HOUSTON BUSINESS REVIEW

TUTORIAL ON SELLING YOUR BUSINESS "Enhancing Value – Financial Perspective Part I"
By Ralph Fain

Ralph Fain is a principal in the brokerage firm, R/Fain Group. Mr. Fain also has over 20 years of broad business experience with Fortune 500 companies. R/ Fain Group is a professional business brokerage firm which confidentially represents the interests of various sellers and buyers. Each week Mr. Fain will give tips on Business Brokering, and how to sell your business.

In our latest three articles we have written about ways to enhance the value of your business via improving and/or highlighting the favorable operational, tangible and intangible factors of your company. These encompass the gathering and provision of relevant information/documentation, improving administrative/accounting/operational processes and procedures, improving the physical appearance of your business and emphasizing the positive intangible attributes of your business which make it unique in the eyes of a prospective buyer. The next series of articles will focus on one of the last pieces to the puzzle – improving the value proposition of your business from a financial perspective.

In an April article we briefly mentioned the importance of having a good financial record (i.e., the business is profitable, sales/revenue and profits are increasing at a reasonable rate, etc) and having good financial records (accounting records are accurate and up to date, tax returns and financial statements are prepared timely, are readily accessible/available, accurately reflect the condition of the business, etc). From a financial perspective, those two areas are the most critical.

In addition, it is also of importance for the owner of the business to have a rudimentary understanding/knowledge of basic accounting/financial/tax concepts. In order for the owner/seller of a company to maximize the value and marketability of his or her business, it is necessary for the owner to understand the concepts of net income/profit and cash flow and how the owner’s (and his employee’s) everyday decisions have a positive or negative impact upon these critical numbers.

Simplistically speaking, net income or profit is the figure remaining after subtracting all expenses (not necessarily all expenditures) of the business from the sales/revenues of the company. Forgetting the impact of taxes and non-operating items, Sales/Revenues less Cost of Goods Sold equals Gross Profit ; Gross Profit minus General, Administrative and Sales (S, G & A) expenses allow you to arrive at Net Income (net profit). For example:

	 		Sales (Revenues)					$750,000
			Cost of Goods Sold					$500,000
			Gross Profit						$250,000
			Sales, general and admin expenses	$150,000
			Net Income (profit)					$100,000