How important are projections when selling your business? Where you're going is more important than where you have been.
If there was ever a transaction that included an infinite amount of variables, it's the sale of a business. There are multiple details to consider, including financial performance, management team, company culture--the list goes on and on.
The one detail that rises above the rest are the company's financial projections. An investor is interested in your past, sure, but they're buying your company for the future. Your projections need to be both realistic and optimistic, and will contribute heavily to your company's price tag.
A Pro Forma financial statement typically includes projections for the future, including net revenue, cash flow, expenses and anticipated profits using your current financial statements to build a picture of the future. If created for internal use, these projections should be as accurate as possible. Your numbers should be a true expectation. For external use, you'll need to be more optimistic, including a stretch goal for your company. Obviously, you'll be using your Pro Forma for external use when selling your business.
According to John Emory Jr. of the investment banking boutique Emory & Co., an investor will expect to see a multi-year projection as part of the Pro Forma. They will scrutinize income statements and budgets from the past (and some will only consider past performance), but the real focus for many will be on anticipated cash flows for the next 3-5 years.
These projections should be optimistic; investors will expect it. In fact, they'll discount your projections, assuming that your numbers will be slightly rosier than reality. However, don't confuse "optimism" with random numbers. Growth projections pulled out of the air won't do much to convince a skeptical investor. Let's take a closer look at how to be both optimistic and realistic in creating a Pro Forma.
Emory notes that the more detail and logic you provide in your Pro Forma, the more likely you and an investor will accept your projections. Here are some tips to ensure your projections are solid:
Base projections on a customer-by-customer basis. Some companies simply set growth projections based on a percentage - random as it may be. They'll project an increase with little or no explanation as to why. A more accurate method for estimating sales is to conduct a customer-by-customer audit. Of course, this may only be practical for your larger customers.
Your predictions should be accurate for the first six months, however, curved future predictions are realistic and acceptable. You'll want to create a Pro Forma that includes projections of typically 1-, 3- and 5-year outlooks. While a 5-year projection doesn't seem realistic in today's rapidly changing world, it will be expected on the part of many buyers.
If you're considering selling your business, I always recommend conducting a valuation or an appraisal to get a clear understanding your company's worth and help you set realistic expectations.
The type of valuation you conduct will vary based on the size of your company and purpose of the appraisal. A larger company may requesting a formal appraisal for a legal purpose so you'll need a complete summary appraisal. A less formal valuation summary is a calculation of value and includes your basic company information and a brief financial summary.
Either type of valuation gives you a view of the past, and for some companies, that's all they need. Berkshire Hathaway, Emory notes, just asks for financials from the previous years. They don't base their price on your projections. However, a valuation can serve as a great starting point for negotiations. If you can agree upon the current value, then your Pro Forma projections carry much more weight.
The quantitative world and the qualitative world need to work in tandem to deliver results. If you achieve a quantitative goal, it will confirm that your qualitative strategy was correct.
Most Pro Formas are created by a CFO and tweaked by the senior management team. That's a great combination of quantitative and qualitative visionaries who can collaborate on a rosy, yet realistic, sales tool that will be the strongest piece of your pitch. When you're selling your business, a Pro Forma serves as the quantitative actualization of your vision..
If you can demonstrate how your company will grow and generate strong cash flows, a big price tag for your business can be your reward.
By Rock LaManna
Rock LaManna, President and CEO of LaManna Alliance. Rock can be reached by email at email@example.com.
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|Title Annotation:||The Bottom Line|
|Date:||Mar 1, 2018|
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