Friday, October 15, 2010
Thursday, October 14, 2010
The Small Business Balance Sheet
My cell phone rang and I answered, “Hello this is Dan, how can I help you”? “Dan, this is Wanda”. Wanda has a nice Childcare Center that she was considering selling and I had been working with her over the past weeks in evaluating the financials of the business to determine what price to position it in the marketplace. “I’ve decided to hold off on selling my business. After my husband and I discussed it, I think we will not get enough for the business to satisfy our needs and so it is probably better that I continue to run the business and try to get my numbers up to improve the potential selling price of the business,” she said.
I provide my clients with information they need to know about their business and the “state of the market” during current economic times. They decide if they are willing to sell and at what price, I do not make that final decision. But the historical financial data of the business is a significant factor in determining the value of any business. The current balance sheet is a financial document to review. It gives you a “snapshot in time” and affords you a window in the health of a small business. The simple formula Current Assets - Current Liabilities = Cash Flow affords you insight into how well a business is managing the Cash Flow and whether they appear to be paying their bills in a timely manner. In addition, Short Term and Long Term Liability are key factors. More often I see that business owners who wish to sell are influenced by the amount of short and long term debt to derive the value of their business (of course they want to pay all of the debt off and have some additional cash left wouldn’t anyone?).
In Wanda’s case (which is typical), if she sold her business for what she felt like it was worth she may not break even and that is why her decision is to “hold off a little while”. In today’s economy, this view is becoming more prevalent. Small businesses are experiencing declining revenues and declining profits. Hopefully, they are paying attention to payroll costs and other factors to keep them in line with revenues and profits. If not then debt begins to accumulate due to restricted cash flow. But even under the best of circumstances many small businesses today are realizing additional debt just to keep themselves afloat.
Sometimes (not always), small business owners decide to sell due to their debt load. When they contact a Professional Business Broker they really want someone to solve their debt problem by selling the business for more than the debt they owe. In Wanda’s case, she has a wonderful little business and it is still profitable (even during these tough economic times), but two things may have tripped her up a little bit. First, about a year ago she decided to buy the commercial property her childcare operates out of and perhaps paid a premium for it shortly before the decline in property values (all commercial property will be subject to an appraisal for bank financing and hers was appraised). In addition, shortly after the purchase of the property the center experienced a broken water pipe over one weekend which caused her to lose children as she was forced to close the center for almost two weeks for repairs to be completed. While we can make a case for lost revenues and higher than normal labor cost (after all, she did not want to lose teachers so she had to keep paying them or lose her staff), it creates a distraction for prospective buyers. So I agreed with Wanda and we will review her situation at the end of the year.