We asked our own David Laycraft about the importance of quality records and reporting when it comes to the valuation or sale of a company. Here’s what he had to say:
“As a Trusted Advisor, I am often asked by business owners, who generally have many competing demands on their time, if their investment in the tracking, reporting and analyzing of their historical and current financial results ever pays off?
Business valuations generally focus on the future stream of cash flows: not the equipment or working capital owned by the business, but the cash flows that these assets will generate going forward and which will provide the owner with a return on their capital.
Quality financial information:
- Provides not only definitive historic results and trends that could provide insight and support for future performance and projections that valuators and investors are ultimately interested in; but
- Is also crucial when a bank is asked to provide financing for operations, growth or a potential transaction.
Here are a few areas where business owners might want to focus:
- Identify and understand your sales and margins on each product or service line, and by territory.
- Understand your customer base – not only who they are, but issues such as buying trends, value-added opportunities and credit risk issues.
- Ensure that you have a documented and industry-accepted process for measuring items such as sales, expenses, inventory and accruals.
- Assess if you are you able to produce quality, monthly financial reports in a reasonable amount of time.
- Identify one-time or non-recurring items, as they may be normalized (i.e. not counted) as part of the valuation process.
- Produce cash flow statements and/or working capital measurements and trends.
- Compare and provide commentary on annual results, including industry benchmarking, if possible.
It is also generally recommended that a business have “review engagement” level financial statements prepared by their external accountant, at least in the years leading up to a sale. Not only does this provide a heightened level of assurance, but a review is often a requirement for some investors and financiers, especially for larger or more complex operations.
So yes, I believe that quality financial information provides a strong return to business owners, not only while they own the business but also when it is time to sell!”
David Laycraft P.Ag., MBA, CMC, CBV, CF, CDFA
David has over twenty years of diversified experience working with privately-held businesses, and regularly assists clients in identifying, measuring, growing and realizing business value.
David can be contacted at (403) 750-7685 or firstname.lastname@example.org