Cash Flow Projection and a Successful Exit
A small business owner named Simon understands how the business's cash flow drives his current income and how it will eventually impact the valuation and sale price. However, Simon lacked awareness of potential exit routes that demand cash flow. For example:
When considering an ESOP, his business met all the essential parameters EXCEPT having the adequate cash flow to service the debt needed to fund the ESOP.
When running a “sanity check” on whether key employees could finance an insider purchase with a bank loan, the bank would only finance a small amount due to projected cash flow.
In considering a third-party sale, and as a result of Simon’s exit planner’s financial gap analysis, the company needed to invest in updated systems, new hires (next-level management), and incentive plans for key employees to increase the business cash flow to make it happen.
Simon has said that “he’s ready to exit”, but after analyzing his business’ readiness for an exit, and projecting future cash flow, Simon will not be able to exit the way he wants to for at least five years — there’s just too much to get done to realize the value he needs. So, the story's moral is to have a ten-year cash flow projection and keep it current for planning growth and your eventual exit. The stronger the cash flow and its management, the greater the chance of building a transferable business and having multiple options for exit.
And begin planning today…it will take longer than you think.
Contact us about our ExitReadiness® CASH Flow service @ EMAIL@ENNISLP.COM or 301-859-0860.
