Financial Management for Business Exit Strategies

​This video was produced as part of the Washington State University MAP Alliance program on Strategic Planning for Your Business Exit. It covers the role of financial management in creating a successful exit.

Video Narrative – Amended for Readers

Hi, I am Steve Rosvold with CFO.University. Thanks to John Anderson, Patrick Locke and Nolan Yaws-Gonzalez for inviting me to be part of this Washington State University MAP Alliance program on strategic planning for your exit. My role in this session is to talk about financial management.

Patrick explained why your exit mindset is so important and your focus needs to be working “on” the business not “in” the business.

John focused on getting the operations humming before talking to buyers.

The third leg of the exit planning stool is financial management. One thing to keep in mind, think like a CFO for this phase.

I’ve broken this brief lesson into four sections; reporting, foresight/analysis, resource optimization and strategic issues. These are all related to financial management.

First, let’s talk about reporting. Reporting includes your financial reports, tax reports and other compliance reports that have to be filed with somebody. You may not have a CPA doing your financial reports, but I highly recommend you do before diving too deep into your exit planning. The financial reports are really important. They can create or destroy your credibility with potential buyers. The financial statements include the income statement, the balance sheet and the cash flow statement. They must be current, timely and void of significant errors to be value accreting to a potential buyer.

One of the quickest ways to lose credibility and deplete value with potential buyers is to give them poorly prepared financial statements. These will either scare the buyer away or significantly reduce the price a buyer is willing to pay.

The reporting piece is a financial history of your business that buyers rely when conducting their due diligence.

Second, is providing foresight and analysis. This is giving a buyer the chance to really envision the future through your eyes. This is a value creation activity intended to provide them with more ways grow the business. For example, how you are growing your customer base, new product potential or other activities you have in mind to make the business better. Frequently, this foresight piece is supported through financial projections, similar in format to your historical reports, just looking into the future. If you prepare budgets, buyers will be interested in them. It’s likely they will ask for past actual to budget variances as a measure of how variable your earnings are or how well management is at driving future results.

Also, how you have made decisions to invest in the business will be important to the buyer. This may help them in various ways. As an idea generator for follow investments in the business. As a means to determine if the business is under or over capitalized based on their business model. As a way for the buyer to assess the ongoing capital needs of sustaining the business.

You can create value by sharing your planning process and the future of your company with your buyer.

One caveat on point two. Sharing this information is an exercise in risk management. Only share this information when you are comfortable it won’t be used against you if the deal falls through. Non-disclosure agreements, non-refundable deposits and knowing the buyer are potential mitigation measures to the reduce this risk.

Third, is resource optimization. What assets do you have to sell and how are they being utilized. There may be assets not recorded on the balance sheet that generate revenue or create expenses. For example, your customer list, management team, proprietary processes or systems may not be recorded on the balance sheet but may be large contributors to your success.

This lesson is focused on the income statement, cash flows and the resources that used to generate income and cash flows.

So, think about how you are using resources. If it’s people, if it’s physical assets, like a plant or a warehouse, or if it’s some kind of intellectual property, those are the resources you are using to generate cash. To sell your business you must find a buyer willing pay for the cash flows that come from those assets. Or, minimally, they must have a vision for how they can create cash flows from those resources.

This is why this area is so important. If you aren’t able to identify the resources that create your cash flow your buyer won’t be willing to pay for the all the resources you have to offer.

The fourth area I want to cove is strategic financial management. This has a number of aspects to it. One aspect is people, both internal and external. Make sure you have the right people on the bus to make your business stay on route. For the financial aspects this includes solid bookkeeping, preparation of accurate and timely reports, financial help in the planning process and developing proper metrics to guide you. An example of metrics include; return on assets, gross margin %, or, in SAAS businesses, cost of customer acquisition, customer churn and lifetime customer value.

The second aspect of strategy is resource allocation and is closely related to resource optimization. This has to do with how you are acquiring assets and what type of assets are you acquiring. Are they on the balance sheet, are they talent, are they intellectual property or some other type of asset? This is an important step to take to ensure you don’t miss the opportunity to sell your buyer something you have to sell. With a growing % of corporate value made up of “assets” not recorded on the balance sheet this is an area owners and CFOs should really dig into. Once identified the challenge becomes explaining how these other assets generate cash flows and how those cash flows impact the value of the business.

Our assets today are going to generate future cash flows, and somebody is going to pay for that. That is how they create the value.

How you describe your resources, explain how those resources produce cash while making sure you aren’t leaving anything on the table are important matters to sort out before sitting down with buyers. By assisting potential buyer in understanding all the resources you have available and your plan to capitalize on them you are helping your buyer visualize a more valuable company.

Finally, be sure to explain why you exist, how you serve customers and what value you bring to the market. This last area includes how you manage capital, the other side of managing your resources. How are you funding those assets? With bank debt or equity? Do you have enough capital to invest in all the positive return projects you have? If you can show there are good growth opportunities for the business a buyer will be willing to pay a premium vs a static business.

So, think like a CFO, make financial management an important part of your activities and have a happy exit.

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