Risk to Generating Future Profits

General Category on August 15th, 2013 Comments Off

When you are selling your business, the more sets of financial statements your business has prepared by an accountant, the better.  It will help demonstrate how strong your business has traded and if there have been difficult years – providing you can explain it and how the difficult years were addressed, buyers will be confident your business is profitable and viable.

When a business buyer is looking at a business, they want to know:

  • How your business has traded up until now, and most importantly;
  • How your business will trade into the future.

Hence why the Global Financial Crisis (GFC) was an important event for all businesses, as it was a reality check. It showed:

  • Some businesses were unaffected by the GFC;
  • Some businesses were affected but have since recovered and are strong businesses again; and
  • Some businesses never recovered from the GFC and the businesses may never produce profits similar to pre GFC.

So whilst the financials up to now are important and provide buyers with a picture of how the business has traded, more importantly is how the business will trade into the future.  If a business is making $200,000 profit for the past 5 years, buyers need to understand whether this profit can continue going forward.

Some of the areas business buyers will want to understand further to determine future viability of the business are:

  1. Owner(s) involvement in the business;
  2. Impact of the current owner(s) leaving the business;
  3. Spread of clients and impact of key clients leaving;
  4. Economy the business trades in;
  5. Technology and impact on trade;
  6. Developments in the area;
  7. Future competition;
  8. Equipment condition to generate sales; and
  9. Current employee performance, staff retention and recruitment.

So whilst the past helps buyers come to the table, it is the future viability of the business going forward that will help the business sell.  Business buyers appreciate you have made excellent profits in past years, but they also want certainty this will continue for them into the future.

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