“What is the value of our business?” is the most frequently asked question we encounter. Business valuation involves numerous factors influenced by a multitude of variables, and every business owner must understand the worth of their enterprise for various reasons. It serves as a foundational point from which all other opportunities emerge. Our approach involves analyzing your empirical data, recent comparable sales, and industry-specific metrics established by experts in your field to provide comprehensive metrics. Additionally, we collaborate with you to establish a “range of value,” incorporating accurate forecasting, identifying crucial growth metrics, and pinpointing any essential yet overlooked aspects of your business. How can we assist you in maximizing this range of value?
Key Components of Ideal Financial Documentation for Business Accounting Evaluation
An ideal set of financial records comprises accrual-based accounting statements accompanied by a robust month-end closing process to ensure alignment between expenses and revenues. Period. It’s not unusual for business owners to lack extensive accounting expertise, but a deficiency in back-office accounting skills can pose difficulties in assessing financial performance. Many owners develop intuitive metrics over time to compensate for inadequate or incomplete financial records. However, when a potential buyer conducts thorough due diligence, the absence of supporting data can hinder lender financing. Business owners often rely on cash flow or accounts receivable to gauge the health of their business based on years of experience with incomplete statements. Clear and promptly finalized financial records facilitate smoother communication with potential buyers.
Common Issues in Valuations: Areas of Inadequate Recording and Typical Valuation Pitfalls
A lot of business owners record cash sales and then do not report the income. Everyone at some point and some level does it. However, sometimes these amounts can be significant. The tax savings on these lost sales, however, are insignificant to the value of those sales in the overall enterprise value of the business when it comes time to contemplate a sale.
Business Improvement by Ceasing One Common Practice
Mixing personal expenses with business expenses to the extent that they cannot be distinguished from each other is a common issue. Nearly every business owner incorporates some personal expenses into their business operations. However, when these expenses are indistinguishable, similar to unrecorded cash sales, the marginal tax benefits of including them within the business are significantly outweighed by the impact on valuation when assessing cash flow multiples. For instance, while directing $10,000 of personal expenses through the business may yield tax savings of approximately $3,000 to $4,000, it could diminish the enterprise value by $40,000 to $70,000 at the time of sale.
Real-Time Insight: Essential Metrics for Owner and Management Team Awareness
Days Sales Outstanding is a valuable metric that provides insight into the speed of sales collection. It’s particularly useful when using accrual basis statements rather than cash basis. For leveraged businesses, the Cash Flow to Debt Ratio is crucial for assessing liquidity. Familiarity with gross and net margins per sales dollar is essential for comprehensive financial understanding. Lastly, comprehending the company’s Working Capital Ratio is vital as it offers insights into liquidity and overall economic health.
What Does An Ideal CFO Look Like at Different Revenue Levels?
At different revenue levels, the responsibilities of CFO duties vary, along with the required skill sets and resume experiences:
- $10 million revenue: At this level, it’s advisable to have a proficient Accounting Manager or Controller overseeing financial operations. Depending on the complexity of the business, a bookkeeper might also be necessary to handle day-to-day transactions and maintain accurate records.
- $20 million revenue: As the revenue increases, the need for a CFO becomes more apparent. A dedicated Controller is essential at this stage to manage financial reporting, compliance, and internal controls effectively. Adequate staffing is necessary to support the growing workload.
- $40 million+ revenue: At this level, a CFO is typically indispensable to provide strategic financial leadership, manage financial risk, and drive growth initiatives. Alongside the CFO, a Controller is still crucial for maintaining financial stability and ensuring accurate reporting. Adequate staff is essential and may include specialists in inventory management, accounts receivable, and accounts payable to handle the increased volume and complexity of transactions.
Essential Financial Reporting Insights for Sellers 2-3 Years Out
Cease mixing personal expenses with business expenditures, or alternatively, establish a single credit card exclusively for personal transactions if unavoidable. Ensure all sales are accurately recorded in the books. Implement a systematic month-end closing procedure and conduct monthly statement reviews with the relevant team members. Consider establishing effective Key Performance Indicators (KPIs) to steer business growth, and secure organizational buy-in on set targets throughout the organizational chart.
About the Author
