Smart credit and collection processes can make your company more attractive to potential owners
The Real Issues article (p. 32 January LBM Journal) titled “Planning Your Company’s Future,” highlighted the difficulty many dealers face in developing a comprehensive succession plan, and the unease it creates for all employees. Transitioning ownership is a major undertaking, and you want to make sure it’s a success for everyone. Putting your financials in order now can help ensure that you’ll have a more profitable sale and easier change of ownership.
Get started by looking at three key aspects of the transaction, their importance, and how you can strengthen your company in each area.
Reducing risk and uncertainty
The Great Recession created huge bad debts for most dealers. New buyers will want to be assured that the credit quality of the current customer base is strong. Otherwise, they may look to the bad debt historical data from the Great Recession as their expectation of how bad it could get in the next recession and discount their willingness to pay.
If you haven’t yet, now is the time to create a thorough credit assessment of your customer portfolio. Make sure your credit staff is using multiple business and consumer credit reports to evaluate customers’ credit quality and likelihood of default. Armed with this information, you can clearly represent the value of your customer base and reduce risk and uncertainty for prospective buyers.
Your company’s cash flow will also be a priority for new leadership—the buyers need to understand how much cash they’ll need to support operations after the sale. If your DSO (Days Sales Outstanding) is 45-plus, then a potential buyer may need to tap his or her bank for operating capital—adding risk to the equation. Making improvements to your credit management and collections now, such as working to turn all customers into on-time payers, can improve your position when it comes time to sell.
Like staging a home for sale, you want to put your business in the best possible light to maximize its financial value and attract the best buyers at the highest possible price. The value of your company includes hard assets like property, inventory and buildings, along with the quality of your balance sheet.
What are some financial red flags that can impact your company’s valuation?
- Lagging customer payment trends
- Bad debt write-offs
- Varying and undocumented customer credit terms
- Inconsistent cash flow
- Reliance on bank loans and lines of credit to fund operations
One of the best ways you can improve the value of your company is by cleaning up your accounts receivable. Transparent, easy-to-understand financials provide clarity to your operation and make it easier for potential buyers to understand where the company’s valuation fits when looking at similar sales.
Fostering continuity can be an elusive but important aspect of any ownership transition. After all, a new owner will want to maintain many of the relationships and processes that have led to your success. Consider putting processes in place now that create stability and foster continuity before, during, and after an ownership transition such as:
- Maintaining consistency and professionalism in your credit and collections functions
- Providing clarity and transparency of your company’s financial health, and setting realistic expectations for future credit risk and credit flow
- Assuring customers that established credit and collections functions and contacts will not change
If you’re seriously considering the sale or transfer of ownership of your business, then now’s the time to get your financials in order. Creating a plan now can ensure that your company will be positioned to make a profitable and successful transition when you’re ready.