Written By: Andrew GelfandÂ
Read By: Christopher McKenna
As noted in Part 1 of this two-part series, committing the business owner’s knowledge of the company to a thorough, detailed budget addresses numerous questions and increases credibility with buyers.
Similarly, formalized multi-year projections are instructive since they provide insight into the business owner’s view of and plans for the future. Business owners often say “I can barely predict next month. How can I project two or three years into the future?” The question is a legitimate concern. With that said though, the process of preparing a multi-year projection is as instructive as the outcome.
The multi-year projection can address some of the following questions:
- Has the business owner made or does the business owner plan to make investments that are expected to increase revenue?
- Are these new products under development that are expected to generate revenue in the near future and what is the revenue trajectory for these products?
- Is the company investing in new market strategy that is intended to increase market share?
- Is the business owner planning to invest equipment that will increase revenue or lower costs?
- Will the company need to increase administrative employees to support growth?
How the business owner addresses these questions provides considerable insight into the future.
Once the business owner has invested in the process of creating an annual budget and a rolling multi-year projection, preparing the budget and multi-year projection next year should be easier — at least many of these topics that need to be considered should be similar.
Preparing a multi-year projection as a management tool and updating it annually increases credibility of the projection with buyers since it was prepared in the ordinary course and not prepared solely in connection with the sale process.
In closing, let’s forget that buyers are purchasing expected future earnings and cash flow. The ability to present a credible and convincing budget and multi-year projection creates confidence that the company will achieve the projected earnings and cash flow which will support the desired sale valuation.