These are all factors a business owner can typically control within a relatively short time frame, in as little as two to three years. That said, other key business elements such as industry and competition also impact the sale price, but business owners will need a much longer-term strategy in order to effect change in these areas.
Working capital is a measurement of operating liquidity, most of the time it is calculated as AR, inventory and prepaids minus AP and accruals. Lines of credit are most often excluded as well as cash, long term debt and notes payable. Because working capital is required to run a business, buyers typically require a certain amount of net working capital be left in the business to meet standard operating needs.
Working capital is not typically used in calculating the initial offer price, although it is certainly a critical point of negotiation. But basically, the higher your net working capital, the less money you put in your pocket after a sale.
When buying a company, one key factor in your success is the transition that happens immediately afterwards. You need time with the previous owner to understand how and why they operated the business the way they did. And you need their support to transition customer relationships.
As you think about negotiating for the seller’s time after a sale, think about their role in the business. Do they have a strong, empowered management team? Or did the seller operate the business from a place of tight, centralized control?
It’s about that time when I like to make some forecasts for the year ahead. I am happy to report that last year’s predictions were pretty much on target and the M&A marketplace continued to run strong throughout the year.
One thing I did not predict, however, was a Donald Trump presidency. We generally expect elections to create uncertainty, but the markets have responded in a positive manner. I believe the M&A marketplace will follow in kind with a productive and active year ahead.
Here’s what else I see coming.
By Scott Bushkie – CBI, M&A Advisor
Here’s hoping all your holiday gifts were well chosen and gratefully received. If you’re anything like me, you bought all your presents on Christmas Eve morning. There’s something about that final shopping day that puts me in the spirit.
Of course, that kind of last minute shopping might work for gifts, but not when it comes to buying a business. As you think about business growth, sit down with your team and figure out if acquisition could be the right strategy.
Here’s why several of our active buyers are searching the market right now.
No one likes to think about all the what-if scenarios in life. Most business owners have no plan for exiting their business at all, much less exiting in the face of conflict or tragedy. As you finalize your business goals for next year, make time to protect your business against the five dismal D’s.
Your business owner friend is boasting about how they got a 10 multiple on the sale of their company. Fact or fiction? For most companies, this would be fiction. (Or, to give your friend the benefit of the doubt, perhaps it’s a multiple of net income rather than the more standard EBITDA.)
After selling businesses now for 18 years, there’s still one stumbling block that takes me by surprise and hits hard, and that’s seller’s remorse.
On average, I see it every two or three years – a seller goes through the whole process and then ultimately can’t pull the trigger. The last time it happened was April of 2015.
I recently came across a Warren Buffet quote that struck me: “If past history was all there was to the game, the richest people would be librarians.” Don’t I wish that were true. My mom was a teacher for 30 years, and she knew a lot about history.
When it comes to buying a business, past performance is important. As a buyer, you’ll typically look at the last three years of financials, with a particular focus on the trailing twelve months. But you can’t get so tied up in historical numbers that you forget to ask the right questions about future performance.
Succession planning is a real buzzword right now. With the large number of Boomers set to retire, everyone is talking about how to help them make it happen. Unfortunately, many business owners are having these conversations far too late.
If business owners just did one thing, one thing that I believe would make their work more enjoyable and more profitable, it would be to set a succession plan from day one of starting or buying a company.