How Your Balance Sheet Affects Your Business Sales Price and Business Value in Merger and Acquisition Transactions

Or, In Business Planning such as: Business Mergers and Acquisitions, Business Valuations,  M&A Business Valuations, Exit Planning, Succession Strategies, Business Strategic Planning, Business Brokerage, for Companies Such As, Construction Contractors, General Contractors, Engineering Companies, Sub-contracting Companies, Distributors and Supply Houses, Service Firms, how your balance sheet will affect your ultimate business sales price.

 

We mainly focus on the income statement in order to determine earnings and company value.  But your balance sheet is an essential component of any transaction.  This article will briefly address how your balance sheet impacts your business market value in the sales process.

 

A strong balance sheet can keep you in business in tough times.  That can be true in business sales also.  After all, if you are running out of cash or have had a loan called – how strong is your negotiating position?

 

When selling any business the theory is that the buyer should get the assets necessary to produce the income that they are buying.  These assets may be trucks but they may also be cash and receivables (working capital).  Just like when you sell your house and pay off your mortgage (whether it is more or less than the sales price) debt will be paid off by the seller out of the sales proceeds or at least count as part of the sales price. 

 

General balance sheet tips – Have cash.  Manage accounts receivable.  Try to collect as rapidly as possible.  Put systems in place to collect.  This includes making sure your requisition package is complete, all insurance certificates are current and whatever else is required.  Keep inventory as low as possible.  Do you really have savings after handling, storage, loss, etc. from buying in bulk?  The squeaky wheel does get the grease.  Manage accounts payable.  You must pay but do your best to obtain extended terms when possible.  Keep bank debt to a minimum if possible.  I was once told and the saying has never failed me, “A banker is someone who gives you an umbrella and when it starts to rain asks for it back.”

 

Have lines of credit but do everything you can to not NEED to be in them.  Keep physical assets in good repair but do not overinvest in the 3-2 years before a sale.

 

If you have real estate owned by your company (review with your advisors then in 99% of the cases) get it into a stand-alone entity now.

 

In this time of low profits and high receivables many businesses – particularly many contractors are worth more dead than alive.  Namely many contractors have more due to them in accounts receivable than the value of their company.  A market buyer will not give them a price as high as the accounts receivable.   An uncomfortable place for any owner to be.

In summary, maintain a strong balance sheet with plenty of current assets and working capital in order to strengthen your negotiating position in a business sale and tide your company through any short term rough waters.