Financial projections are fundamental when selling or buying a business.
They can be somewhat difficult to get right, as you are trying to predict the future growth of a business while also attempting to anticipate expenditures with many elements of uncertainty.
Projections display a detailed financial roadmap that helps businesses predict future performance, assess risks, allocate resources efficiently, and set realistic goals.
They ultimately provide sellers and potential buyers with a comprehensive view of the business's potential growth and help facilitate a smoother and more transparent transaction.
Here are the 7 key reasons why financial projections are essential in the context of selling or buying a business:
Demonstrating Future Potential #1 - Importance of Projections When Selling Your Business
Growth Prospects: Projections highlight future growth potential, showing buyers the anticipated increase in the business’ revenues, market share, prospective financial direction and expansion.
Profitability Outlook and Comparative Analysis: They outline expected profitability while comparing historical financials, giving buyers greater confidence and increasing attraction towards acquiring the business at a premium price. This can be especially important for deals when aiming for a higher sale value and higher multiple than the industry averages.
Risk Assessment: They highlight potential risks and mitigation strategies, enabling buyers and sellers to make informed decisions.
Supporting Valuation #2 - Importance of Projections When Selling Your Business
Business Valuation: Accurate projections are crucial for determining the business’s market value, which is essential during negotiations. Valuations based on solid projections are more credible and can lead to a fair selling price without much disagreement.
Justifying the Asking Price: Financial projections help to justify the asking price by showing how the business is expected to generate future cash flows, and how expenditure may increase or decrease alongside this growth.
Competitive Analysis: Financial projections, alongside ratio and statistical analysis can provide an apples to apples comparison with business of similar business models and industry. Ideally demonstrate why your business is a great opportunity, and also highlight key areas to further develop on.
Building Credibility and Trust #3 - Importance of Projections When Selling Your Business
Transparency: Providing detailed financial projections builds trust with potential buyers. It shows that the seller has a thorough understanding of their business, which reduces the likelihood of hidden issues and challenges arising either during due diligence or post acquisition.
Facilitating Financing #4 - Importance of Projections When Selling Your Business
Loan Approval: Buyers often require financing to purchase a business. Financial projections are critical in securing loans, as lenders require this information to assess viability. Projections show the business’s ability to generate enough cash flow to repay the loan. This is typically known as a debt-to-service cover ratio.
Investor Confidence: For buyers seeking external investors, detailed projections help secure necessary investments by demonstrating potential profitability. Investors are more likely to commit funds when they see a clear path to returns.
Serving as a Negotiation Tool #5 - Importance of Projections When Selling Your Business
Strengthening Position: Projections can strengthen the seller's position by providing evidence of future profitability and growth. Sellers can negotiate better terms and higher prices with solid financial data.
Price Adjustment: If the business performs better than expected during due diligence, updated projections can justify a higher selling price. This flexibility can lead to more favourable outcomes for sellers and drive business sale value. There is, of course a risk that if the projections don’t play out, the total consideration could be reduced.
Enabling Strategic Planning for Buyers #6 - Importance of Projections When Selling Your Business
Integration and Transition: Projections help buyers plan for integrating the new business into their existing operations. They provide a roadmap for a smooth transition.
Operational Planning: They assist buyers in planning future operations, budgeting, and resource allocation. Detailed projections allow buyers to prepare adequately for future business needs.
Ensuring Regulatory and Legal Compliance #7 - Importance of Projections When Selling Your Business
Regulatory Assurance: Businesses worldwide must meet certain standards and regulations. Accurate projections that account for regulatory requirements reassure buyers of the business’s compliance. This is essential for industries with constantly changing and strict regulatory frameworks and also helps businesses maintain integrity and security.
Think Acquisition's 4-Step Process to Assist in Developing Projections
1. Seller projection analysis
First and foremost, we will conduct an analysis of our clients' own projections. Some clients may be overly pessimistic, while some may be overly optimistic. We will conduct research around the company and industry alongside applying our own industry expertise to gain a comprehensive understanding of the business model, the financials and the rationale for their projected assumptions.
*If the client has absolutely no projections, we will work with them and their accountant as required to produce a first draft.
2. Seller discussion
Secondly, we then initiate our first phase of in-depth conversations with our clients, discussing their financials and projections in a comprehensive Q&A session to answer any queries. From this, we will input or subtract any reasonable adjustments in their projected numbers to ensure our client is best representing their projections while maintaining a realistic attitude.
3. Deal analysis
Thirdly, we will utilise our valuation model to fully analyse the past, present and future data and produce projected numbers based on our research and investigation. This will allow us to note further changes to better represent the business leading to the best valuations possible.
4. Review and approval
Finally, we will discuss our final projections and our thoughts and gain approval from all relevant parties before going to market. We support our clients by keeping them closely engaged throughout the process to facilitate the best possible deal.
Contact
If you would like to speak to one of our directors about the potential of selling your business, please get in touch to schedule a call.
We will always act transparently and share the realities of a business sale, allowing you to decide whether your business is really worth selling.
T: 02920 025 852
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