Written By: Andy Gelfand
Read By: Christopher McKenna
Let’s face it. Preparing a monthly budget and multi-year projection is hard. It can take several years to determine the best way to prepare them. If the business owner has not historically prepared a budget pr a multi-year projection, learning to do several years prior to a sale process will be very constructive.
Specifically, it will enable the business owner to learn how to prepare these management tools before they will be scrutinized by buyers. In addition, preparing a multi-year projection provides insight into the business owner’s financial goals for the near future. Whether or not the business owner prepares a formal budget and a multi-year projection, the business owner has an instinctual expectation for the succeeding year and the near future. The preparation of a budget and multi-year projection formalizes expectations.
A budget and multi-year projection are extremely useful in a sale process, but in different ways. Let’s start with budgets. A sale process typically takes six to twelve months. During the sale process, the business owner advises buyers that the company’s current year budgeted revenue and EBITDA are $X and $Y, respectively. Some obvious questions that buyers will ask include:
- How is the company tracking to its budget?
- Are the results ahead of plan (or behind plan) due to higher (or lower) revenue, a higher (or lower gross margin, lower (or higher) expenses, or some combination thereof?
- Based on year-to-date results, the budget is achievable?
- What results does the company need to achieve during the remainder of the year to achieve the budget?
- Are the results proportionate during the year or is there seasonality that would cause certain months to be stronger or weaker?
- Are these products and/or services that are stronger/weaker during certain months of the year?
The budgeting process also provides buyers with insight into how the business owner thinks about monthly cash flows. For example, does the company make monthly accruals for large periodic expenses or expense these items as incurred? Instances include annual employee bonuses that are based on year-end results or real estate taxes that are typically paid twice per year. Monthly budgets will reveal how the company addresses this type of expense.
Preparing a monthly balance sheet budget is highly informative as well. The balance sheet demonstrates to buyers the monthly cash sources and uses related to items such as building inventory in anticipation of a busier season, increasing accounts payable due to extended trade terms, or increasing fixed assets due to maintenance and/or growth capital expenditures.
Committing the business owner’s knowledge of the company to a thorough, detailed budget addresses numerous questions and increases credibility with buyers.