How To Sell Your Business For A Higher Price

Creating Optimal Cash Flow Trends Can Significantly Increase The Value Of Your Business Sale

When you list your business for sale, the bids and eventual proceeds you can expect to receive will be largely influenced by historical cash flow results. Your focus cash flow in the period prior to sale, can significantly increase the profit you realize.

Buyers will tend to look at a business sale price as a multiple of the expected future net cash flow. The multiple will vary based on industry and also future expected growth. The best way to increase the multiple in your favor is to focus on optimizing the cash flow base that will be multiplied.

The ideal financial picture would show 3 to 5 years of past financial statements that show steady and even exponential growth in both earnings and cash flow. Alternatively, there are three other historical cash flow and earnings trends: 1) declining cash flow, 2) cash flow that trends up and down, 3) steady or near flat cash flow results.

If your business is experiencing declining cash flow or eradicate cashflow, the cash flow base and the multiplier will likely be reduced due to future uncertainty. Steady cash flow results will not likely impact the base, but the multiplier will not be high due to absence of growth potential.

Lets look at a few different scenarios to give you a better idea of how these different cash flow trends impact a business sale.

Scenario #1. Mature business sale where the business has been in flat to slight decline. This is a very typical situation where the business owner(s) have held the business for a long period of time, are no longer investing in growth, and are at or near retirement age. To prepare for sale, there may be a final push to show better results from selling off assets and optimizing accounting statements. But the long term historical trend will show that the cash flow improvement occurred immediately prior to sale and will not likely stop the base and multiplier from being discounted.

Scenario #2. Business showing steady cash flow results where growth has been siphoned off to the owners. Because the actual financial results do not show growth, there will likely be no increase to the multiplier. If a typical multiplier was 3 to 4, a growth based multiplier could be 5 to 10, potentially making a significant difference to the proceeds the business owner can expect to receive. Yes, the financial statements can be recast to build back in the funds taken out by the owners. But recasting can be imperfect based on the convoluted ways owners extract funds from their businesses. Plus, unless the recast is done by a third party with significant review, its not likely to be assigned much value by potential buyers.

The key takeaway here is to start planning your exit strategy and future business sale well in advance. By investing in growth 3 to 5 years prior to listing the business for sale and generating financial statements that drive results to the bottom line, business owners are more likely to garner premium returns in the market. The extra work and effort could generate a huge payday by potentially increasing both the base and the multiplier.