The Ins and Out of the Balance Sheet

Ask any accountant and they will tell you that there are three primary reports that you should be looking at on a monthly basis to help guide your business.  The big three are profit and loss, statement of cashflows and your balance sheet.

I have been an entrepreneur for the last 20 years.  In that time, we have bought and sold multiple businesses in a variety of industries.  For all that, the balance sheet baffled me.  I understood the numbers, a balance sheet is simple, assets (what you have) minus your liabilities (what you owe) = your equity.  Your liabilities + your equity must = your assets, which is why it is called a balance sheet.  But for the longest time the significance eluded me.  Here it is, in the simplest terms.

The EQUITY of your business is the business’ net worth.

Positive/increasing net worth in business, as in your personal life, is a sign of financial health.  Being in good financial health makes it easier to get credit and as a business, that can translate into investors and other exit options that are not open to people and businesses that have negative equity.

If you have negative or declining equity, your business is riskier and less healthy, making it harder to attract investors or buyers.  If you do find a buyer, your business will be worth less. Not only in the topline purchase price, but in the net amount you get to keep at the end of the transaction.

Let say you sell your business for a million dollars. Cha-Ching! A million buckaroos.  You hear the numbers and begin to have visions of retirement; you can smell the ocean and taste the boat drinks as you contemplate the deal.  What many business owners forget is that not only are there expenses associated with the sale of your business, but the balance sheet is going to impact your bottom line as well.

In John Warrillow’s eBook, The Freedom Point, (Click here for your free copy) he outlines seven steps to calculating his freedom point. Step 5 and 6 review estimating your net proceeds.  But number 6 is the killer and shows up in your balance sheet.

Warrillow states, “When you hand over the keys to your business, you’ll likely have to do so free and clear of any long-term debt.  Therefore, you need to add the amount required to pay back any business loans to the total funds you need to accumulate to reach your freedom point.”

This is good advice to a business owner who is 3-5 years before their exit.  But when that long term debt surprises you at the time of sale, it can make the difference between being able to afford your happy ending and being unable to sell your business because the sale won’t provide the funds necessary for your next stage.

“One of the first things that we tell our clients after valuing their business for sale is that they should speak with their accountant,” explains Stewart Guthrie Co-Broker for the Liberty Group of Nevada.

Why? A good accountant will look not only at the revenues and expenses of the business, but at the debt structure of the business and the equity position(s) of the owners.  One of the biggest mistakes that we see owners make is waiting too long to plan their exit.  Tax strategy and debt structure need to be part of the planning process 3-5 years before you intend to exit in order to be effective.

A balance sheet is an important tool for business owners.  It is a score card that can tell you if you are winning or losing in terms of the health of your business. It does not tell you the value your business in terms of what a buyer would be willing to pay, but it does have the information that you will need to plan ahead for a healthy and lucrative exit.

 

About the Author:

Kathryn Guthrie brings more than 16 years of entrepreneurial experience to her role as broker and is committed to assisting small business owners successfully transition their businesses to the next generation of ownership. After successfully selling Real Property Management Sac-Metro in 2019, Kathryn committed her time and talent to helping small business owners build value and sell their businesses. She is a Certified Exit Planning Advisor (CEPA) through the Exit Planning Institute, holds a certification as a Value Builder Advisor and is a member of the International Business Broker Association (IBBA). Her services as a coach have been used to compliment the transaction services that she provides as a business broker.

 







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