Thursday, November 25, 2010

How to use Powerful Accounting Practices to Improve a Business

The below blog provided by Jeffrey D. Bronswick of RP& Co.

Whether you are buying, selling, starting or growing a business, cash flow planning is critical to the success of any business. Businesses with proven techniques for cash flow planning are more successful and therefore more valuable than their competitors. If you are buying a business, make sure these practices exist. If you are selling, identify areas that need improvement and fix them in order to increase the value of your business in the eyes of a prospective buyer.

Planning should be done in advance and for at least one year out. The cash flow plan should be closely aligned with the strategic plan for the business. The purpose behind the plan is to:
1. Predict when, where, and how cash needs will occur
2. Predict what the best sources are for meeting additional cash needs
3. Be prepared to meet these needs when they occur (it helps to keep good relationships with bankers and other creditors)
4. Plan business profitability and growth

The starting point for avoiding a cash crisis is managing the balance sheet. Collection of accounts receivable and payments to vendors are two areas that require daily attention. A well run business will develop both short-term (weekly, monthly) cash flow projections to help manage daily cash, and long-term (annual and up to 5 years) cash flow projections to help develop the necessary capital strategy to meet business needs.

Remember, the plan should be by week or by month. NOT by year. Many businesses make this mistake. Most businesses have cycles and planned and unplanned major expenditures, so you need to see the highs and lows in the business on a weekly or monthly basis. If you plan properly, the cash needs will be very apparent on the cash flow projection in a given month. If you know in advance when the cash needs of your business are the highest, it will trigger actions on the part of the business for capital retention, cost reduction and bank borrowing availability.
How does a well-run business deal with these ups and downs? By negotiating in advance…
1. Vendor payment terms
2. Customer payment terms (and prepayments if warranted by the business)
3. Bank lines of credit
4. Long term debt
5. Equity capitalization

If the business has not prepared cash flow projections before, preparing historical cash flow statements and balance sheets will help you gain an understanding about the past cash flow performance and your potential needs in the future.

The process of planning future cash flows is very time consuming, but if it is done correctly, it will not only save you money, it could save your business.

Jeffrey D. Bronswick is President of RP&Co. - Certified Public Accountants located in Buffalo Grove, IL. Jeff works closely with his clients in helping guide their growth and financial success, assisting them with operational and financial issues, and in charting tax strategies to maximize their after tax income. Jeff received his Bachelor of Science in Accountancy (Cum Laude and with University Honors) from Northern Illinois University in 1988.

Tuesday, November 9, 2010

A Tale of Two Businesses by Guest Blogger Ed Cook

I recently listed two businesses of similar size with similar characteristics. Good management, good reputation and priced right. Yet one sold in less than 4 months and one is still for sale more than 9 months after listing. Can you figure out which one sold and which one did not?

Business A - Pet Care Business
$100,041(Cash Flow)
$297,000(Sales Price)
2.97(Multiple - Sales Price/Cash Flow)
$98,010(Down Payment Required)
$198,990(Seller Financing Offered)

Business B - Business Supply Company
(Cash Flow )
$390,000( Sales Price )
2.78 (Multiple - Sales Price/Cash Flow)
$331,500 (Down Payment Required)
$58,500 (Seller Financing Offered )

There was no doubt in my mind that Business B would sell quickly. It had the numbers, the reputation and a great location. I knew that Business A would sell, but assumed that would take a bit more time. Well guess what? The answer is A. That pet care business received 4 solid offers and sold within 4 months of listing, while the business supply company remains for sale 9 months later and has yet to receive one offer. Why the difference? Seller financing.

The pet care business went to market offering terms of 33% down payment with the remainder as a seller note. This opened up a huge pool of buyers, most from outside the industry, and allowed the seller to be selective with both prospective buyers and offers.

The business supply company went to market offering terms of 85% down payment and a 15% seller note. They have yet to receive an offer. Quite simply, buyers are looking to put as little money down as possible. If they are being asked to put down $330,000 on a business listed at $390,000 they will simply move on to the next deal. They will go out and buy a bigger business where the seller is offering financing.

But seller financing offers one more thing to the buyer that is even more important than the financial consideration. When a seller is willing to finance a large portion of the transaction it shows the buyer that the business is sound and that the owner feels it will be successful for years to come. That implicit guarantee from the seller sends exactly the right signal to the would-be buyer.

The business supply company eventually offered up more seller financing but it was literally too little, too late. The buyers had moved on to other deals. Here we sit nine months later with no offers. All because the seller was not willing to offer proper financing.

When you sell your business, offer the proper terms at the proper price with the initial listing. That gives you the very best chance to sell your business.

By the way, the pet care business accepted a cash offer as the buyer sought to differentiate himself from the other offers. It’s funny that the seller that offered financing ended up with cash while the one that wanted cash will end up taking terms.

Ed Cook is a professional business intermediary with Chicagoland Sunbelt. Ed has over twenty years of broad-based experience in every aspect of running a small business giving him the skills and knowledge needed to help buyers and sellers achieve their needs. Ed has been very successful in helping his clients navigate this difficult market. If you would like to learn more about the process of buying or selling a business, Ed can be reached directly at