Author: John Knight

You already know that your company’s revenue and profits play a big role in how much your business is worth.

Do you also know the role cash flow plays in your valuation?

Cash vs. Profits

Cash flow is different from profits in that it measures the cash coming in and out of your business, rather than an accounting interpretation of your profit and loss. For example, if you charge £10,000 upfront for a service that takes you three months to deliver, you record £3,333 of revenue per month on your profit and loss statement for each of the three months it takes you to deliver the work.

But since you charged upfront, you get all £10,000 of cash on the day your customer decides to buy. This positive cash flow cycle improves your company’s valuation because, when it comes time to sell your business, the buyer will have to write two cheques: one to you, the owner, and a second to your company to fund its working capital – the cash your company needs to fund its immediate obligations like payroll, rent, etc.

The trick is that both cheques are drawn from the same bank account. Therefore, the less the acquirer has to inject into your business to fund its working capital, the more money it has to pay you for your company.

The inverse is also true.

If your company is in a cash hole, a buyer is going to calculate that they need to inject a lot of working capital into your business on closing day, which will deplete their resources and lessen the cheque they are able to write to you.

For a no obligation meeting to discuss maximising your business exit, please call me on 01299 405999, or email john@strategic-business-exits.com.

In marketing my client’s excellent West Midlands-based manufacturing business, I have been approached by over 90 enquirers in the past 8 months.

Many of the enquiries have come from investment companies and individual investors seeking well-run and profitable manufacturing and engineering businesses in the West Midlands area from £1m to £10m turnover.

I now have a select database of serious potential investors and acquirers so, if you’re considering exiting a similar business, please contact me in strictest confidence.

1) Repeat after me: Repeat business adds value to my business.

Acquirers like nothing more in a business than customers who keep coming back for more. And if they have to come back to buy from you because they’re contracted to, all the better.

2) You probably think you’re irreplaceable in your business. I know I am. But, guess what? Buyers don’t like that. They want to acquire businesses that are not reliant on the owner. Or anyone else, for that matter.

If you get a good, solid team of people around you, not only will you be able to take a step back occasionally but when it comes to exiting your business, it makes it easier to sell because, quite frankly, the new owners won’t want you around for any longer than necessary, no matter how much of a genius you are. Even I wasn’t wanted when I sold my businesses. Unbelievable.

3) Turn your business into a cash machine. Buyers like cash-generative businesses and the more cash in the business, the less they’ll have to fund the working cap themselves once you’re paid off. So, make sure your invoicing is swift and your cash collection efficient and firm.

4) Make your business like Ben Nevis: scalable.

Explore ways you can scale up your business model – could it be franchised, for example?

Are there synergistic bolt on products and services you could add to your current offering? Could you expand into new territories? Do you own IP that could be licensed? Could you appoint agents or distributors?

A scalable business is a saleable business.

5) Make friends with everyone. You never know who your buyer might be, or where they come from.

Food for thought – I’ve sold 4 businesses of my own and the buyers were as follows: a) a client, b) a competitor, c) a licensee, and d) a synergistic business.

So, it pays to be nice to as many people in business as possible because they may well come back and buy you out.

For a no obligation meeting to discuss maximising your business exit, please call me on 01299 405999, or email john@strategic-business-exits.com.

It’s looking good. You’ve received a great offer, it’s gone to Heads and due diligence is well underway.

You could book your ticket to the beach but unfortunately part of the deal is that you have to stick around for 2 years to get the rest of your money in a performance ‘earn out’.

Well, that’s not so bad is it? At least you’ll have your up-front part of the consideration in the bank. Well, yes but you’ll have little or no time to enjoy it – the Earn Out Monster will see to that.

So, the deal is done and you turn up to work at your office – I mean their office – and the name above the door has already been changed. The re-brand has started.

Your staff – I mean their staff – have all been briefed and inculcated in the new regime’s ways of doing things – they blame you for this.

The petty cash tin and your favourite bourbon biscuits have been snaffled by the newly-installed FD.

It dawns on you that this is no longer your business yet you have to be here for 2 more years working with Neville, the new MD. A driven character who will very soon drive you up the wall.

Still, at least there are clauses in the Share Purchase Agreement that says they can’t interfere with your ability to deliver your targets and achieve your earn out, aren’t there? Yes there are but will that stop them from deliberately or inadvertently distracting you from your quest? No it won’t.

This, my friend, is when the Earn Out Monster comes out to play and you will have to confront it, fight it and slay it.

Earn outs may be a necessary evil but contact me and I’ll help you overcome it: john@strategic-business-exits.com.