Actually, Why Do Cash Rich Businesses Sell Better?

A potential buyer for your business may not be able to rely on banks or other financial institutions for providing them with cash injections they would need to put in the firm after completing the sale. You need to demonstrate that your business can be self-financing, as external funding is becoming more and more difficult to secure.

For a new owner, it is not unusual to be under pressure from the suppliers to change the credit terms, or finding that even great clients are dragging their feet in paying their bills.

Most of the businesses I help preparing for sale are juggling with cash.

It would alert a potential buyer who would not be very keen to take over a business that may end up in crisis management.  Juggling with cash is not cash management, this is gambling with your business money!  Cash management ensures to position your company against problems in the supply chain adequately.

When it comes to selling your business, liquidity is a priority. You need to demonstrate that you are in full control of your cash position by improving your working capital performance, to give security in the long term to your supply chain, your banks and your potential buyer.

Cash is money that you can access easily either from the bank or within the business. It is not inventory, it is not accounts receivable, and it is not property. You need petty cash or money in the bank to pay suppliers, to pay the rent, and to pay your employees.

Review how you can generate more money by remodelling your business. It can include:

  • Divestment of certain assets
  • A reformulation of your growth strategies
  • Cost reductions
  • Strategic acquisitions
  • Restructuring
  • Selling excess inventory
  • Selling noncore businesses
  • Entering new markets
  • Using new distribution channels

The management team focus should shift to sustaining growth and profitability and monitor working capital finance plan religiously.

It is critical, to set up a long-term working capital strategy. New financial technologies and changes in bank regulations increased the range of alternative funding options for businesses. The best plans include a mix of long-term and short-term finance options

What are your long-term financing options?

They include equity-based capital and term loans. In equity-based capital, investors ask for ownership of portions of the business in exchange for cash. Long term loans mean borrowing a pre-agreed amount of money, then paying it back – with interest – in regular instalments over an agreed period.

In our opinion, those options are relatively ineffective and rigid,  they allow businesses to raise a significant amount of money, but they could be problematic.

Equity-based funding may dilute shareholders’ stake, and when it comes to selling your business, you may not get what you expected. Term loans involve reimbursing the money plus interests for the duration of the loan impacting your cash flow negatively. Most banks would ask for secured loans which would mean a high level of exposure for you, as the borrower, as you would have to use your personal assets as collateral.

Long-term finance solutions can be effective in funding business growth

What are your short-term financing options?

Short-term investment solutions should help you to cover gaps in working capital. They include invoice discounting, factoring, and trade finance if you use them tactfully they are adequate.

To meet your working capital funding for your business growth requirements you cannot purely rely on these types of options. We recommend using a combination of both short and long-term options.

What are the best funding options?

You should look for providers who offer fast injections of working capital to fund opportunities as they arise for a growth-focused long-term working capital strategy. They may include

  • Ongoing, revolving credit facilities
  • Can be used, paid and reused as often as you require
  • 120 to 180 days credit
  • Straightforward transaction fee
  • No non-usage fees
  • Insurance-backed not secured loan against business assets

You will then be able to afford the flexibility to optimise your working capital arrangements, tailor them to suit your specific requirements and manage your cash flow efficiently.

Cash flow is the balance of money coming into and going out of your business. Effective cash flow management is essential to attract potential buyers for your business.

Follow the CASHBOX rules to make sure that your cash flow remains healthy.

C- Control your costs

A good cash flow management system starts with minimising costs The less you spend, the easier it is to stay cash positive. Make sure that every penny you spend has an official business reason. Sell your excess inventory, to avoid putting too much strain on your cash flow. Get rid of the waste and where ever you can look for the best possible value for your money.

A- Adopt robust credit control processes

You should always send your invoices out as soon as you finish the job, or the product is out of the door. You should offer your clients a few easy ways to pay, even if cash or direct payment is the best option for your cash flow.

An excellent and simple invoicing and payment system can reduce late payment and cash flow problems. You should be able to see which invoices are becoming due or already overdue. Chase payment a week before it is due to make sure the amount will reach you on time. If a customer does not pay on time, you should be persistent until you get your money.

To help your client to pay quickly and without fuss, make sure your terms and conditions show on all your proposals, contracts, and invoices. You cannot just assume that your clients know that they must pay within 30 days. You should run credit checks through credit agencies before granting new customers significant credit. If the amounts you are invoicing are large or it takes a long time to deliver your products you can ask for a down payment at the order date or a part payment before or on supply.

S – Seek help if you fear serious problems are coming

Do not wait if your sales predictions show a shortage of cash. You should take immediate actions:

  • Cut costs,
  • increase your prices,
  • secure new revenue or
  • seek finance or funding to get you through.
  • Talk to experienced professionals such as accountants, bankers and others who can show you how to mitigate the risks and introduce some changes to prevent future cash flow issues.

H– Harvest cash flow forecasts

Forecasting cash will help you to timely compare money coming in and going out of your business. Make sure your sales projections are reliable, and your cost estimates are realistic. We recommend a rolling 13 weeks cash flow forecast but if your business experience seasonal fluctuations a 26 weeks forecast would be more suitable.

By forecasting your cash flow, you will be able to identify times you risk running out of money, as well as times when you have a surplus of money. Both present different challenges, so you can respond by planning the best course of action for your business. Testing new products or services when you have an excess of cash can ease cash flow while chasing a sale or a late payment might bring in money to overcome a shortage

B- Bring favourable credit terms

You should agree on good credit terms with your suppliers, 30 days or more if possible, to allow you to stay cash positive for longer and leave you with more working capital. Your providers’ payment dates may not match yours, so if possible agree on regular orders, so they will be willing to give you longer credit terms

O– Optimise your prices

Incremental price increases could streamline your income without putting off customers. SMEs are often reluctant to raise their prices because they are afraid to lose business. Your clients are used to small price increases over time and will not look for alternatives if they believe they are still getting good value for money. Check your competitors’ offers first, and educate your customers on your products or services value compared to your rivals.

X– Xerox your cash position

Cash flow is your business lifeblood and the primary indicator of its health. Do not mismanage it; you must govern your finances with due care and attention. To prevent serious cash flow issues the golden rule is to know exactly, each week how much money is available and never spend more that you have on hand that week.

Mishandling cash flow can be unforgiving. If you can, you should build up a cash cushion to stay afloat for at least six months. It can be critical if your business is to continue during difficult sales periods.

If you want to sell your business at a premium, then make sure you have a rigorous cash management system and funding mechanisms in place for opportunities as they arise for a growth-focused long-term working capital strategy.

Can your business survive without you?

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If you wish to build up the value of your business and would want to explore what you could do to make it sellable, please do not hesitate to call Jean-Bertrand de Lartigue on +44 1656 766 363 or email him, jb@exit-planning.co.uk

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