Sale and Succession
If you’re seriously considering the sale or transfer of ownership of your business, then now is the time to get your financials in order. Creating a plan now can ensure that your company will be positioned to make a profitable and successful transition when you’re ready.
Get started by looking at three key aspects of the transaction, their importance and how you can strengthen your company in each area.
1. Reducing risk and uncertainty
The Great Recession created huge, bad debts for most dealers. New buyers will want to be assured that the credit quality of the current customer base is strong. Otherwise, they may look to the bad debt historical data from the Great Recession as their expectation of how bad it could get in the next recession and discount their willingness to pay.
If you haven’t yet, now is the time to create a thorough credit assessment of your customer portfolio. Make sure your credit staff is using multiple business and consumer credit reports to evaluate customers’ credit quality and likelihood of default.
Your company’s cash flow will also be a priority for new leadership — the buyer needs to understand how much cash they’ll need to support operations after the sale. If your DSO is 45-plus days, then a potential buyer may need to tap their bank for operating capital — adding risk to the equation. Make improvements to your credit management and collections now, such as working to turn all customers into on-time payers.
2. Improving value
Like staging a home for sale, you want to put your business in the best possible light to maximize its financial value and attract the best buyers at the highest possible price. The value of your company includes such hard assets as property, inventory and buildings, along with the quality of your balance sheet.
Here are some financial red flags that can impact your company’s valuation:
Lagging customer payment trends;
Bad debt write-offs;
Varying and undocumented customer credit terms;
Inconsistent cash flow; and
Reliance on bank loans and lines of credit to fund operations.
One of the best ways you can improve the value of your company is by cleaning up your accounts receivable. Transparent, easy-to-understand financials provide clarity to your operation and make it easier for potential buyers to understand where the company’s valuation fits when looking at similar sales.
3. Providing continuity
Fostering continuity can be an elusive but important aspect of any ownership transition. After all, a new owner will want to maintain many of the relationships and processes that have led to your success. Consider putting processes in place now that create stability and foster continuity before, during and after an ownership transition, such as:
Maintaining consistency and professionalism in your credit and collections functions;
Providing clarity and transparency of your company’s financial health, and setting realistic expectations for future credit risk and credit flow; and
Assuring customers that established credit and collections functions and contacts will not change.
Transitioning ownership is a major undertaking, and you want to make sure it’s a success for everyone. Putting your financials in order now can help ensure that you’ll have a more profitable sale and easier change of ownership when the time is right.
Scott Simpson is president and CEO of BlueTarp Financial, which helps dealers grow and protect their business with professional credit management services.