The value of financial health when selling a business

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The value of financial health when selling a business

Whether you start planning the sale of your business years in advance, or just a few months before, it’s crucial to actively maintain the financial health of your business from the earliest opportunity.

When preparing to sell a business, there are many factors that you’ll need to take into consideration to ready your business for the change in ownership.

From bringing company affairs up to date and updating accounting records, to tightening the flow of cash running in and out of the business. 

The earlier you start planning the sale of your business, the longer you’ll have to take proactive steps to improve its financial position. Keith Tully of Real Business Rescue, a limited company insolvency expert, explains the value of financial health when selling a business and how it has the power to influence the sale process. 

How is the financial health of a business measured?

Financial statements – When selling a business, you’ll need to detail how it is faring financially and back this up with financial statements, such as the profit and loss account, balance sheet and cash flow, in addition to a cash flow forecast. Most of these statements will be produced as standard by your accountant and should therefore be easily accessible. 

Cash flow and balance sheet test – The balance sheet shows the assets and liabilities of a business, subsequently illustrating whether it’s in the red or black – this is known as the balance sheet test. The cash flow statement also indicates whether there’s enough cash running in and out of the business, if there’s more cash owed by the business, this may indicate a serious cash flow problem. This is known as the cash flow test. 

The value of financial health when selling a business

Due diligence and business intelligence – Alongside the financial statements prepared by your accountant and the cash flow test and balance sheet test, prospective business buyers may carry out further due diligence to investigate the financial health of a target business. 

Business intelligence platforms can provide deep insights into the past, present, and future financial position of a business, helping buyers to assess credit risk. From bad debts to insolvency action, such platforms dive into the financial history of a business which can be useful for assessing the financial health of a business. 

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Why is financial health important when selling a business?

The financial health of a business provides a window into its profitability, financial efficiency, growth potential and ultimately concludes how well or poorly company finances are managed. A business with strong financial health is likely to have higher chances of survivability in uncertain trading conditions, as seen with the coronavirus pandemic and the cost of living crisis. 

A business with optimum financial health may also be of sound credit risk which makes it easier for a future buyer to secure finance. The higher the health rating of a business, the greater the appeal to prospective buyers which will influence how much they are willing to pay to seal the deal.

It’s important to note that additional factors will also influence how much a buyer will be willing to pay for a business, such as goodwill, ownership of particular intellectual property, location, or strong financial forecasts. 

Why optimum financial health is priceless when selling a business 

When selling a business, you’ll want to start preparations early to get company finances into order. Doing so can up your chances of attracting potential buyers for your business in the form of a formal expression of interest or a serious offer. 

During the business sale process, you may also undertake a market appraisal or a more comprehensive business valuation to calculate the market value of your business. This process entails assessing the financial position of your business which will be carried out through an assessment of company accounts, hence why it’s crucial to tighten company finances before selling your business. 

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