Why do people say cash is king when selling a business? And what does it really mean? “Cash is king” in the context of selling a business emphasizes the importance of cash flow and liquidity in determining the value and attractiveness of the company to potential buyers. Here are a few key reasons why cash is king when selling a business:
1. Demonstrates Stability and Sustainability
Cash flow is a critical indicator of a business’s financial health and its ability to generate consistent income. Buyers seek companies with strong cash flow because it signifies stability, sustainability, and the potential for a steady return on investment.
2. Assures Risk Mitigation
Cash reserves provide a cushion to address challenges and uncertainties that may arise during the transition period after the sale. In addition, having cash on hand allows the new owner to manage any unexpected expenses or bridge temporary gaps in revenue.
3. Supports Growth and Expansion
A business with a healthy cash position is better equipped to seize growth opportunities. Therefore, buyers often look for companies that generate surplus cash, as they can reinvest the money to fuel expansion, fund innovation, or pursue strategic initiatives.
4. Facilitates Financing
Buyers may require external financing to acquire a business, and lenders also prioritize cash flow when evaluating loan applications. As a result, a company with solid cash flow is more likely to secure favorable financing terms, making it easier for potential buyers to proceed with the acquisition.
5. Enhances Valuation
Businesses with consistent and robust cash flow are typically valued higher than those with irregular or volatile earnings. Cash flow is a fundamental factor in determining the market value of a business, and buyers are willing to pay a premium for those with a proven track record of generating healthy cash flows.
Tips for Improving Cash Flow
The phrase “cash is king” underscores the significance of cash flow in the sales process. Bottom line: buyers prioritize businesses with strong cash flow. So how do you go about crowning cash as king and maximizing the value of your business? Here are a few tips to start:
1. Shift Your Mindset
Rather than running your business to make a living, shift toward running your business to show profitability. It may sound subtle, but it’s an essential distinction. Pay attention to the bottom line, and grow that number as much as possible. While continuing to run and grow your business, be sure to prioritize areas that will have the most significant positive impact on the bottom line.
2. Run Your Salary Through Payroll
An owner’s salary (run through payroll) is a discretionary cash flow expense and is one of the easiest ways to improve cash flow. There are others as well, but this is the simplest way with the greatest impact, so take advantage of this one. Consult with your CPA about the details.
3. Plan Ahead
As much as you consider what you can sell your business for, remember to consider how much cash you’ll get to keep. We’re talking taxes here, and planning ahead will make all the difference. Start discussions early with your CPA and advisory team about how to minimize the tax implications of your business sale, and remember to include your will and estate planning in the conversation as well.
4. Engage a Professional Business Advisor
Seasoned business advisors like ours at Viking have decades of experience, and we can help you avoid common mistakes and give you actionable insight on maximizing the value of your business. We are here for the long haul and will guide you through the sales & transition process when the time is right for you to sell.
If you are thinking of selling your business, we are here to help. Contact us today for a complimentary business valuation, no strings attached.