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HOUSTON BUSINESS REVIEW
TUTORIAL ON SELLING YOUR BUSINESS "Enhancing Value – Financial Perspective Part IV"
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 last article, we discussed how important a role variance analysis plays in ensuring accuracy, reliability and comparability of financial statements for your company. Today we will continue the discussion as it pertains to industry averages and also talk a little about “re-casting” of financials. As you may recall, our ”re-cast” or restated 2004 financials were as follows:
Industry Norms
Restated 2004 figures % only
Sales/Revenues $1,200,000 100% 100%
Cost of Goods Sold 660,000 55% 60%
Gross Profit Margin 540,000 45% 40%
Sales, General & Admin. 372,000 31% 30%
Net Income 168,000 14% 10%
As we have already made adjustments due to our variance analysis of year to year company results (comparison of years 2002 – 2004), it is now time to compare your company’s financial ratios to industry standards. [Note: averages for a 3 year period are often used when comparing to industry barometers but for ease of illustration we will compare 2004 results only to industry norms]. As the chart above illustrates, with the minor exception of SG&A, your company’s restated 2004 financial results compare very favorably with the standards for the industry – GPM at 45% for your company easily exceeds the industry norm; Net Income at 14% for your company also is very favorable when compared to the industry standard of 10%. Your company’s SG&A is immaterially higher (31% vs 30%) than the industry norm and that can be explained due to the generous salaries paid your family members; if their salaries/benefits were reflective of a more realistic pay scale, your SG&A numbers would be several % points (3%) less than the industry norm – this would make your SG&A figure 28% vs the norm of 30%.
By undergoing the variance analysis of your company’s results on a year to year basis and by performing a similar analysis as compared to industry standards, you now have “re-cast” financial statements which properly reflect current accounting/financial standards and the accurate financial results your company/industry. Not only have you vastly improved the presentation of the financial condition of your company, you have also discovered something important for yourself and others (most importantly prospective buyers).
You have uncovered the fact that your company favorably exceeds the industry standards in these critical areas – Gross Profit Margin %, SG&A % (after adjustment for family salaries/benefits discussed above), and Net Income %. Guess what else – as a result of the above, you can now make an exceptionally strong case (and have demonstrable proof) as to why your business should be more highly valued than those of your competitors.
Our next article will continue this series in Enhancing the Value – Financially and will continue with more detail regarding “re-casting” – this time to arrive at discretionary cash flow (a prime determinant of the value of a business). See you in this same space next time when we will continue the series regarding improving the financial presentation of your company. As always, should you have any questions or require additional information please feel free to contact the R/ Fain Group at 832-646-0832 or via our web site.
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Ralph Fain Archive
- Buying a Franchise – Part 2 (March 2007, Issue No. 3, Thursday Edition)
- Buying a Franchise – Part 1 (March 2007, Issue No. 2, Thursday Edition)
- The 12 Step Process (August 2006, Issue No. 4, Thursday Edition)
- “More Fundamentals on Selling” – Non-Competes and Earn-outs (July 2006, Issue No. 2, Thursday Edition)
- “More Fundamentals on Selling” – Part III (June 2006, Issue No. 3, Thursday Edition)
- “More Fundamentals on Selling” – Part II (June 2006, Issue No. 1, Thursday Edition)
- “More Fundamentals on Selling” – Part I (May 2006, Issue No. 1, Thursday Edition)
- “Asset Purchase vs Stock Purchase” – Part II (February 2006, Issue No. 1, Thursday Edition)
- “Asset Purchase vs Stock Purchase” – Part I (January 2006, Issue No. 4, Thursday Edition)
- “Other Factors to Consider When Selling” – Part II (January 2006, Issue No. 4, Thursday Edition)
- “Other Factors to Consider When Selling” – Part I (January 2006, Issue No. 3, Thursday Edition)
- “Sale Structure – Stock Sale” Pros and Cons (January 2006, Issue No. 2, Thursday Edition)
- “Sale Structure – Asset Sale” Pros and Cons (December 2005, Issue No. 5, Thursday Edition)
- “Selecting A Business Broker” (December 2005, Issue No. 3, Thursday Edition)
- “Earnings and Multiples” Part IV (December 2005, Issue No. 1, Thursday Edition)
- “Earnings and Multiples” Part III (November 2005, Issue No. 4, Thursday Edition)
- Earnings and Multiples” Part II (October 2005, Issue No. 3, Thursday Edition)
- Earnings and Multiples” Part I (October 2005, Issue No. 2, Thursday Edition)
- “Valuation – What’s My Business Worth” Part II (September 2005, Issue No. 2, Thursday Edition)
- “Valuation – What’s My Business Worth” Part I (September 2005, Issue No. 1, Thursday Edition)
- Preparing Your Business for Sale/Enhancing Value – Summary (August 2005, Issue No. 3, Thursday Edition)
- "Enhancing Value – Financial Perspective Part VII" (August 2005, Issue No. 2, Thursday Edition)
- "Enhancing Value – Financial Perspective Part VI" (August 2005, Issue No. 1, Thursday Edition)
- "Enhancing Value – Financial Perspective Part V" (July 2005, Issue No. 4, Thursday Edition)
- "Enhancing Value – Financial Perspective Part IV" (July 2005, Issue No. 2, Thursday Edition)
- "Enhancing Value – Financial Perspective Part III" (July 2005, Issue No. 1, Thursday Edition)
- "Enhancing Value – Financial Perspective Part II" (June 2005, Issue No. 4, Thursday Edition)
- "Enhancing Value – Financial Perspective Part I" (June 2005, Issue No. 2, Thursday Edition)
- “Preparing Your Business For Sale – Part IV(B)” (May 2005, Issue No. 4, Thursday Edition)
- “Preparing Your Business For Sale – Part IV(A)” (May 2005, Issue No. 1, Thursday Edition)
- “Preparing Your Business For Sale – Part III” (April 2005, Issue No. 4, Thursday Edition)
- “Preparing Your Business For Sale – Part II” (April 2005, Issue No. 3, Thursday Edition)
- “Preparing Your Business For Sale” (April 2005, Issue No. 2, Thursday Edition)
- Tutorial on Selling Your Business “Why Am I Selling”? (March 2005, Issue No. 5, Thursday Edition)
- Why a Business Broker (March 2005, Issue No. 3, Thursday Edition)
- Buying and Selling Businesses (and Related Topics) (March 2005, Issue No. 2, Thursday Edition)
- Who Is Ralph Fain? (March 2005, Issue No. 1, Thursday Edition)
- Utilizing A Broker, Benefits To Seller (February 2005, Issue No. 4, Thursday Edition)
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