It’s All About the Cash

Ken Saddler, MBAPartner

B2B CFO®

February 8, 2012

The Alternative Board

Financial StatementsProfit and Loss

Sales- Cost of Product or Service

Gross Margin- Operating Expenses

Operating Profit

+/- Other Income / Expense

Income Before Taxes- Taxes

Net Profit to Balance Sheet Retained Earnings in the Equity section

Financial StatementsProfit and Loss

EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortization

Why is this so commonly used in business?

What does discounting mean?

Which line on the P&L is the closest to EBITDA?

Assets

+ Current Assets

+ Other Assets

+ Fixed Assets- Accumulated

Depreciation

= Net Fixed Assets

Total Assets

Financial StatementsBalance Sheet

Liabilities

+ Accounts Payable

+ Short Term (< 1 yr term) Obligations

Current Liabilities

+Long Term (> 1 yr term) Obligations

Total Liabilities

= +

Owner’s Equity

+ Stock

+ YTD Net Income

+ Retained Earnings

- Owner Distributions

Total Owner’s Equity

Balance Sheet MetricsCurrent Ratio = Current Assets / Current Liabilities

– Measures a company’s “liquidity”

Accounts Receivable Days (a.k.a. DSO)

A/R / Sales * 365

Accounts Payable Days (a.k.a. DPO)

A/P / Cost of Goods Sold * 365

Inventory Days (a.k.a. DOH)

Inventory / Cost of Goods Sold (Annualized) * 365

Return on Assets

Net Income / Total Assets

Valuing Your Business

Many valuations and pricing of deals are done as a multiple of EBITDA.

• Discounted cash flow analysis is generally applied at the buyer’s cost of capital.

Price = 3 – 5 yr historical Trailing 12 months EBITDA average X Industry average multiple * / (1 + r) n

Equity = Price* This number is negotiable depending on a number of factors that can help you increase the value of your company.

Valuing Your Business

Other Types of Events to Consider– Asset sales– Debt assumption– Recapitalization– IPO

Valuing Your Business

What can you do to increase value?– Prepare monthly financial statements and use them to

help guide decision making and run the business– Present audited or at least CPA reviewed financial

statements prepared under the accrual method of accounting

– Deliver consistent revenues; growth is a plus; have a strong brand

– Deliver a consistent trend of positive EBITDA and cash flow

– Expand EBITDA faster than sales

Valuing Your Business

What can you do to increase value?– Clean up your balance sheet– Build a strong, knowledgeable, loyal team that

will help the business to continue successfully after you exit

– Reasonably diversify products, customers, and vendors

– Invest in a strong ERP system– Operate with repeatable, well documented

processes– Reduce debt

Valuing Your Business

What will reduce value?– Problems on the balance sheet, especially if not

immediately disclosed to potential buyer– Running the business exclusively to reduce the

tax liability– Taking excess distributions, particularly in the

most recent years– Too much reliance on a one or two key

customers– Reliance on tax returns as financial statements

Valuing Your Business

K.I.S.S. Approach• Net Income, EBITDA, Retained Earnings

and Equity are inextricably linked• Focus on the few things in your business

that will increase these accounts• Your business will be more valuable• You will receive a higher price on your exit

Obtaining Bank Financing

Checklist1. The Opportunity

2. The Company and its History

3. The Industry

4. The Strategy

5. Interim Financial Statements

6. Annual Financial Statements

7. The Forecast – next 12 months plus years of loan request

8. Corporate and Personal Tax Returns for 3 Years

9. Personal Financial Statements of Owner

Recommend CFO meet with bank prior to owner’s first meeting to gain intelligence and receive feedback.