risks involved with any new initiative or product introduction. Perhaps the new product line won’t do well which could put pressure on repaying the loan. To help mitigate those risks, setting aside cash as a reserve affords some breathing room if new initiatives don’t work out.

What is your Statement of Cash Flow telling you about your business? Have you achieved a cash position that provides a reasonable cushion for unforeseen events? If an incredible growth opportunity presented itself today, would you be able to act decisively?

If you would like to discuss how your business is positioned, contact us.  We’re glad to help you create and interpret your Cash Flow Statement.

How Weak Cash Flow Affects Your Business

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by Michael Iverson

In a recent article, I discussed a company that had greatly improved its cash position in a year’s time. To complete the discussion, it’s important to consider reasons why a company’s cash position might deteriorate from one year end to the next

Take a look at the following Statement of Cash Flow:

Statement of Cash Flow for ABC Company for the year ended December 31, 2013

Cash Flow from Operating Activities   

Cash receipts from customers                     568,000

Cash paid to suppliers and employees       (622,200)

Cash generated from operations                  (54,200)

Interest received                                                    500

Interest paid                                                       (1,200)

Taxes paid                                                         (2,900)

Net Cash Flow from Operating Activities         (57,800)

Cash Flow from Investing Activities

Equipment additions                                           (10,500)

Replaced equipment                                           (24,200)

Proceeds from sale of equipment                           1,900

>Net Cash Flow from Investing Activities             (32,800)

Cash Flow from Financing Activities

Proceeds from capital contributions                   12,100

Repayment of loan                                             (19,300)

Net Cash Flow from Financing Activities             ( 7,200)

Net Increase/Decrease in Cash                 (97,800)

Cash at January 1, 2012                               122,600               

Cash at December 31, 2012                           24,800

In the statement above, the Cash Flow from Operating Activities is a negative number. As you can see, cash receipts from product sales are exceeded by the cash paid to company employees and suppliers. That’s not a good sign.

The objective of any business is to generate cash sufficient to cover all expenses and pay owners/investors a reasonable return. In this instance, the product sales for the business didn’t quite meet the costs associated with manufacturing and selling the product. Unfortunately, there were no returns on investment for the owners and investors.

Rapid Depletion of Cash

Looking at the cash balances at the beginning and ending of the year ($122,600 to start the year vs. $24,800 at year’s end), the healthy cash balance at the start of the year was seriously depleted by year’s end. The situation is serious enough to threaten the viability of the business.

The problem is the company’s negative Cash Flow from Operating Activities. By reviewing the year’s budget, we could determine the extent to which actual Sales for the year fell short of budgeted Sales. If actual Sales fell short of budgeted Sales, we would further examine the reason(s) why.

The other possibility is that the Sales was fine, but collections for products sold fell far short of expectations. In other words, product sold and delivered was not paid within the payment terms provided to customers.

Cash Flow from Investing Activities shows that equipment purchases totaled $34,700, increasing the negative cash flow. Since equipment purchases could include both replacement equipment and new additions for product expansion, these investments can put a further strain on the business.

Capital Contributions Required

The owners contributed $12,100 in capital during the year, however, loan repayments used $19,300 of cash. Are there more loan repayments due in 2014 and beyond? If so, then the owners will likely be required to contribute in 2014, assuming the cash flow from operating activities continues to be negative.

Borrowing money from a bank will be difficult given the company’s poor cash flow.

Keep a close eye on your Cash Flow from Operating Activities and understand the drivers of this number. This knowledge can be the difference between staying in business and going out of business.

If you would like to discuss how your business is positioned, contact us.  We’re glad to help you create and interpret your Cash Flow Statement.

Capital Financing: Back to Banking Basics

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by Anne Moore Odell

In these challenging economic times, it can be difficult for businesses to know where to turn for capital financing opportunities.   The answer might be right around the corner at your local community bank.

”It is going to be the small businesses that drive the economy and new jobs, not the government,” says Mike Iverson, CPA and principal of Trillium Financial. “People need to talk to their bankers now.   Your bank needs to get an understanding of your current situation.  Don’t wait until 30 days before your line of credit comes due.”

“Banks are not charitable organizations, but are in business to make money,” says Phyllis Murdock, Senior Vice President of Private Entrepreneurial Banking at the Buckhead Community Bank.   The bank serves businesses around metro Atlanta. She elaborates, “We will consider the traditional five C’s of Credit:

  1. Capacity to repay
  2. Capital invested in the business
  3. The Collateral or ‘guarantees’ that provide supplemental forms of repayment
  4. The Conditions surrounding the loan
  5. Character of the borrower.”

To get capital funding from banks, businesses must demonstrate their ability to repay loans.  Banks look carefully at cash flow from the business and the timing of the repayment.   Says Murdock, “We’ll take a look at past credit relationships, both individual and commercial, and payment history if this is a renewing line. There may be contingent forms of repayment—these will come into play as well.”

In response to downward economic trends, banks are looking at all lines of credit and requests for capital with greater scrutiny, including close examination of another of the five “C”s of credit:  Collateral.  Equipment, buildings, accounts receivable and in some cases inventory may all be sold by the bank for cash.  If accounts receivables are to be used, banks might request an “aging receivables” report and monitor the accounts receivables during the life of the line of credit.  Both business and personal assets of owners are considered.

Murdock explains, “The money that the applicant has personally invested in the business becomes an indication of how much the principals have at risk should the business fail.  This is the capital injection and we believe that the borrower who has significant personal investment in the business is more likely to do everything in his power to make the business successful.”

“It is very important to talk to your bank regularly and them updated on any significant changes to your business — good or bad,” says Iverson.  Murdock adds, “Local banks understand the economic climate of the community that they serve and have a willingness to invest in that community. Frequently bankers are invested in the community and have a true understanding of what is occurring in the town.”

Current conditions have made banks very cautious, lending only to clients with whom they have had previous relationships. Stay in touch with your banker and other financing partners.  It can make the difference in getting your loan renewed.

Need help getting your financials in order to approach your bank?  Contact Trillium today!

Understanding Fixed and Variable Costs and Your Break-Even Point

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by Michael Iverson

Running a business is difficult enough when you have a good grasp of your cost structure. If you don’t understand the relationship between your fixed and variable costs, achieving financial success in your business will be challenging. Let’s take a closer look at these costs and what they mean for your business.


A fixed cost, simply stated, is a cost that is incurred whether you generate $1 of revenue or not. For example, building rent is typically a fixed cost. A landlord charges a flat fee per month for use of a property. The rent amount will be the same whether a company sells $1 million worth of goods and services or nothing at all. Other examples of fixed costs include insurance, equipment leases, and non-hourly administrative salaries.


A variable cost is incurred as a function of generating revenue. If you do not sell no product or service, you don’t incur this costs. You begin to incur variable costs as you generate revenue. Variable costs include direct hourly labor related to the provision of a service or the manufacture of a product. It can also include sales commissions paid, the cost of raw materials, distribution costs, and utilities expenses related to manufacturing activity.


Metrics You Should Know


Average fixed costs—Identify and quantify the fixed costs associated with running your business, and calculate the average fixed costs for a month. Monthly averages typically work well because some businesses have a degree of seasonality to them. In the example below, Acme Company had average monthly fixed costs of $241,891 for the year 2013.

Average variable cost as a percentage of sales—Simply divide average variable costs for the period by sales for the period to calculate this percentage. If Acme Company had average monthly variable costs of $341,985 and average monthly sales of $856,803, its average variable cost as a percentage of sales is 39.9%.

Break-even point—The sales level at which Revenue equals Total Costs is known as the break-even point. As the term “break-even” implies, Profit is zero after you subtract all of your variable and fixed costs. It can be expressed as the equation:
Revenue – (Total Variable Costs + Total Fixed Costs) = Profit


It’s important to know your breakeven point so you understand at a minimum how much in sales volume you need to generate just to begin to make a profit. Let’s apply the principle to our Acme Company example: 

Avg. monthly sales $856,803 x 12 mo.= $10,281,636 Annual Revenue

Total Variable Costs = $2,902,696

Total Fixed Costs = $4,103,820.
$10,281,636 – (4,103,820 + 2,902,696) = $3,275,120


In this example, Acme Company earned a healthy profit of $3,275,120 for the year 2013. To determine the break-even point, we want to find the sales level where profit equals zero. By definition, fixed costs are static no matter the level of sales. We know the variable costs as a percentage of sales are 39.9%, or .399 for purposes of our equation. We solve for the unknown figure, Sales: 

Variable expenses / (1-.399)= sales required for breakeven $2,902,696 / (1-.399) = $4,829,777


The break-even point is $4,829,777 of sales revenue. Acme Company must generate this level of sales before it can start generating profits for the year.


Managers find it helpful to know the break-even point for purposes of business planning. The break-even point is a basic, but important, business metric. Once a manager becomes familiar with this relationship, he or she gains an understanding of how much the business can expand before adding more capacity—which means adding higher level of Fixed Costs.

If you would like help in finding your business’s break-even point, contact us.  We’re here to help!

What Does Break-Even Look Like?

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by Michael Iverson

In a recent article, I discussed the importance of knowing the fixed and variable costs of your business, as well as the break-even point. I’d like to revisit the topic using an illustration that I think you will find helpful. As the saying goes, “a picture’s worth a thousand words.”

Let’s review the particulars of the business mentioned in the previous article. For the year 2012, Acme Company had fixed costs of $2.9 million. The sales price of a unit of product was $112 and the variable costs were $44.70 per unit.

This Sales Table presents sales in 6,000-unit increments. The top line of the table shows no sales and fixed costs of $2.9 million, resulting in a loss of $2.9 million. Toward the middle of the table is 42,000 units sold, with a small loss of $96,000. The break-even point is $4.8 million of sales revenue, or 43,430 units at $112 sales price.

Actual sales for the year were 91,800 units with revenue of $10.2 million. As the table reveals, 90,000 units sold produces a profit of $3.1 million. However, Acme Company did even better.

Now, let’s look at the accompanying Break Even Analysis chart.

Dollar amounts on the vertical axis correspond to unit sales levels on the horizontal axis. The green line represents Fixed Costs of $2.9 million, which do not change with increases in unit sales. The red line represents Sales Revenues, which increase as unit sales increase—to the right along the horizontal axis. The blue line represents Total Costs.

The intersection of the red and blue lines is the break-even point. The area between the red and blue lines to the left of break-even represents losses; the area between the red and blue lines to the right of break-even represents profits. Acme Company generated sales in 2012 that put it well into the profit zone.

Between the table and the chart, you get a good sense of the dynamics between fixed costs, variable costs, and break-even. Understanding your monthly and annual break-even point is an important planning tool. It provides your team with a reference point of knowing when you are operating at a profit or a loss.

If you would like help in understanding your business’s break-even point, contact us.  We’re here to help!

Know the Real Flow of Money Through Your Business During a Year

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by Collette Parker

Did you know that almost half of businesses have their best-ever year right before they file for bankruptcy? They grow right out of business, and usually it’s not because of lack of sales – it’s poor management of cash.

“They may have had their best year on paper, but when you look at cash flow and working capital it’s going south real fast,” says Mike Iverson, CPA, and CEO of Trillium Financial.

The old adage is true: you can’t manage what you don’t measure. And even if sales are good, if you have vendors and employees asking for money – but customers who don’t have to pay for another 45 days – it’s a perfect storm for a cash crisis.

“Take the time to do a financial business plan every year,” Iverson says. Not 30 pages, but a simple two-pager with a financial forecast and a budget for 12 months. “That will give small businesses a leg up from those businesses who don’t write this out.”

Visuals help. It’s not enough to just go through a plan in your head. The process of examining your business closely enough to work out a model and a 12-month plan helps you to understand the flow of your business, including issues of seasonality. If you plan cash flow properly you can figure out how much money you can have in hand when you go into manufacturing season, and how much you’ll make in selling season.

“You can’t just set a $12 million goal, and divide the revenue figures by 12 for the year,” says Iverson.

12-Month Trailing Budget

One financial management tool that is useful in managing cash is a 12-month trailing budget versus actual. Once January closes, look at the last 12 months (including January) and chart the revenue. Then look at December and the 12 months prior. Are the numbers higher or lower? Look at the graph. Is it flattening out? Going down?

“Graphing a trailing 12-month is a simple visual tool,” says Iverson, “and can be used for both sales and expenses. If your management team sees a graph instead of a bunch of numbers, they can understand the concept. Hopefully you’re spotting a positive trend. Either way, you can understand what your cash trends are, and then have a budget that is detailed enough to plan.”

Three Key Elements of Budgeting

When planning the budget for healthy cash flow, be mindful of how much is invested in your working capital, and keep track of three key areas:

  1. Accounts Receivables – Unless you are a cash business, chances are you extend credit to your customers. If your terms are 30 days, your customers should pay you within 30 days, not longer. If you begin to see a trend where customers are waiting 45–60 days to pay, you will probably begin to see cash flow problems. Don’t be a free bank for your customers. Look at ways to reduce the time it takes customers to pay you: ask for advances from customers, or a down payment, installment, or some level of prepaid portion of the sale. If you’re in the situation where you really need the cash now, you can work with a factoring firm for receivables, or the bank for a loan.
  2. Accounts Payable – Have favorable credit terms and solid partnerships with your vendors. In this area, you want to hold on to your money as long as you can. But, if vendors offer early payment discounts and you can afford to take it, go ahead. Sometimes, even if you have to borrow the money to pay early, it might make sense to do so. If you can borrow money at eight percent and take a two percent discount for 10 days early (2% 10 net 30), you are effectively earning 36 percent over a year. (If you do that, make sure the borrowing doesn’t put you at risk for running out of cash and not being able to pay your other bills.)
  3. Inventory – Manage your inventory so that it doesn’t sit in a warehouse for too long. Once you’ve paid for the inventory, it should be sold and generate profit for you. Adjust your inventory for the seasonality of your industry so you’re never caught with too much.

An example of good management of these three factors would be to extend 30-day terms to customers, purchase inventory and turn it around in 15 days; and pay vendors in 30 days.

If you would like to discuss more creative ways to manage cash flow, contact us.  We’re glad to share our ideas!

Identifying a Likely Buyer of Your Business

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by Michael Iverson

One of the most overlooked aspects of selling a business is identifying the right buyer. Some owners never give it much thought, but they should. Finding the right buyer is absolutely fundamental to an exit strategy.

No matter what your objectives are in selling (getting the best price, ensuring a smooth transition for employees, making sure your customers are well-served, etc.), they are most likely to be met when you identify a buyer early.

When you think about selling your business, try to imagine to whom you will sell. Allow me to suggest a few ways to sell a business to your most likely prospective buyers:

  1. Sell to one or more managers of the business.
    An inside sale can be one of the most satisfying ways to sell a business. The business owner knows the character and business strengths of his or her buyer. The buyer has a good understanding of the seller, knows the strengths of the existing operation and the collective work ethic of the employees.
  2. Sell to your employees.
    When a business has many long-time employees who believe in the business and its prospects, selling to employees as a group is a good option. An Employee Stock Option Plan (ESOP) can be established as a vehicle to transfer ownership of the business to the employees. This option may take a little longer to put into motion, but it’s achievable for many businesses.
  3. Transfer ownership to a family member.
    Some entrepreneurs hope that a child or other family member has an interest in taking over the business. Of course, having an interest is just the first step. Any family member that might take over the business also needs talent, a strong work ethic, sound judgment, and an understanding of the business and its employees. If a family member has been involved in the business for a number of years, this option is a strong possibility. The family needs to determine a financing vehicle that lets the owner “cash out” without disrupting normal business operations.
  4. Sell to a competitor, business partner or vendor.
    A competitor, business partner or vendor usually has a strong knowledge of your business and its market. A competitor that is very familiar with your business may understand the immediate, positive impact a purchase would have on his or her existing business, and therefore might be an eager buyer. A competitor buying your business gains new revenue, has an opportunity to consolidate staff, and, could be in a position to raise prices.

    5. When a business partner or vendor is made aware of your desire to sell, don’t be surprised if the initial response is cautious. If the purchase has a synergistic effect with the vendor’s existing business, you might have a potential buyer. However, the benefits aren’t as immediately recognizable as they are to a direct competitor, so a longer lead time may be required.

  5. Sell to an unidentified buyer through a business broker/investment banker.
    It’s also possible to sell a business to a private equity buyer. This can be accomplished by hiring a business broker or investment banker who advertises your business for sale and contacts appropriate buyers. Unlike the potential buyers mentioned earlier, this buyer may have less knowledge about your business or industry. A private equity fund is usually interested in the business as a new stream of cash flow and sees opportunity to enhance the value of the business down the road with the intent to sell it.

    6. Entrepreneurs who haven’t planned their exit strategies could find themselves on this path. A private equity buyer generally has the financing lined up so a quick transaction is possible. The business broker / investment banker can help guide the seller through the transaction process, which at times can be very emotional.

In an upcoming article, I’ll discuss the differences between strategic buyers and financial buyers, and the price each is willing to pay for your business.

To discuss the future sale of your business, how to time your exit and maximize your sales price, let us know and we can get the right resources in place for you.

Will You Sell to a Strategic Buyer or a Financial Buyer?

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by Michael Iverson

 

In the recent article Identifying a Likely Buyer of Your Business, I suggested a number of parties that might be interested in purchasing your business. To review, possible buyers include:

  1. Your management team
  2. Employees of your business
  3. A Family Member
  4. A Competitor, Business Partner or Vendor
  5. An Unknown Investor or Investment Group

These potential buyers can be classified as either Strategic or Financial.

A strategic buyer has knowledge of both your industry and your company. This kind of buyer has a compelling business interest in a possible acquisition of your company. The business interest might be as simple as buying out a prime competitor to achieve dominance of a local market. Or, perhaps a buyout is pursued with the intention of significantly expanding the business.

Typically, strategic buyers are willing to pay more for your business than financial buyers. A strategic buyer is familiar with your business or industry and optimistic about the prospects of your business enhancing his or her existing business. A strategic buyer isn’t afraid to pay full value for your business, because he or she expects to experience significant benefits when the two businesses are combined.

In contrast, financial buyers often have little or no knowledge of your industry or your company. This type of buyer is interested in acquiring your business’ cash flow, and motivated to buy at a discount – as a sort of hedge against his or her lack of familiarity with your business. Some financial buyers aspire to cut expenses of your business to boost profitability and flip the business in a short period of time for a profit.

Given a choice between selling to a strategic or a financial buyer, most business owners would rather sell to a strategic buyer. The price is usually closer to what the owner perceives as full value. In addition, the impact on employees is usually less.
If you have an exit plan in place, you increase your likelihood of selling to a strategic buyer, including identification of likely buyers. If you don’t plan your exit, you might end up selling to a financial buyer for lack of better options.

How Price Is Determined

Businesses for sale are usually valued at some multiple of operating earnings. Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is a variation of operating earnings that many investors use to compare profitability between companies and across industries. It strips away the effects of financing and accounting choices to focus on true operating profits.

Depending on the buyer, an offer for your business may be based on current year’s EBITDA or average EBITDA for the past three years. Typically, some multiple of EBITDA is offered; the multiple varies by industry. For example, 1.5 times EBITDA could be the offer for a business in a steady but low-growth industry, while 6 times EBITDA might be offered for a business in a high-growth industry. Any offer’s value also depends on whether you’re selling to a strategic or a financial buyer.

To learn more about the type of multiple your business might command, or to talk about developing a plan for its sale, contact me at Trillium Financial.

Selling Your Business: What Can You Expect From a Due Diligence Review?

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by Michael Iverson

Selling a business can be an exhilarating experience. Meeting with potential buyers, presenting the business in the best light possible, fielding inquiries, receiving preliminary bids and conducting early-stage negotiations is all part of the process. It’s pretty exciting compared to a typical day at the office.

At a certain point in the process, however, the excitement of an impending sale gives way to something much more serious. The would-be buyer’s offer is usually contingent upon completion of a due diligence review. The buyer gets a chance to conduct a very thorough examination of the business. If the review uncovers unpleasant surprises, it may be possible for the buyer to walk away from the deal.

No Stone Unturned

The buyer may well be making the biggest financial commitment of his or her life, so he or she wants to be sure about the purchase. Confirmation usually comes from outside professionals who advise the buyer through the due diligence period. At the very least, expect visits to your business by an accountant and an attorney representing the buyer. These experts will advise the buyer about whether he or she is making a wise purchase decision. Make sure everyone handling your data has signed a Non-Disclosure Agreement, then provide them the information they request.

Information requests from the buyer’s accountant are likely to include, but not limited to:

  • Financial statements for recent years and related audit reports
  • Tax filings for recent years
  • Financial projections, capital budgets and strategic plans
  • The business’ general ledger and schedules of Accounts Payable and Accounts Receivable
  • Schedule of inventory
  • A schedule of capital equipment, its location(s) and copies of purchase contracts or leases
  • A schedule of depreciation/amortization calculations related to equipment
  • A list of real estate owned or leased, plus copies of mortgages, deeds or leases
  • Analysis of fixed and variable expenses
  • Details of debt covenants and credit lines

The buyer’s attorney will likely want to review the following documents:

  • The company’s Articles of Incorporation, Bylaws and Minutes of the Executive Board
  • The company’s organizational chart
  • The company’s list of shareholders
  • Certificate of Incorporation
  • A schedule of any intellectual property of the company, including trademarks, trade secrets, patents, licenses, agreements with personnel and consultants providing technical know-how.
  • A list of litigation settled or pending; regulatory proceedings against the company; environmental actions pending.
  • Insurance coverages protecting the company and Executive Board from general liability, personal liability, product liability, errors and omissions, workers’ compensation, etc.

In addition, the buyer will want to see information about your product or service lines, customers, key suppliers, major competitors, and marketing programs of the company.

As you can see, the process will test your record-keeping and organizational skills. I often stress the importance of developing a business infrastructure. This is the occasion when all of the time and effort pays off for having a well organized and documented financial, operational, sales, and administrative processes.

Managing the Process

The buyer and his or her advisers have every right to gather the information they need to evaluate the business. You have every right to make sure their work doesn’t become disruptive to your business, your employees’ work and your clients.
Manage the process by setting a few guidelines for retrieval of information. The buyer’s requests should be made directly to you, or your designee. If the provision of information cannot be immediate; encourage the buyer to request things in advance.

The due diligence process can be very intense and emotional. Have key advisors to surround yourself so that you can keep your eye on moving the business forward. Understanding what to expect can save you a lot of time and emotional energy.