Clean up Your Balance Sheet

In most circumstances price is determined from the income statement and operating results. Yet few people understand how a balance sheet can make or break a sale. The balance sheet contains the assets (think bank accounts) and liabilities (think debts). More assets than necessary usually will not increase the value of the business. For this reason we advise business owners to liquidate unnecessary equipment and inventory. They take up space, add to the clutter, and will not increase the sales price. (Yes real estate and some intellectual property will increase the price but those are exceptions.)

All businesses need to make capital investments. Some need to make substantial capital investments. You must keep making reasonable investments so you can keep running your business efficiently until it does sell. For instance, a plumbing contractor owns ten trucks and replaces two each year. This type of investment probably should continue even with a hoped for sale in the next year or two. On the other hand, the same plumbing contractor should probably not move to a new facility that is going to require $200,000 in one time fit-out charges. This investment is unlikely to be recovered in a short timeframe. Additionally, if he takes on debt to make the improvements the entire debt will have to be paid or offset against the purchase price. This will greatly reduce the seller’s proceeds from the sale.

The last area to talk about is inventory. Many business owners have not taken inventory in years. They estimate the cost of goods sold based on past history, this year’s purchases, their gut feelings or other logical or illogical method. This can cause several problems. First, if inventory is accumulating over time, you might be making more money than you think because your income has been understated which means your valuation will be low. Second, you may end up giving away inventory because many inventory adjustment clauses state that the buyers will not pay for “stale” inventory. This may be inventory over two years old, inventory that is out of season or inventory items negotiated piece by piece. Again, just like other excess assets, sell extra inventory before the buyer comes into the picture. Anything you get for it is likely to be more than a seller will pay.