They say, "beauty is in the eye of the beholder" — and it's true; different acquirers will evaluate your business differently. What's constant is financial performance. Potential investors are essentially buying your earnings — that's why you'll hear terms like EBITDA (earnings before interest, taxes, depreciation and amortization). The best time to sell is following three years of consistent revenue and earnings growth.
Different people and organizations will evaluate your business differently. For some potential acquirers, purchasing your company may be a new venture (an individual investor). For others, it may be part of a long-term strategic plan (an industry consolidator). Different people will come to different conclusions on a fair "sale price."
What is constant is financial performance. Every potential acquirer will ask for three years of financial statements — Balance Sheets, Profit and Loss Statements, and possibly other subsidiary schedules including aged receivables, aged payables and work-in-process.
Balance Sheet: What Investors Are Really Asking
Potential investors want to examine your capital structure. They want answers to fundamental questions:
- Are we properly capitalized — what's our working capital turnover?
- Are we properly leveraged — what's our debt/equity ratio?
- Are we effective in collections — what's our average age of accounts receivable?
- Do we pay our bills in a timely manner — what's our average age of accounts payable?
- How reliable are our fixed assets — what's our degree of fixed asset newness?
Real client pattern — Will's experience
I worked for an industry consolidator. My assignment was to find potential HVAC, Electrical and Plumbing contractors for acquisition, from making initial contact through closing. The company's valuation calculations included making allowances for replacing service trucks — their operating assumption was that service trucks need to be replaced every six years. Acquisition targets with older fleets were deemed to have greater post-closing investment requirements, and the company adjusted their offer accordingly.
Potential investors will look at balance sheet figures to help determine how much additional capital, if any, may need to be invested in your firm post-acquisition. And that assessment will change their acquisition offer.
Profit & Loss: Your Operating Effectiveness
Potential investors want to see your operating effectiveness:
- Revenue trend — are revenues increasing, decreasing, or remaining constant over time?
- Margins — how do they compare to industry standards? If you're a trades contractor, you'll need departmentalized financial statements to answer this. For example, an Air Conditioning contractor performing T&M Service, System Replacements and New Construction needs departmentalized statements identifying the gross margin of each service — margins will identify any potential pricing, productivity or purchasing issues for the potential acquirer.
- Overhead spending — Marketing & Advertising (cost for new customer acquisition versus average job size and lifetime revenue per customer), Insurance (are we adequately insured?), Staff (organizational structure, capacity for expansion, compensation versus market norms), and Repairs & Maintenance (fleet spending and what it says about fleet effectiveness).
Frequently Asked Questions
What financials will a buyer ask for?
Three years of Balance Sheets and Profit and Loss Statements, plus subsidiary schedules like aged receivables, aged payables, and work-in-process.
Why does my balance sheet matter to a buyer?
It tells them how much additional capital they may need to invest post-acquisition — including things as specific as fleet age — and that assessment directly changes their offer.
When is the best time to sell?
Following three years of consistent revenue and earnings growth.