Its all about the cash - Ken Saddler


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Kenn Saddler, a B2B CFO partner, talks to 'The Alternative Board' about the importance of cash flow in operating a business. As Ken says, "It's all about the cash."

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  • Talk about building a foundation before getting into discussions about valuation and bank financing.
  • Reviews financial performance for a period of time.
  • Answer #1 = Most closely approximates CASH. Companies are often valued in multiples of EBITDA, or discounted EBITDA. Mention that multiples are down quite a bit from just a couple of years ago in today’s economic and financial / credit markets. Fewer companies being sold as a result. Slowly getting better.Answer #2 = Means valuing future cash flows for what they are worth today. Why do we do that? There’s an alternative to making any investment and that’s to put your money in an interest bearing account. That’s not very good return with rates as low as they are today. Companies use different rates to determine the present value of an investment. The rate generally relates to the borrowing cost of the buyer.Answer #3 = Operating Profit
  • Go through each category and briefly explain what is categorized there. System of debits and credit is established so that if done properly this equation always works.This statement is SNAPSHOT of a business at a POINT in time. Also known as Statement of Financial Position
  • What the heck is liquidity? How much cash or items that could quickly be turned into cash a company has (receivables, s/t investments, inventory).
  • I’m going to make a positive assumption about each of your businesses and build a more favorable scenario and that you have time to realize the full value of your business before you Exit.EBITDA is usually adjusted in the process of due diligence. Multiples also depend on company value drivers.There may be addbacks, like owner compensationThere will most likely be negative adjustments for things the buyer believes should reduce EBITDA but may be on the balance sheet (excess or unsaleable inventory, bad debt, etc.)Explain formula, time value of moneyOther options -
  • CFO responsibility. Why are you requesting the funds? What will be the use of proceeds? What terms are you requesting? Why is the firm a success and why will this venture be successful. Sell, create excitement. Why invest in my company?Who are we? What makes us special? Company history. Bios on key members of management.Macro view of the industry and growth expectations. Use information from a trade group or industry association to give outsiders perspective, not just a biased view from a company inside the industry.If you don’t have one, consider putting one together. For the bank, at a minimum take them through the SWOT. Emphasize strengths but be honest about weaknesses too and how you intend to reduce them. Need to be able to intelligently walk the bank through the next three to five years (or term of debt). CEO should definitely present this section.Include P&L, BS, and stmt of CF, as well as A/R and Inventory schedules especially if this is how the loan will be collateralized.Preferably reviewed or audited. Ratio analysis compared to industry can be helpful here too.One year detailed forecast. Three to five year longer range financial expectations. Important to link strategy with forecast here.Professionally present this in a three ring binder or similar format for ease of reading and presentation.
  • Its all about the cash - Ken Saddler

    1. 1. It’s All About the Cash The Alternative Board Ken Saddler, MBA Partner B2B CFO® February 8, 2012
    2. 2. Financial Statements Profit and LossSales- Cost of Product or ServiceGross Margin- Operating ExpensesOperating Profit+/- Other Income / ExpenseIncome Before Taxes- TaxesNet Profit  to Balance Sheet Retained Earnings in the Equity section
    3. 3. Financial Statements Profit and LossEBITDA = Earnings Before Interest, Taxes, Depreciation and AmortizationWhy is this so commonly used in business?What does discounting mean?Which line on the P&L is the closest to EBITDA?
    4. 4. Financial Statements Balance SheetAssets Liabilities Owner’s Equity+ Current Assets + Accounts + Stock+ Other Assets Payable + YTD Net+ Fixed Assets + Short Term (< 1 Income = yr term) +- Accumulated + Retained Depreciation Obligations Earnings= Net Fixed Current Liabilities - Owner Assets +Long Term (> 1 DistributionsTotal Assets yr term) Total Owner’s Obligations Equity Total Liabilities
    5. 5. 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
    6. 6. 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.
    7. 7. Valuing Your BusinessOther Types of Events to Consider – Asset sales – Debt assumption – Recapitalization – IPO
    8. 8. Valuing Your BusinessWhat 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
    9. 9. Valuing Your BusinessWhat 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
    10. 10. Valuing Your BusinessWhat 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
    11. 11. Valuing Your BusinessK.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
    12. 12. Obtaining Bank FinancingChecklist 1. 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 OwnerRecommend CFO meet with bank prior to owner’s first meeting to gain intelligence and receive feedback.