cash or almost-cash items?
Assets: Cash, accounts receivable, inventory, deposits, and prepaid expenses
Liabilities: Accounts payable, accrued expenses (those not yet paid), and the current portion of any loans (interest, and perhaps some principal)
The current ratio measurement is important because if the current liabilities exceed current assets, the company is considered illiquid, which means that if all the current creditors demand immediate payment, the company doesnât have enough current assets to pay those demands. And if youâre trying to sell a company, thatâs not going to endear you to most Buyers.
To fix up your balance sheet in preparation for a sale, follow these steps:
1. Collect your receivables.
Buyers check to see whether Sellers are diligent about this collection (at least, they should). If the terms are net 30 (that is, money is due within 30 days), as a Seller you should be collecting those receivables within that time frame. If customers are taking longer to pay, thatâs effectively a use of cash.
Slow collections on receivables may mean Buyer has to obtain a revolver loan , a loan designed to help companies with fluctuations in cash flow. Loans arenât free; therefore Buyer may demand to reduce the purchase price to help defray the cost of that loan.
Buyer will likely assume your working capital, namely receivables and payables, as part of a transaction. Buyer will probably want all the receivables but may make you grant a discount on overdue accounts. Buyer will also only assume payables if theyâre current or within terms. For example, if a vendor gives you net 30 days terms but youâve been paying net 45 days for years without complaint from the vendor, you can make a case that the actual (or de facto ) terms are 45 days.
2. Make sure inventory is all saleable.
If you have obsolete or slow-moving inventory, talk to your accountant about how best to write off this inventory. Writing off inventory decreases the companyâs earnings, so you want to get this step out of the way before you go through a sale process. If you write off any inventory prior to a sale process, you should be able to discuss the rationale you used for those write-offs as well as the steps youâve taken to prevent future build-ups of excess or obsolete inventory.
You put yourself in a precarious position as Seller if, during the due diligence phase, Buyer discovers a boatload of obsolete inventory that isnât reflected on the valuation. In this scenario, Buyer will likely attempt to renegotiate (that is, argue for a different deal, probably with a lower price) because earnings are now effectively lower in light of the inventory the company needs to write off.
If you want more information about the wonderful world of accounting, check out Accounting For Dummies, 4th Edition, by John A. Tracy, CPA (Wiley). Or you can talk to your accountant.
Pay off debt
Another hurdle in selling a company is taking care of your long-term debt. Many Sellers either âconvenientlyâ forget about the debt or hope/assume that Buyer will simply assume the debt no questions asked. Hereâs a little bit of expert advice: That ainât gonna work! The long-term debt of the business is Sellerâs obligation.
Donât despair if your business has unattractive long-term debt; you have some options: Retire that debt now, make a plan to retire that debt before closing, or retire that debt at closing. Although Buyer can assume the long-term debt of an acquired company, Buyer will probably simply deduct the amount of debt from the proceeds of the sale. For all practical purposes, if Buyer assumes the debt, Seller is retiring that debt at closing.
If youâre worried that your companyâs long-term debt may block a sale, hereâs a tip for negotiating with the lending source. Call the lender, explain that a deal to sell the company is on the table but may be in jeopardy because of the
Assets: Cash, accounts receivable, inventory, deposits, and prepaid expenses
Liabilities: Accounts payable, accrued expenses (those not yet paid), and the current portion of any loans (interest, and perhaps some principal)
The current ratio measurement is important because if the current liabilities exceed current assets, the company is considered illiquid, which means that if all the current creditors demand immediate payment, the company doesnât have enough current assets to pay those demands. And if youâre trying to sell a company, thatâs not going to endear you to most Buyers.
To fix up your balance sheet in preparation for a sale, follow these steps:
1. Collect your receivables.
Buyers check to see whether Sellers are diligent about this collection (at least, they should). If the terms are net 30 (that is, money is due within 30 days), as a Seller you should be collecting those receivables within that time frame. If customers are taking longer to pay, thatâs effectively a use of cash.
Slow collections on receivables may mean Buyer has to obtain a revolver loan , a loan designed to help companies with fluctuations in cash flow. Loans arenât free; therefore Buyer may demand to reduce the purchase price to help defray the cost of that loan.
Buyer will likely assume your working capital, namely receivables and payables, as part of a transaction. Buyer will probably want all the receivables but may make you grant a discount on overdue accounts. Buyer will also only assume payables if theyâre current or within terms. For example, if a vendor gives you net 30 days terms but youâve been paying net 45 days for years without complaint from the vendor, you can make a case that the actual (or de facto ) terms are 45 days.
2. Make sure inventory is all saleable.
If you have obsolete or slow-moving inventory, talk to your accountant about how best to write off this inventory. Writing off inventory decreases the companyâs earnings, so you want to get this step out of the way before you go through a sale process. If you write off any inventory prior to a sale process, you should be able to discuss the rationale you used for those write-offs as well as the steps youâve taken to prevent future build-ups of excess or obsolete inventory.
You put yourself in a precarious position as Seller if, during the due diligence phase, Buyer discovers a boatload of obsolete inventory that isnât reflected on the valuation. In this scenario, Buyer will likely attempt to renegotiate (that is, argue for a different deal, probably with a lower price) because earnings are now effectively lower in light of the inventory the company needs to write off.
If you want more information about the wonderful world of accounting, check out Accounting For Dummies, 4th Edition, by John A. Tracy, CPA (Wiley). Or you can talk to your accountant.
Pay off debt
Another hurdle in selling a company is taking care of your long-term debt. Many Sellers either âconvenientlyâ forget about the debt or hope/assume that Buyer will simply assume the debt no questions asked. Hereâs a little bit of expert advice: That ainât gonna work! The long-term debt of the business is Sellerâs obligation.
Donât despair if your business has unattractive long-term debt; you have some options: Retire that debt now, make a plan to retire that debt before closing, or retire that debt at closing. Although Buyer can assume the long-term debt of an acquired company, Buyer will probably simply deduct the amount of debt from the proceeds of the sale. For all practical purposes, if Buyer assumes the debt, Seller is retiring that debt at closing.
If youâre worried that your companyâs long-term debt may block a sale, hereâs a tip for negotiating with the lending source. Call the lender, explain that a deal to sell the company is on the table but may be in jeopardy because of the
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