Hey Reader,

When you're on the inside of your business, you know every nook and cranny of your company. You know the seasonal changes, the distinct differences that must be accounted for, and more than you would even realize.

You have probably heard the saying that a picture is worth a thousand words. In business transactions, a good financial forecast is that picture.

Buyers and investors will view everything with fresh eyes, digging into everything with questions and skepticism. It's the same savvy that made you an excellent business owner.

There are 3 main reasons to create good financial forecasts.

Valuation Impact

Forecasts supported by historical information are the most concrete evidence of the growth potential and financial health of your company. Showing clear information that supports growth and stability is extremely important in the eyes of a buyer. You might not be worried, but they are.

Wild swings in forecasts versus actuals decrease the value of the projections and an increased degree of risk will reduce the valuation of a company. A company with $1M in revenue and valued at 1x revenue in normal operating conditions might be penalized with a 10-15% discount from either valuations or buyers due to concerns about the validity of the projections. That's $150,000 lost due to poor projections. Now apply that same discount to your own business.

The trends presented in the forecast of the revenue patterns, profit margins, and scalability all lend themselves to an increased valuation of the business but also increase the desirability of the business to buyers. Only 15% - 30% of small businesses sell, and only 30-70% of medium-sized businesses ($3+M EBITDA) sell. Being prepared with accurate financial projections is one of the cornerstones of an easy-to-sell business.

Operational Improvement

Creating good forecasts that are accurate before your business information is shared allows you to find any problems and fix them before anyone starts asking questions. You'll gain a deeper insight into your business, along with items that could be removed from the company costs ahead of the sale.

Here is an example of a 24% change in EBITDA where a buyer might refuse to accept your proposed adjustments. These are probably some of the more common ones as well. By identifying and correcting the major adjustments, you're more likely to have the buyer purchase off the higher EBITDA and not argue about the adjustments. Definitions below the graph.

Why this matters

At a 7x multiple, you are dealing with $1.68M in negotiable value. Try preventing the negotiations from starting!

Imagine how much easier it would be to fix the owner's additional salary, intercompany, and rent. Removing those three means you're now negotiating over $280,000 of easily identifiable costs. Nonrecurring or repairs wouldn't typically be fought against due to the fact they are tangible, verifiable, and straightforward.

That's a massive difference when you come to the table prepared!

Definitions quickly

Owner Salary - The additional salary the owner takes above what a C-suite replacement salary would be.
Rent - Rent to a company-owned property that's not part of the transaction and not market rate
Intercompany - Sales or expenses that are improperly marked up between related entities
Non-recurring - One-time expenses, such as legal fees
Repairs and Maintenance - Expensing items that should have been capitalized.

Buyer Confidence

Track records are the most important part of the forecast value and creating accurate budgets plus actuals enables easy conversations with buyers that increase their confidence in the business operations.

There's a lot to be said for a business owner who is prepared for the task of selling their business. You're more likely to succeed, and more likely to get a higher price.

Once a buyer becomes suspicious, it's very difficult to come back from the issues. By evaluating your company with strong financial acumen and addressing any issues upfront, you'll find that the selling process is easier.

The value of good financial projections also applies to loans, minority investments, capital raises, majority sales, and any business transition that occurs.