A Financial Model Will Help Sell Your Business
As M&A Advisors, we meet with hundreds of business owners, each at different stages of preparing to sell their business. One of the most common areas we see for improvement is in the financials, or lack thereof. Many business owners, especially owner-operators who have been so successful they have not needed to watch their income and expenses, do not understand the importance of A) Keeping good books and records of the business B) Using a bookkeeper to follow accounting best practices C) Regularly completing a financial model for the business. This lack of awareness results in the business being woefully unprepared for a sale, and owner’s expectations of value completely out of whack with reality. Some successful owners do not have P&Ls and balance sheets. Others do not have current tax returns. But they are making really good money! In today’s post, we are going to focus on the Financial Model and how completing one regularly, can not only help your business, but will help prepare it for a sale.
What is a Financial Model?
A financial model is a measurable depiction of a company’s financial performance. It is created (typically on a spreadsheet like Excel) using historical financial data, assumptions about the business and industry, and projections. It is an invaluable tool with which to analyze various aspects of a company’s operations. It provides the owners a snapshot of past and future revenue, expenses, cash flows, and enables them to better understand their company’s current value. It provides a quantitative baseline for decision-making, forecasting, budgeting, and assessing the financial viability of an acquisition or project.
In a business, the responsibility for creating and maintaining a financial model typically falls on whoever in your business handles the finances. This could be the owner, a fractional CFO, an analyst, a CFO, a finance department, or corporate development team, depending on the size of the business.
Entrepreneurs and Small Business Owners: In smaller companies or startups without a dedicated finance team, entrepreneurs and small business owners may need to handle financial modeling themselves or outsource it to external consultants or advisors.
Financial Analyst/Fractional CFO/CPA: A financial analyst or relevant outside Advisor is primarily responsible for building, updating, and analyzing financial models for your business. They gather historical data, make assumptions, usually with the help of feedback from department managers or the business owner based on history, work in process, what is in the pipeline and market trends. With this they create a financial snap shot and projections to help decision makers make informed financial decisions.
Finance Manager: Finance managers in larger companies oversee the work of financial analysts and may also be involved in building and reviewing financial models. They ensure that the models align with the company’s strategic goals and provide insights to senior management.
Chief Financial Officer (CFO): The CFO is the top financial executive in a company, responsible for overall financial management, strategy, and decision-making. While they may not be directly involved in building financial models, they rely on the insights generated from these models to inform their decisions and guide the company’s financial direction.
Corporate Development Team: In larger organizations, a corporate development team may be responsible for tasks related to mergers, acquisitions, or other strategic initiatives. Members of this team often create and work with financial models to evaluate potential deals and their financial implications.
Business Unit Managers: In some cases, business unit managers may also be involved in building or reviewing financial models specific to their division or department. They use these models to manage their unit’s budget, forecast revenues and expenses, and make informed decisions about resource allocation.
Overall, the responsibility for handling financial models depends on the size, structure, and complexity of the organization. It typically lies within the finance department, but other roles and departments may also be involved in the process.
8 Reasons To Regularly Review Your Financials:
Forecasting and Planning: Financial models help businesses forecast future financial performance by taking into account factors such as sales growth, costs, and investments. This aids in budgeting and setting financial targets, crucial for effective business planning.
Valuation: A financial model can be used to estimate the value of a business, project, or investment, especially when raising capital, selling a business, or making strategic decisions like mergers and acquisitions.
Risk Management: Financial models help businesses assess and quantify risks associated with different scenarios, enabling them to make informed decisions and mitigate potential negative outcomes.
Capital Allocation: Financial models aid in determining the optimal allocation of resources and capital among various projects or business units, ensuring that funds are invested efficiently and profitably.
Performance Evaluation: By comparing actual financial results with forecasts, businesses can assess their performance and identify areas of improvement, leading to necessary adjustments to strategies, operations, and financial management.
Decision-making: Financial models provide a quantitative framework for evaluating different business scenarios, such as expanding operations, launching new products, or entering new markets, enabling data-driven decisions that can enhance profitability and growth.
Raising Capital: When seeking external funding from investors or lenders, a robust financial model is essential to showcase the business’s potential profitability and financial stability, thus increasing the likelihood of securing the required capital.
Internal Communication: A financial model helps create a common understanding of the business’s financial goals and performance among different departments and stakeholders, fostering better alignment and collaboration within the organization.
How a Financial Model Helps You Sell Your Business:
Valuation: A well-built financial model can help you determine the fair market value of your business, using various valuation methods such as discounted cash flow (DCF), multiples, and net asset value. A clear and credible valuation is crucial when negotiating with potential buyers.
Forecasting: Financial models help project future financial performance by incorporating assumptions about growth rates, market conditions, and operating performance. These projections can help you and potential buyers assess the future prospects of the business, which is an important aspect of the sale process.
Scenario Analysis: Financial models can be used to run various scenarios, such as best-case, worst-case, and base-case scenarios, to evaluate the potential impact of different assumptions or events on the business. This can help you identify risks and opportunities, allowing you to better prepare for negotiations with potential buyers.
Due Diligence: A well-organized financial model can help demonstrate to potential buyers that you have a thorough understanding of your business’s financials, which can instill confidence in your management abilities. Providing a detailed financial model can also streamline the due diligence process, as potential buyers will likely request this information.
Deal Structuring: Financial models can help you evaluate different deal structures, such as earn-outs, seller financing, or equity rollovers, to determine the optimal transaction structure that maximizes your proceeds while minimizing your risk.
In summary, a financial model is an indispensable tool for businesses, as it helps them make informed decisions, optimize resource allocation, manage risks, and evaluate performance, all of which contribute to achieving their financial objectives and long-term success.
This article was written by Lauren Altschuler, CBI, CEPA. Lauren is a Certified Business Intermediary (CBI) and a Certified Exit Planning Advisor (CEPA) with over 30 years of business and M&A experience. Lauren helps business owners achieve their business exit goals through a successful merger or acquisition. She is a business advisor at Transitions In Business, a Twin Cities based M&A firm that specializes in selling business to business and healthcare, transportation, manufacturing, distribution and construction/trade services companies. If you have questions about this article and would like to connect with Lauren click on the link below.
